What Are Insurance Guaranty Associations?

Insurance guaranty associations are state-sanctioned organizations that protect policyholders and claimants in the event of an insurance company’s impairment or insolvency. Insurance guaranty associations are legal entities, whose members make guarantees and provide a mechanism to resolve claims.

Key Takeaways

  • An insurance guaranty association protects policyholders and claimants in the case of an insurance company’s impairment or insolvency.
  • They are given their powers by the state insurance commissioner.
  • Assessments of member insurers, together with the assets of the insurer, are used to pay the covered claims of policyholders of the insolvent company—up to statutory limits.

Understanding Insurance Guaranty Associations

The failure of an insurance company is different from the failure of other firms because insurance companies are regulated by the states in which they are registered to do business, and do not have the protection afforded by federal bankruptcy laws. State insurance commissioners are charged with reviewing the financial health of insurance companies operating in their state, and in the case of an insolvency, must act as the estate administrator.

Insurance guaranty associations are given their powers by the state insurance commissioner, with their duties and obligations outlined in a plan of operation. 

All U.S. states have an insurance guaranty association. A board of directors (BoD) is appointed to each in order to ensure the organization is able to effectively and efficiently meet the statutory expectations listed in the plan of operation.

The association presents an annual report to the state insurance commissioner, outlining the activities that it had undertaken during the year, as well as its income and any disbursements it may have made.

Insurers are required to participate in a guaranty fund of the state where they are licensed.

Insurance Guaranty Association Requirements

If a company appears to be at risk of meeting its obligations, it can be deemed impaired, in which case the commissioner will determine the steps the insurance company must take to reduce its risk over a reasonable time frame.

If an insurance company is unable to meet its obligations, it is considered insolvent, requiring the state insurance commissioner, the state insurance guaranty association’s board, and the courts to determine how to pay the covered claims of the insurer.

There are a few options the association has at its disposal to pay these claims. The first is to evaluate insurance companies with a similar profile to the insolvent one. These companies then pay the association for the assessment. The association uses this money, along with any assets from the insolvent company to pay off these claims. Other options include extending policy coverage through the association itself or by allowing other insurance companies to take over the existing policies of insolvent companies.

Special Considerations

Coverages provided by guaranty associations differ from state to state. However, most states offer at least the following amounts of coverage (or more), which are specified in the National Association of Insurance Commissioners’ (NAIC) Life and Health Insurance Guaranty Association Model Law:

There is a limit to the benefits people can claim through the association with insolvent insurers. And it doesn't matter whether they have one or more policies. This is capped at $300,000 in most states. Insurance companies that are in rehabilitation are not considered insolvent. This means that unpaid claims are not paid by state guarantee funds.