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Property and casualty guaranty funds are part of a non-profit, state-based, statutorily-created system that pays outstanding claims of insolvent insurance companies. By paying these claims, guaranty funds, sometimes called guaranty associations, protect policyholders and claimants.
Guaranty funds are active in every state, the District of Columbia, Puerto Rico and the Virgin Islands. State laws require that licensed property and casualty insurance companies belong to the guaranty funds in every state where they are licensed to do business.
Most guaranty funds were created in the 1960s as state insurance commissioners and lawmakers responded to an increase in insolvencies of insurers writing policies in the high-risk auto insurance business.
A guaranty fund system also exists for the life, health and annuity insurance industry; but it operates independently from the property and casualty system. This information concerns only the property casualty guaranty funds.
The potential failure of insurance companies, like the potential failure of all businesses, is an unfortunate, but inevitable, part of doing business in a free-market system.
Since inception of the property and casualty guaranty fund system, there have been about 600 insolvencies. In all, the system has paid out about $24.2 billion.
Guaranty funds largely are funded by industry assessments, which are usually collected following insolvencies. These assessments raise funds to pay claims and administrative and other costs related to the guaranty funds claim paying activities.
Assessments typically are capped at two percent of a company’s net direct premium written in similar lines of business in the guaranty associations’ state the prior year, although in exceptional circumstances amounts can be increased by state legislatures. The other source of funding is recoveries from receivers of the insolvent insurance companies. Assessment costs are recouped by various means.
With the exception of New York (which uses a pre-insolvency system), the states’ guaranty funds assess after an insolvency occurs. Assessments are computed and billed based on the immediate needs of the guaranty association that has claims it needs to pay. Claim files come in from the insolvent insurance company; the adjusters review them, and set appropriate reserves on those files. (Reserves are the projected ultimate liability under terms of a given policy.)
In most states the assessment cap is two percent of net direct-written premium or less. Guaranty funds cannot assess an insurance company over the statutorily set cap on assessments. In exceptional circumstances, for instance when a natural catastrophe causes several large insolvencies and creates a need for additional assessments, state legislatures may enact emergency legislation that grants additional assessments or permits guaranty funds to borrow money, such as through a bond issue, or grant assessments to repay borrowed funds.
The state insurance commissioner or a representative is appointed receiver and begins the process of collecting assets and determining the company’s outstanding liabilities. When this process is concluded a final distribution is made to the company’s creditors. This is almost always less than 100 percent of what is owed; usually this final distribution is made a number of years after the company is ordered liquidated.
In most cases, an estate will not yield sufficient money to pay claims in full; and most are not able to pay claims in a timely manner. For this reason, one or more guaranty funds step in (depending on the number of states in which the failed company wrote business) to cover claims. The estate’s creditors not covered by the guaranty funds (among them large corporate entities that opt to buy less expensive alternative risk products) usually receive only partial payment on their claims.
Guaranty funds ease the burden on policyholders and claimants of the insolvent insurer by immediately stepping in to assume responsibility for most policy claims following liquidation. The coverage guaranty funds provide is fixed by the policy or state law; they do not offer a “replacement policy.”
By virtue of the authority given to the guaranty funds by state law, they are able to provide two important benefits: prompt payment of covered claims and payment of the full value of covered claims up to the limits set by the policy or state law.
Yes. Most guaranty funds limit the amount they pay to the amount of coverage provided by the policy or $300,000, whichever is less. These coverage “caps” are fixed by state law; the guaranty funds play no role in setting coverage caps. Most guaranty funds pay 100 percent of their state’s statutorily defined workers’ compensation benefits.
It varies, but claim payments usually begin as soon as possible once a company is ordered liquidated. The process is speeded by the guaranty funds’ “early access” to estate assets provided by state law. It is not uncommon for claims to be paid within 60-90 days after the order of liquidation.
Guaranty funds, coordinating with the receivers of the liquidating companies, work hard to avoid any interruption in periodic benefits that are being paid to claimants, such as workers’ compensation loss-of-wages payments.
No. The state insurance guaranty funds are designed as a safety net to pay certain claims arising out of policies issued by licensed insurance companies. They do not pay non-policy claims or claims of self-insured groups, or other entities that are exempt from participation in the guaranty fund system.
In addition, some lines of business are excluded from guaranty fund coverage, such as surety bonds, warranty coverage and credit insurance. (Life and health claims and annuity claims are covered by the life and health guaranty funds, not the property and casualty system.)
Guaranty fund coverage is limited to licensed insurers (the members of the guaranty funds that, in turn, pay insolvency-related assessments.) When a licensed insurance company becomes insolvent, the guaranty funds pay eligible claims; but a company does not have guaranty fund coverage if it is writing non-admitted or unlicensed products, such as surplus lines or is a self-insurer covered in the non-admitted market.
These limits on guaranty fund coverage are necessary to balance the need to provide a safety net to those who would be most harmed by the insolvency of their insurance company and keep the burden of providing the safety net at an acceptable level.
Typically, state guaranty funds are administered by an industry board that is elected by the guaranty fund members (that is, all companies writing licensed business in that state). There is oversight authority by a state’s commissioner of insurance, who reviews the fund’s plan of operation, and may also audit a guaranty fund. In most states appointment to the guaranty fund board is subject to the approval of the commissioner of insurance.
While many of the funds are based on a model set forth by the National Association of Insurance Commissioners (NAIC), there are differences in statutes that govern the funds and their operation from state to state, including the amount of coverage provided by the fund.