U.S. Insurance Financial Regulatory Oversight and the Role of Capital Requirements
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Federal Securities Laws and Insurance Company Receiverships
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Sr. Manager, L/H Financial Analysis
Last Updated 5/1/18
The NAIC Insurer Receivership Model Act requires that regulators that have entered into the rehabilitation phase of the receivership proceedings coordinate with the guaranty associations that would be triggered by an order of liquidation. This new requirement has been added to ensure that, in the event that the insurer needs to be liquidated, the associations are prepared to fulfill their obligations to policyholders as expeditiously as possible.
All 50 states, Puerto Rico, the United States Virgin Islands (property/casualty only) and the District of Columbia have a guaranty mechanism in place for the payment of covered claims arising from the insolvency of insurers licensed in their state. Before the creation of guaranty associations, a typical claimant could have waited for years for payment of a claim and then still receive only a fraction of what was due under the terms of the policy or contract. Guaranty associations, subject to statutory limitations, were created to alleviate these problems and ensure the stability of the insurance market. Specifically, in the event of a life/health insurer liquidation, the guaranty mechanism provides for the continuation of eligible contracts that would otherwise terminate.
Funding for the guaranty associations comes from assessments on solvent insurers. These assessments are not open-ended, but subject to certain annual limitations. Furthermore, property/casualty insurers are allowed to recoup the assessments through premium increases, premium tax offsets or policy surcharges. Most property/casualty guaranty fund enabling acts are based on the NAIC Post-Assessment Property and Liability Insurance Guaranty Association Model Act. Life/health insurers are allowed to offset portion of the assessments, over a period of years, against their premium tax liability. The NAIC Life and Health Insurance Guaranty Association Model Act permits life/health insurers to consider the amount reasonably necessary to meet their assessment obligations in the determination of the premiums they charge.
Most state guaranty associations are overseen by a board of directors composed of industry representatives. Some guaranty associations’ boards also include public members while only a few include state regulators on the board. Most state insurance departments maintain a list of companies in receivership/liquidation on their website.
Before a claim against an insolvent insurer can be considered a “covered claim” and eligible for guaranty association payment, the fund must be “triggered” with respect to the particular insolvency. The guaranty associations and the receiver have different statutory duties to protect policyholders of the insolvent insurer. The duties of the guaranty funds and associations are limited to covered policies or claims as set forth in state guaranty fund statutes.The guaranty associations are critical parts of the receivership process. The plan for liquidation of a life insurer generally requires the guaranty associations to help fund the transfer of policies to a solvent company. Maintaining open channels of communication and close cooperation between guaranty associations and receivers during the receivership proceedings, from the time the troubled company enters the process to the winding down of the insolvent estate, will ensure the most efficient resolution for the benefit of the affected policyholders.