Guaranty Fund System: Key Role

We’re sometimes asked questions about what happens in the unlikely event an insurance company becomes insolvent. The answer is that the insurance guaranty fund system in place for the last 40 years continues to provide a safety net to ensure that the needs of policyholders can be met if an insurance company fails. Not surprisingly people tend to have more questions on insurer solvency during a period of financial and economic volatility. The National Conference of Insurance Guaranty Funds (NCIGF) has just released its annual Insolvency Trends – 2010. In the paper NCIGF cites a recent A.M. Best article indicating that insurance company impairments for both life/health and property/casualty writers were up by at least 30 percent in 2009 compared with 2008. At least 20 insurers became impaired in 2009, up from 15 in 2008 and 14 in 2007. A.M. Best says it can be difficult to track impairments because regulators sometimes take a financially troubled company under confidential supervision in an effort to save it. NCIGF notes that an “impairment† would not necessarily trigger a property/casualty guaranty fund to undertake claim payments. However, the property/casualty guaranty funds did see their share of new activity in 2009. By the way, deficient loss reserves and inadequate pricing are the leading cause of U.S. p/c insurer impairments, according to A.M. Best data. In contrast, investment problems and catastrophe losses play a much smaller role. Check out further I.I.I. information on insolvencies and guaranty funds.

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