Guaranty Associations/Funds

last updated 7/1/2022

the naic model insurance receivership law requires regulators that have entered the rehabilitation phase of receivership proceedings to coordinate with insurance associations collateral that would be triggered by a liquidation court order. this new requirement has been added to ensure that, in the event that the insurer must be liquidated, associations are prepared to meet their obligations to policyholders as expeditiously as possible.

Reading: How are state insurance guaranty association funded

The 50 states, Puerto Rico, the US Virgin Islands (property/casualty only), and the District of Columbia have a guarantee mechanism for the payment of covered claims arising from the insolvency of licensed insurers. in your state. Prior to the creation of guaranty associations, a typical claimant might have waited years for a claim to be paid and then received only a fraction of what he owed under the terms of the policy or contract. Guarantee associations, subject to legal limitations, were created to alleviate these problems and guarantee the stability of the insurance market. specifically, in the event of liquidation of a life/health insurer, the guarantee mechanism provides for the continuation of eligible contracts that would otherwise terminate.

the financing of the guarantee associations comes from the evaluations of the solvent insurers. these evaluations are not open, but are subject to certain annual limitations. In addition, property/casualty insurers may recover assessments through premium increases, premium tax offsets, or policy surcharges. most of the laws that enable the property/casualty guarantee fund are based on the post-assessment property and liability insurance guarantee association model law . Life/health insurers are allowed to offset a portion of the assessments, over a period of years, against their premium tax liability. The NAICLife and Health Insurance Guaranty Association Model Lawallows life/health insurers to consider the amount reasonably necessary to meet their appraisal obligations in the determining the premiums they charge.

Most state warranty associations are overseen by a board of directors made up of industry representatives. Some guaranty association boards also include public members, while only a few include state regulators on the board. Most state insurance departments maintain a list of companies in receivership/liquidation on their website.

Before a claim against an insolvent insurer can be considered a “covered claim” and eligible for payment from the guaranty association, the fund must be “activated” with respect to the particular insolvency. guarantee associations and the trustee have different statutory duties to protect policyholders from the insolvent insurer. The duties of the guarantee funds and associations are limited to the policies or claims covered as established in the statutes of the state guarantee fund.

guarantee associations are fundamental parts of the judicial administration process. A life insurer’s settlement plan typically requires guaranty associations to help finance the transfer of policies to a solvent company. Keeping the channels of communication open and close collaboration between the guarantee associations and the trustees during the insolvency procedure, from the time the company in trouble enters the process until the liquidation of the insolvency estate, will ensure the most efficient resolution for the benefit of affected policyholders.