when the insurance company aig, which was considered “too big to fail”, was on the verge of bankruptcy during the great recession, usa. uu. The government stepped in to bail out the company in 2008. However, bailouts like this don’t happen every day.
In fact, you probably shouldn’t count on Uncle Sam to save your insurance company if your finances take a nosedive. however, he’s not totally out of luck if his insurer goes bankrupt.
States regulate insurers, and all 50 have systems in place to protect policyholders if an insurance company goes out of business. it is important to understand how the process works and what kind of protection you will get. Better yet, you should know what steps to take to avoid ending up with an insurance company that goes out of business so you don’t have to rely on the state to bail you out.
why insurance companies go bankrupt
Although the insurance industry is highly regulated, insurance companies fail for a variety of reasons. For example, they might underprice their products and have higher-than-expected insurance claims, as happened with the long-term care insurer Penn’s treaty. The company was declared bankrupt in 2017 and its bankruptcy was considered one of the largest in the US. history.
US insurance company insolvencies peaked in the early 1990s, with more than 50 companies going bankrupt in 1992 alone, according to a study by the Society of Actuaries and the Canadian Institute of actuaries. in recent years, that number has been less than 10 a year. however, for policyholders, even one failure a year is too many if it’s their insurer that goes bankrupt.
how states protect insurance policy holders
When an insurance company is in financial trouble, the guarantee system in the state where the insurance company is based will come to the rescue, so to speak. All 50 states, the District of Columbia and Puerto Rico have insurance guarantee associations, according to the National Conference of Insurance Guarantee Funds.
most states have both:
- a life and health guarantee association that covers life, health, disability and long-term care insurance policies, as well as annuities.
- a property and casualty guarantee association dealing with auto and homeowners policies and workers’ compensation companies.
- $300,000 in life insurance death benefits
- $100,000 cash surrender values for life insurance
- $250,000 in present value annuity benefits
- $500,000 in major medical or hospital benefits
- $100,000 in other health insurance benefits
- $300,000 in long-term care insurance benefits
- $300,000 in disability insurance benefits
- $300,000 for property and casualty claims
- no limits on workers’ compensation claims
- a.m. best, which rates companies on a scale from a++ to d-
- fitch, which rates companies on a scale of aaa to d
- the kroll bond rating agency, which rates companies on a scale of aaa to d
- moody’s, which rates companies on a scale of aaa to c
- standard & poor, which rates companies on a scale of aaa to d
Insurers licensed to sell insurance in a state must be members of the state guaranty association and contribute to a guaranty fund that protects policyholders.
If an insurance company becomes financially unstable and unable to pay policyholders’ claims, the state insurance commissioner can take over the company through a process called receivership. First, the commissioner will try to rehabilitate the company to improve its financial situation. If that doesn’t work, the commissioner can declare the company insolvent and sell its assets, according to the National Organization for Life & health insurance guarantee associations.
what to expect if your insurance company fails
If an insurance company is declared insolvent, the state guarantee association and guarantee fund take action. The association will either transfer the insurer’s policies to another insurance company or continue to provide coverage to policyholders. therefore, it is important that policyholders continue to pay premiums if the state takes over their insurer.
paying your premiums keeps your coverage intact. Or consider getting a policy from another insurance company, though that’s usually easier to do with auto and home insurance than life insurance.
If an insurance company does not have sufficient funds to pay policyholders’ claims, the guaranty association will use the company’s assets and guaranty funds to pay the claims. however, states have a limit on the number of claims they will pay. Most states limit benefit payments to the following amounts:
If you have insurance policies with benefits that exceed those limits, it can be frustrating if you or your beneficiaries don’t get the full payment you paid for with your policy premiums. however, keep in mind that something is better than nothing.
Also, if you have a claim that exceeds the state limit, you may be able to apply to the company’s “estate” for full payment. But your claim will be pooled with the claims of all of the company’s creditors, and it could take years to see money, according to the national conference of insurance guaranty funds.
how to avoid insurers that could go out of business
To avoid having to rely on a state guaranty association to protect you as a policyholder, you can check insurance companies before you do business with them to make sure they’re financially sound.
Insurance companies are rated on their financial strength by independent agencies, each of which has its own scale and rating standards. The five rating agencies are:
The highest ratings are given to companies that the rating agencies believe are in the best position to meet their financial obligations. Low ratings are given to companies that the agencies say have little ability to meet financial commitments.
You should check ratings from more than one agency because ratings can vary from agency to agency, depending on the Insurance Information Institute. You’ll have to register with these agencies’ websites (and possibly pay a fee) to view your insurer’s ratings, but many insurers advertise their ratings on their websites.
Pay particular attention to downgrade press releases and read the agency’s reasons for downgrading the company.
You can also check your insurer’s website for their ratings. however, please note that you may be displaying your highest scores instead of your most recent scores.
If your financial situations change and rating agencies downgrade you, you’ll want to know as soon as possible to decide if you want to switch insurers.
When is the time to change insurance companies?
If your insurance company’s rating is still in the middle of the rating agency scales, it’s not cause for too much alarm. however, if your insurer’s ratings are really low, consider switching companies, depending on the type of policy you need to replace.
Switching to another auto or home insurance company can be relatively quick and easy. continue to pay your premiums until you have purchased a new policy so there is no gap in coverage. Once the new policy is in force, you can cancel your old policy and ensure you get a refund for coverage you already paid for but didn’t use.
Switching to a new life insurance company can be more complicated. If you drop a policy, you can expect to pay a higher premium for a new one due to your advanced age. the health conditions you have developed will also increase your new cost.
If you want to get rid of a permanent life insurance policy, you may be able to get back the cash value, less any surrender charges.
To help weigh your options if you’re considering switching life insurance policies, talk to a financial advisor or life insurance agent you trust. if you decide to replace a life insurance policy, don’t cancel it until you have a new one to avoid the possibility of ending up with no coverage at all.