What Is an Insurance Guaranty Association?
An insurance guaranty association is a state-sanctioned organization that protects 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 event of an insurance company’s impairment or insolvency.
- Insurance guaranty associations are given their powers by the state insurance commissioner.
- Most of these organizations are funded with the money they collect from conducting assessments of member insurers.
- The total payout in most states is capped at $300,000 per individual.
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 are not protected 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.
Each association presents an annual report to the state insurance commissioner, outlining the activities that it undertook 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 that doesn't work and the insurance company still fails to meet its obligations, it is considered insolvent. At this point, the state insurance commissioner, the state insurance guaranty association’s board, and the courts are required 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, with the funds raised, along with any money collected from liquidating the assets of the insolvent company, being used to pay off the covered claims of policyholders.
Other options include extending policy coverage through the association itself or allowing other insurance companies to take over the existing policies of insolvent companies.
Insurance companies that are in rehabilitation are not considered insolvent, meaning their unpaid claims are not paid by state guaranty funds.
Coverages provided by guaranty associations differ from state to state. However, most states offer at least the following amounts of coverage, 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
- $500,000 in medical, hospital, and surgical policy benefits
- $250,000 in the 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 impose an overall cap of $300,000 in total benefits for any one individual with one or multiple policies with the insolvent insurer.