Insurance Company Insolvencies
Overview: The Value of Guaranty Funds
Safeguarding Consumers from Insolvent Insurers
State regulators monitor the financial health of companies licensed to provide insurance in their state. 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. Historically, the leading cause of collapse has been inadequate reserves for claims. More recently, significant losses from natural disasters also have led to the insolvency of some insurers.
Under procedures established in all states, property/casualty insurers cover claims against insolvent insurers. As a condition of licensing, insurers are required to be members of guaranty associations. When there is an insolvency, insurers are assessed based on their revenues in the state so that claims can be paid. In most states, companies can be assessed annually up to a maximum of 2 percent of their net written premiums.
Key Public Policy and Industry Issues
Developments for policymakers to consider as they evaluate insurance regulation and reform include:
- Assessing Insolvency and Modernizing Rules—Insolvency rates have been declining, thanks to the industry’s improved capital position. Unfortunately, that trend may not last in the current economic downturn and soft market. There were seven property/casualty insolvencies in 2008. Four of these were title insurers, which were adversely impacted when the real estate bubble burst. While insolvency rates have declined, the dollar cost of insolvencies has increased, with the largest assessment for an insolvency reaching $2.3 billion in 2008. The National Association of Insurance Commissioners (NAIC) is working on a Solvency Modernization Initiative to determine whether current solvency requirements need to be modified.
- Federal Charter Option—Congress has considered but not yet enacted a measure to grant insurance companies the option of being federally regulated. Under such an option, a guaranty fund would be created to protect consumers against the insolvency of federally regulated insurers. Federally regulated companies would pay into the federal guaranty fund as well as pay insolvency assessments at the state level.
- Understanding the Federal Loan to AIG—On September 16, 2008 the Federal Reserve Bank of New York agreed to provide a two-year, $85 billion government bridge loan to the American International Group (AIG) when the company was in danger of becoming insolvent. It is critical to note that the federally regulated noninsurance parent company was financially distressed. AIG’s insurance subsidiaries remain solvent and able to pay claims.
- III White Paper—Insolvencies/Guaranty Funds
An in-depth review of insolvencies and the use of guaranty funds in the property/casualty insurance industry.