What If My Insurance Company Becomes Insolvent?

When you purchase an insurance policy or annuity, you expect the terms and conditions of the policy to be fulfilled and in the event that it is needed, you also expect to receive the protection you have paid for. State insurance departments devote much effort to enforce laws that require insurance companies to operate on a financially sound basis but still the chances of an insurance company becoming insolvent cannot completely be over-ruled.

Though scenarios where financial losses cause an insurance company to become insolvent are very rare but still insurance consumers are protected by every state. Such protection is provided by the state from “guaranty fund”. A guaranty fund is commonly established by state law. Licensed companies doing business in the state make up the membership of the guaranty fund association.

Generally the Insurance department regulates the business of insurance in a country. It monitors the financial condition of insurance companies. If a large company should fail, various healthy companies and perhaps many state insurance departments may become involved in devising a plan for the rescue. The goal is always to protect the policyholders and make certain that insurance customers can have faith that their policies will be honored.

When an insurance company becomes insolvent, the Insurance Commissioner is authorized to petition a court to place the company into formal rehabilitation or liquidation proceedings. Such proceedings are court supervised receiverships in which, as mandated by statute, the Insurance Commissioner is appointed by the court to act in the capacity of a rehabilitator or a liquidator.

The guaranty associations are established by state law and comprises of membership of companies. Guaranty associations pay the claims of policyholders of an insolvent company when that company’s assets become insufficient to meet their obligations to policyholders. The money used to pay these claims comes from assessments made against all insurance companies that are members of the respective guaranty association. Guaranty associations operate and pay claims at no direct cost to the state treasury or taxpayers.