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.
- 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.
Insurers are required to participate in a guaranty fund of the state where they are licensed.
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 (B of D) 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.
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.
Often, the insurance guaranty association will obtain funds by assessing member insurers that write the same kind of business as the insolvent insurer. These assessments, together with the assets of the insurer, are then used to pay, up to statutory limits, the covered claims of policyholders of the insolvent company.
An association may also provide continued coverage for the policyholder or transfer policies to healthy insurers.
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:
- $300,000 in life insurance death benefits
- $100,000 in net cash surrender or withdrawal values for life insurance
- $300,000 in disability income (DI) insurance benefits
- $300,000 in long-term care (LTC) insurance benefits
- $250,000 in present value (PV) of annuity benefits, including cash surrender and withdrawal values—payees of structured settlement annuities are also entitled to $250,000 of coverage
- $100,000 for coverages not defined as DI insurance, health benefit plans or LTC insurance
Most states have an overall cap of $300,000 in total benefits for any one individual with one or multiple policies with the insolvent insurer. Insurance companies that are in rehabilitation are not considered insolvent. This means that unpaid claims are not paid by state guarantee funds.