Ettlinger, Chapter 8: Regulating Insurer Insolvency
cost and expenses of admin-ing the liquidation;
partial pmts of debts to employers for services rendered w/in 1 yr of the liquidation order;
all claims for policy losses incurred;
claims for UEP and general creditors. (the last don’t usually get much.)
Guaranty Funds – established to protect P/Hs from the inability of an insolvent insurer to pay its policy claims. Most of these funds relate to property-liability and follow a post-insolvency assessment approach to funding claims. That is, the fund estimates claims it must pay, and issues assessments to solvent insurers.
Purpose – meant to pay out most claims, and a portion of UEP. Here are some limitations on fund coverage:
lines covered – usually excluded are title, credit, mortgage, OM, reinsurance, and E&S.
refunds of UEP – most states have $10,000 limit per policy return of UEP.
max covered claim (cap) – model calls for $100k per policy claim, except for WC, which has unlimited stat benefits. Many states have $300k cap.
claim deductibles – model and most states have $100 deductible over existing policy deductibles.
large net worth deductible – for insureds with large net worth ($10-15M), there is a deductible up to 10% of their net worth. These were instituted to avoid paying claims of sophisticated corporate P/Hs.
trigger of coverage – usually only available after a court finds a company to be insolvent and is going into liquidation.
How Funds Are Operated – nonprofit, unincorporated entities.
All licensed insurers (doesn’t include E&S) are members of the association.
The members elect a board of directors.
Assessments are made to the solvent members according to WP.
If insurers aren’t reimbursed, they may pass on the assessment costs to P/Hs in their rates. Many states allow a credit for assessment against premium taxes owed by members of guaranty funds.
Effect on Consumers
First, those consumers w/ claims benefit directly. However, there are indirect costs partly passed back to consumers in the form of higher insurance rates.
Second, insurance markets are distorted, since consumers will be more apt to go to non-financially sound insurers.
Effect on the Insurance Industry – Insurers are motivated to promote strong financial regulation.
First, insurers are directly assessed for operation of guaranty funds.
Second, competition is distorted.
Brief Assessment of the System for Dealing With Insurer Insolvencies – in 1970s, insolvencies could be handled w/in a state or region. Now the growing complexity of the process prompts calls for reform. How can the activity of funds from 50 states be coordinated to reduce unnecessary work and improve the consistency of treatment to P/Hs? Suggestion follow: