- a company in trouble
- role of the insurance commissioner
- role of the liquidator
- role of guarantee associations
- guaranteed coverage
- how the coverage is financed
- nolhga paper
a company in trouble
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insurance is supervised and regulated by state insurance departments, and one of its main objectives is to protect policyholders from the risk of a company in financial difficulties. When a business enters a period of financial difficulty and is unable to meet its obligations, the insurance commissioner in the business’s home state initiates a process, dictated by state law, through which efforts are made to help the company to recover its financial position. this period is known as rehabilitation.
Reading: What is insolvency in insurance
If it is determined that the business cannot be rehabilitated, the business becomes insolvent and the commissioner will petition the state court to order the business to be liquidated.
role of insurance commissioner
The insurance commissioner, whether appointed by the governor or elected, directs the state insurance department and oversees and regulates insurance activity within the state. The commissioner is also responsible for determining when a state-domiciled insurance company should be declared insolvent and seeking state court authorization to seize its assets and operate the company pending rehabilitation or liquidation.
role of the receiver
When gaining control of a business, the commissioner (or department of insurance) is, by law, the rehabilitator or liquidator of the business. In this capacity, the commissioner or department takes control of the company’s operations. Instead of doing so directly, the commissioner may hire a special deputy trustee to oversee the company’s activities. The trustee may be an employee of the state insurance department or an independent professional with experience in legal, accounting, and actuarial matters.
the trustee supervises the accounting of the company’s assets and liabilities and manages the company’s assets. In doing so, the trustee seeks to maximize the company’s assets, transfer them to cash, and then distribute that cash to creditors who have valid claims against the insurer according to payment priorities specified by state law (in all states, policyholders are priority claimants whose claims are paid before those of general creditors).
role of guarantee associations
State Life and Health Insurance Guaranty Associations are state entities (in all 50 states, as well as in Puerto Rico and the District of Columbia) created to protect policyholders from an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance or annuities in a state must be members of that state’s guaranty association.
The guaranty association cooperates with the commissioner and trustee in pre-liquidation planning. once liquidation is ordered, the guaranty association provides coverage to the company’s policyholders who are state residents (up to levels specified by state law; see below; any benefit amount above levels profit from the guaranty association becomes a claim against the company’s remaining assets). for a complete list of each state’s laws regarding this coverage, see the guaranty association laws in the “facts & “figures” section.
While the laws governing maximum limits and the types of policies covered vary from state to state, most states are consistent with the NAIC model law and provide coverage in at least the amounts specified below . Check your state association’s website to confirm the benefit levels applicable in your state.
- $300,000 life insurance death benefits
- $100,000 life insurance cash surrender values
- $250,000 present value of annuity benefits , including net cash surrender/withdrawal values
- $500,000 in basic hospital, medical and surgical expenses insurance policy benefits
- $300,000 in insurance policy benefits long-term care insurance
- $300,000 in disability insurance policy benefits
- $100,000 in other health insurance benefits
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 benefit aggregate is $500,000). the above coverage levels apply separately for each insolvent insurer.
how coverage is financed
When an insurer goes bankrupt and the necessary funds to meet the obligations with the insured are lacking, the state guarantee associations are activated. Guarantee associations have two main sources of financing when providing coverage to policyholders. First, guarantee associations have subrogation rights over a proportionate share of the remaining assets of the failed insurer. Those assets, which can be substantial, can be used by guarantee associations to pay covered claims. Second, insurers doing business in that state are allocated a portion of the amount required to cover that portion of covered guaranty association claims that are not otherwise funded from the assets of the estate. the amount insurers are assessed is based on the amount of premiums they charge in that state.
the national organization of life and health insurance guaranty associations (nolhga) is comprised of the life and health insurance guaranty associations of all 50 states and the district of columbia. Through NOLHGA, associations work together on a voluntary basis efficiently and effectively to provide ongoing protection to policyholders affected by insurance insolvency in multiple states. nolhga establishes a task force of representative guaranty associations to work with the insurance commissioner to develop a plan to protect policyholders.
For more information on nolhga’s role in the process, see “what is nolhga?” and “the safety net at work”.