Chapter 7: General Reference
Ohio Insurance Guaranty Association
What happens if an insurance company declares bankruptcy? Would policyholders recoup any of the unearned premiums-premiums that an insurance company collected from them but had not earned because the policy period hadn't expired? How would policyholders and claimants receive compensation for any claims in process? To assure that policyholders aren't abandoned, each state has a "guaranty association," or fund, which ensures payment to policyholders who have claims against an insurer that goes insolvent.
Industry regulation

The regulation of insurance company solvency is a function of each state. Each state's insurance department monitors the financial health of insurers licensed to transact business in the state. The Ohio Department of Insurance (ODI) is the state's regulator of insurance transactions.

The issue of how insurance company solvency should be regulated continues to be a point of discussion. Some believe that many state regulators lack sufficient tools and resources to oversee the complex nature of insurance. Others believe that state regulation has stood the test of time and there is little need for a federal regulatory bureaucracy. Routinely, a bill will surface in Congress that calls for some type of federal regulation, although no changes have been legislated, to date.

To assist regulators in monitoring the financial condition of insurers, all licensed insurance companies file detailed annual financial statements with state insurance departments. The statements are uniform and each insurer writing business in the state is required to file. In addition, insurance department examiners conduct periodic on-site audits of selected insurers each year, where all financial aspects of a company are reviewed in detail.

How guaranty associations work

Few other industries have a mechanism in place to provide a "safety net" for consumers of their product. Guaranty associations provide such a net for policyholders. Insurers are required to be members of a state's guaranty association as a condition of obtaining a license to write insurance in that state. The association operates through a board of directors composed largely of representatives of licensed insurers in the state. The purpose of the association is to reduce or avoid financial loss to policyholders and claimants resulting from the liquidation of an insolvent insurer.

The association, created by state law, provides a mechanism to collect and pool funds from solvent insurers to pay policyholder claims left unpaid as a result of the insurer insolvency. When an insurance company is declared insolvent, licensed insurers are assessed an amount based on their premium volume in that state. Each licensed insurance company is required to pay their corresponding assessment to the guaranty association.

This insurance mechanism ensures payment (up to $300,000) to those policyholders who have claims against the insolvent company. These could be typical insurance claims from damages caused by a covered peril under an insurance policy, or a claim against the insurer for unearned premiums.

Insurance department accreditation

In an effort to strengthen the methods used to measure an insurer's financial condition, the National Association of Insurance Commissioners (NAIC) formally adopted solvency accreditation standards in June, 1990. Most states have enacted laws to enhance solvency regulation to meet the NAIC standards. The ODI was certified by the NAIC in December, 1991, the 9th state to receive accreditation.

Ohio Insurance Guaranty Association (OIGA)

Since its establishment in 1970, a total of nine Ohio domestic P/C companies have been liquidated. The latest was in 1998, when P.I.E. Mutual Insurance Company was liquidated. Prior to this, the most recent liquidations occurred in 1990 (Oil & Gas Insurance Company and Ohio General Insurance Company).

The Ohio fund has assessed member companies over $229 million from 1970 through 1999. In 1999, the fund collected $47 million in assessments, leaving $10 million in deferred assessments outstanding to be collected as needed to pay claims.

For more information about Ohio's guaranty fund, contact the Ohio Insurance Guaranty Association, 1840 Mackenzie Drive, Columbus, OH 43220, 614-442-6601.

Source: Excerpts from "Insurance Issues Update," edited by Ruth Gastel, Insurance Information Institute