Insurance Guaranty Funds
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State regulators monitor the financial health of state-licensed companies through analysis of the detailed annual financial statements that insurers are required to file and periodic on-site examinations.
When a company is found to be in poor financial condition, regulators can take various actions to try to save it. Insolvencies do occur, however, despite the best efforts of regulators. All states have procedures through which the insurance industry covers claims against insolvent insurers.
Property/Casualty
The guaranty fund system was created by policymakers and the insurance industry nearly 40 years ago and is designed to protect those least able to deal with losses associated with insurance company failure - the average citizen, small business policyholder or claimant. The guaranty fund system has safeguarded countless policyholders who might otherwise face financial ruin because of unpaid claims.
Guaranty funds pay covered claims within limits set by individual state laws and the insurance contract. Guaranty funds generally pay the amount of coverage stipulated by the policy or $300,000, whichever is less. These "caps" are fixed by state law; the guaranty funds play no role in setting coverage caps. New York has a cap of $1 million.
Most guaranty funds pay 100 percent of their state's statutorily defined workers' compensation benefits. The guaranty fund system offers coverage of covered claims, but not a "replacement policy." A guaranty fund system also exists for the life, health and annuity insurance industry; but it operates independently from the property and casualty system.
Since the late 1960s, the U.S. property/casualty guaranty system has paid out about $21 billion in claims on behalf of insolvent insurers. About $10 billion disbursed in the last six years, largely because of the frequent and severe hurricanes that have struck the Gulf Coast over this time period. Since 1976, there have been about 600 insolvencies of property and casualty insurers. To put that figure in context, approximately 2,648 p/c insurers are licensed to do business in the U.S.
Since the late 1960s, the U.S. property/casualty guaranty system has paid out about $21 billion in claims on behalf of insolvent insurers; about $10 billion in the last six years. Since 1976, there have been about 600 insolvencies of property and casualty insurers. To put that figure in context, there are about 2,648 p/c insurers licensed to do business in the U.S.
New York has a pre-assessment system, which requires insurers to contribute to a permanent insolvency fund, while the other states have established insurance guaranty associations (known as guaranty funds). Insurers are required to be members of guaranty associations as a condition of licensing. When there is an insolvency, they are assessed based on business they do in that state so that claims can be paid.
The National Conference of Insurance Guaranty Funds is a national organization, which provides assistance and support to the U.S. property and casualty guaranty funds. Property and casualty guaranty funds are active in every state, the District of Columbia, Puerto Rico and the Virgin Islands.
Life/Health
Much like the FDIC’s coverage of the banking industry, state guaranty associations provide benefits up to a specified limit. For the associations, these limits are spelled out in state law. While the laws that govern maximum benefits available and types of policies covered may vary somewhat from state to state, most states provide at least:
- $300,000 in life insurance death benefits (In New York it is about $500,000)
- $100,000 in cash surrender or withdrawal value for life insurance
- $100,000 in withdrawal and cash values for annuities
- $100,000 in health insurance policy benefits
Since its creation in 1983, the National Organization of Life and Health Insurance Guaranty Associations has assisted its member guaranty associations in guaranteeing more than $20.2 billion in coverage benefits for policyholders and annuitants of insolvent companies. In that time, the associations have provided protection for more than two million policyholders and worked on more than 60 multi-state insolvencies.
Other resources:
New York Department of Insurance
Frequently Asked Questions
What happens when my insurance company goes out of business?
Insurance companies that experience severe financial difficulties are taken over by the insurance department of the state in which they are based. You should be notified by the insurance department if this occurs. Even if the company is placed under the control of the insurance department, claims will continue to be honored as long as premiums are paid or cash value exists. The claims will be covered by state guaranty associations, which will either pay them directly or transfer the policies to a financially stable insurance company.
What will happen to my insurance coverage if my state guaranty association becomes liable for my policy?
