Impaired Insurer

What Is an Impaired Insurer?

An impaired insurer is an insurance company that is potentially unable to fulfill its policy obligations and has been placed under rehabilitation. An impaired insurer is not insolvent but it does pose a potential threat to its policyholders. States consider impaired insurers a risk because they may be unable to fulfill obligations afforded to its citizens in the case of an emergency.

Understanding an Impaired Insurer

State insurance commissions may determine that an insurance company may be an impaired insurer if it is running into trouble and may be unable to fulfill its obligations. A court can place the insurer in conservation or rehabilitation until the health of the company improves enough that the risk of insolvency has ended. An impaired insurer that is unable to exit court-ordered conservation or rehabilitation may be considered an insolvent insurer and may be forced into liquidation.

When an insurance company is found to be impaired, state insurance commissioners must determine the extent of the impairment and how much money is required in order to no longer be impaired. The commissioner will then notify the insurance company of the amount, as well as provide a time frame over which the insurance company is expected to make good on the amount.

State insurance associations may guarantee or insure the policies written by its members, including members that become impaired insurers. Help extended to impaired insurers, outside of guarantees, may include credit or other funds, though the extension of any financial assistance is dependent on the likelihood of the impaired insurer being able to repay.

Insurers are most likely to face the threat of impairment if they provide similar policies to an undiversified set of individuals and businesses. For example, a company that only provides homeowner policies to people living in a coastal flood zone without also providing policies to less flood-prone areas runs a greater risk of being unable to pay its obligations.

Special Considerations

The Conservation of Impaired Insurers

After an insurance company is found to be impaired, in some states, an insurer may be placed under an order of conservation before entering the rehabilitation process. An order of conservation gives the regulator time to determine the course of action that should be taken in regards to an impaired insurer. Typically within 180 or 360 days, the regulator will either release the insurer from conservation or petition that the insurer enters the rehabilitation process (or is liquidated). At times, after assessing the insurer's current status, the regulator may discharge the conservation and allow the insurer to return to normal business operations. In most states, an order of conservation can be kept confidential in order to mitigate any potential harm to the insurer's business.

The Rehabilitation Process for Impaired Insurers

The rehabilitation process is intended to exhaust all remedies and make every attempt to help the insurer recover its losses and to regain its former financial standing. A rehabilitation proceeding is a formal proceeding. After a complaint is filed by the regulator, the insurer is served with a complaint and summons. In some cases, the rehabilitation process can also be used to prepare the insurer for liquidation. State insurance regulators require insurance providers to comply with regular reports and financial statements which display the financial condition of the insurance company. This will give the state regulators the chance to help in case the insurer is in deep financial trouble by taking steps to avoid more complications. But, after all the efforts made, it is finally concluded that the insurance company cannot be rehabilitated, the insurer is then declared bankrupt or insolvent.