State guaranty associations play a vital role in keeping the promises made by the insurance industry and protecting policyholders when their company goes out of business. Since 1983, state guaranty associations have:
How have they done it? The explanation starts with how insurance is regulated, why state guaranty associations were created, and why the associations created NOLHGA to help them protect policyholders more efficiently.
Associations & the Receivership Process
Insurance companies are regulated by the states—companies must be licensed in each state in which they do business, and state insurance departments monitor their financial stability. The states also oversee the guaranty association safety net—each state, along with the District of Columbia and Puerto Rico, has a life and health insurance guaranty association to protect its residents if an insurance company fails. All companies (with limited exceptions) licensed to do business in the state are required to be members of the guaranty association (in other words, a company that does business in 25 states would be a member of 25 guaranty associations).
If an insurance company is found to be financially unstable, the insurance department in its home state (also known as its domiciliary state) can step in and take control of the company. This begins what is known as the “receivership process,” and in this first stage, the company is considered to be in “rehabilitation” (some states use a different term) as the insurance department attempts to improve the company’s financial status. The state insurance commissioner becomes the “receiver” for the troubled company, although commissioners often appoint special deputy receivers to oversee the company’s operations.
If the attempt to rehabilitate the company is successful, the receivership process for the company ends. If the company’s financial difficulties are too great to overcome, however, the commissioner declares the company insolvent, and the receivership process moves into the next stage—liquidation. In this stage, the receiver or deputy receiver attempts to maximize the company’s assets to pay off as many creditors as possible—chief among them policyholders.
When a company is liquidated, state life and health insurance guaranty associations are triggered to provide continuing coverage and benefits to policyholders of the company living in their state. Policyholders who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the guaranty association of the company’s domiciliary state. If the company does not have enough funds to meet its obligations to policyholders, each state guaranty association uses a combination of company assets and assessments of member insurers in its state to meet the claims of resident policyholders. The amount assessed is based on the amount of premiums each company collects in that state on the kind of business for which benefits are required.
Benefits & Continuing Coverage
Much like the FDIC’s coverage of the banking industry, state guaranty associations provide benefits up to a specified level, with any benefits above that level being funded from remaining estate assts. For the associations, these levels are spelled out in state law.
While laws governing maximum levels and types of policies covered vary from state to state, most states are consistent with the NAIC Model Act and provide coverage at least in the amounts specified below. Check your state association’s website to confirm the applicable benefit levels in your state.
In most states, the aggregate benefit level for an individual life in any one insolvency is $300,000 (except if there is covered major medical insurance or covered basic hospital, medical and surgical insurance, in which case the aggregate benefit is $500,000). The above coverage levels apply separately for each insolvent insurer.
One important aspect of the life and health insurance safety net is that continuing insurance coverage is provided for policyholders when their policies give them the right to keep their coverage in force. In some cases, it would be difficult for people who have lost coverage due to the failure of their insurance company to find comparable coverage elsewhere. To avoid this, guaranty associations provide continuing coverage, often by placing the policies of an insolvent insurer (including the policies of those who might otherwise be uninsurable) with a healthy insurer. In other cases, guaranty associations simply take on the policies and fulfill the terms themselves.
Why the System Works
State guaranty associations exist for three main reasons:
The guaranty system safety net has evolved over the years as associations have become more experienced in meeting the needs of policyholders of failed insurers. One major step in this evolution was the creation of the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) in 1983. The state guaranty associations created NOLHGA to help them deal effectively and efficiently with the large-scale challenges presented by national insurance company failures, which affect policyholders in many states.
This efficiency is achieved in a number of ways. Through NOLHGA, all state associations can call upon the expertise of a single set of guaranty system professionals and experienced consultants as they attempt to protect the policyholders in their state. Thanks to frequent collaboration with state insurance departments, this group (known as a NOLHGA Task Force) is often formed before an insurer is even declared insolvent. This advance preparation enables the guaranty associations to meet the needs of policyholders as quickly as possible.
Continuing Coverage: Thanks to the guaranty associations, every eligible policyholder has been given the opportunity to have their policy assumed by another healthy carrier or had the covered portions of their policies fulfilled by their guaranty association itself (certain insurance policies that are not guaranteed renewable are sometimes canceled in accordance with the terms of the policies). In the multi-state insolvencies with which NOLHGA has been involved, approximately 2.6 million policies were protected by the guaranty system.
Protection of Benefits: As mentioned earlier, state guaranty associations provide benefit protection up to the levels specified in their state’s laws. While these levels can result in partial coverage of high-dollar policies, in recent insolvencies more than 96% of policyholder life insurance benefits and more than 88% of policyholder annuity benefits have been covered in full.
Rapid Protection: State guaranty associations were established to quickly protect policyholders in their time of need. Put simply, policyholders benefit when their policies are moved to a strong insurance carrier quickly. Thanks to the coordination the guaranty associations achieve through NOLHGA, task forces often develop a plan to protect policyholders of a troubled company before the company is declared insolvent. In the past 15 years, the time required to move policyholders to a sound company has been reduced from years to months, with coverage provided by the guaranty associations until the transfer takes place.
In short, the guaranty system safety net has grown stronger through the years, and it stands ready to catch policyholders if their company falls.