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You say the guaranty funds pay these claims. Where do they get the money to pay them?

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.

faq | by Dr. Radut