What happens if an insurance company declares bankruptcy? Would policyholders
recoup any of their premium payments that had not been earned because
the policy period hadn’t expired? Would policyholders and claimants
be compensated for any claims in process? To assure that policyholders
aren’t abandoned, each state has a guaranty association to ensure
payment to policyholders who have claims against insolvent insurers.
Industry regulation
The regulation of insurance company solvency is a function of each state and will continue to be so under the new financial services reform law passed in 1999. 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.
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.
The National Association of Insurance Commissioners (NAIC) has developed a series of tests—the Insurance Regulatory Information System (IRIS)—which facilitates the early identification of companies in financial trouble. Statistical data taken from these detailed statements are run through IRIS tests. If the tests indicate a company’s financial ratios are outside the normal range in more than four areas, its finances are reviewed in greater detail to determine whether it is in need of immediate regulatory attention. 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
Unlike insurance guaranty associations, few other industries have a mechanism in place to provide a “safety net” for consumers of their product. 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. Its purpose 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 NAIC formally adopted solvency accreditation standards in June, 1990. All but two states have been accredited according to 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 ten Ohio Domestic P/C companies have been liquidated. Recent liquidations include LMI Insurance Company, liquidated in 2000, and PIE Mutual Insurance Company, liquidated in 1998. Prior to this, the most recent liquidations occurred in 1990.
The Ohio fund has assessed member companies over $265 million from 1970 through 2000. In 2000, the fund assessed $46.8 million, leaving $23.4 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