Ohio Insurance Guaranty Association
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 ninth state to receive accreditation.
Ohio Insurance Guaranty Association (OIGA)
Since its establishment in 1970, a total of 10 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
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