Protection can be provided in one of several different ways. For example, a financially sound insurer may take over the troubled company’s policies and assume the responsibility for continuing coverage and paying covered claims. The guaranty association may provide coverage directly by continuing the insurer’s policies or issuing replacement policies with the guaranty association; in some situations, the association may work with other state guaranty associations to develop an overall plan to provide protection for the failed insurer’s policyholders. The amount of protection provided and when you receive it may depend on the particular arrangement worked out for handling the failed insurer’s policyholder obligations.
How will I know if my insurance company has failed or is unable to fulfill its obligations to its policyholders?
You will receive a notification from the receiver and/or the state guaranty association if your insurance company is found to be insolvent and ordered liquidated.
If my company is out of business, why should I keep paying my premiums?
If you are paying premiums to your company, you must continue to do so even after your company has been taken over. Those premiums go to the guaranty association providing you continuing coverage, and if you stop paying premiums, your insurance benefits may be terminated.
Who should I contact with questions about my policy?
You should contact your state insurance department or your state guaranty association with questions about coverage. Coverage will be provided by the guaranty association in your state of residence, even if the policy was purchased in another state. Policyholders who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the guaranty association of the company’s domiciliary state. (List of Property/Casualty Insurance Guaranty Associations; List of Life Insurance Guaranty Association Web Sites)
What is “conservation”?
Conservation is when the Insurance Commissioner, upon a Superior Court's order, takes over the operations of an insurance company licensed in the state. There are many different reasons for the Superior Court to issue such a "Conservation Order", but most of the time it is because the insurance company is insolvent, and the Commissioner must operate the company in order to conserve assets for the benefit of policyholders, creditors, and other persons interested in the assets of the company. As a court-appointed Conservator, the Commissioner may continue as much, or as little, of the insurance business as the Commissioner deems appropriate. During conservation, one of the Commissioner's main duties is to conduct a thorough examination of the insurance company's books and records to determine whether the company can be rehabilitated so that it may continue operating as a "regular" insurance company (i.e., without the day-to-day management by the Commissioner).
What is “liquidation”?
Liquidation is the process whereby the Commissioner, upon a Superior Court's order, terminates an insurance company's insurance business by canceling all insurance policies and by not issuing any new or renewal policies. During liquidation, the Commissioner sells the company's assets, e.g., furniture, fixtures, equipment, in order to generate cash to pay policyholders' claims and other creditors. Liquidation usually occurs after conservation and after the Commissioner has determined that the insurance company cannot be rehabilitated and that it would be futile to continue with the conservation. A company that is in conservation or liquidation is called an "estate".
What is the “Liquidation Office” or “Liquidation Bureau”?
The liquidation office or bureau is comprised of insurance professionals, e.g., Claims Officer, Reinsurance Officer, Chief Financial Officer, Information Technology Officer, etc., who oversee departments that operate and liquidate insurance companies. The liquidation bureaus were created by the Commissioner to assist him or her in fulfilling duties as a court-appointed Conservator and Liquidator.
Why does the Commissioner conserve an insurance company?
There are many different reasons, but the most common is that the company is in financial trouble such that its further transaction of business would be hazardous to its policyholders, or creditors, or to the public.
What happens when a company is liquidated?
Upon the Superior Court's issuance of a liquidation order, the Commissioner publishes a notice to the company's policyholders, creditors, shareholders and all parties interested in the company's assets. The notice informs persons who might have a claim against the company to file a proof of claim with the Commissioner before the final claims filing date, which is published in the notice and in the court's liquidation order. In addition, the Commissioner notifies all policyholders by mail that his/her insurance policy with this particular company will be cancelled effective 30 days from the date of the liquidation order.
If the insurance company is insolvent, who pays policyholders' claims?
State guaranty funds have for property/casualty, life and health have been established to meet the obligations of insolvent insurers by "administering" (reviewing and paying, as appropriate) covered claims. The valuation of each claim is determined in accordance with policy provisions and statutory requirements. Valid policyholder claims that are either not covered by the insurance guarantee associations or are in excess of the limits paid by the insurance guarantee associations are administered by the liquidation bureau. The extent of payment of the claims administered by the bureau is dependent upon the assets remaining in the insolvent insurance company. Generally, recovery will not be 100 percent.
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