Evolution of Industry Oversight

Question 1

State Guaranty Associations

Answer 1

All states have established guaranty funds or guaranty associations to support insurers and protect consumers if an insurer becomes insolvent. Should an insurer be financially unable to pay its claims, the state guaranty association will step in and cover the consumers’ unpaid claims up to a specific amount. Insurance companies fund each state association through assessments. While policyowners are offered specific protections under the state guaranty association, producers are prohibited from using these protections in their sales presentations.

Question 2

Rating Services

Answer 2

While not technically insurer oversight, rating services help publicize the financial health of insurers. The financial strength (solvency) and stability of an insurance company are two vitally important factors to potential insurance buyers and insurance companies. The PRIMARY purpose of a rating service company, such as A.M. Best, Fitch Ratings, Standard & Poor’s, and Moody’s, is to determine the rated company’s (the insurer) financial strength. An insurer’s financial strength can be evaluated by looking at the companies reserves and liquidity.

Question 3

Reserves

Answer 3

The accounting measurement of an insurer’s future obligations to its policyholders. They are classified as liabilities on the insurance company’s accounting statements since they must be settled at a future date.

Question 4

Liquidity

Answer 4

A company’s ability to make unpredictable payouts to policyowners.