guaranty funds

Question 1

guaranty funds established to

Answer 1

protect policyholders from inability of an insolvent insurer to pay claims

Question 2

guaranty funds pay

Answer 2

pay most claims that would have been due and a portion of UEP

Question 3

Lines covered by GF

Answer 3

most direct P/C policies if issued by insurers licensed to transact insurance in the state (excl. title, credit, mortgage, ocean marine, reinsurance, and surplus lines)

Question 4

GF limitations

Answer 4

• Refunds of unearned premium, often with stated limit
• Maximum covered claim, except WC which is unlimited
• Claim deductible in addition to policy deductible
• Large net worth deductible – many states have adopted and is stated as percentage of those insureds’ net worth
• Trigger of coverage – most state fund coverage only available for an insurer after a court has found it to be insolvent and placed in liquidation

Question 5

-Policyholders can assert the portion of the claims that would have been covered by their insurance policy but which are not covered by guaranty fund

Answer 5

against the insolvent insurer’s liquidator

Question 6

guaranty fund board can

Answer 6

make recommendations to commissioner about insolvency protection and participate in the correction

Question 7

All insurers selling lines covered by GF

Answer 7

automatically become members

Question 8

Assessments are commonly made on basis

Answer 8

basis of premiums written divided along lines of insurance

Question 9

Post insolvency assessment approach

Answer 9

claims estimated and assessments issued after the insolvency

Question 10

Guaranty fund only used

Answer 10

to pay obligations to policyholders, not general creditors

Question 11

state may - if insurer that fails to pay assessment

Answer 11

suspend or revoke license

Question 12

If another insurer agrees to continue the coverage of the insolvent insurer’s policyholders

Answer 12

the guaranty fund will transfer some/ all of the assessments to the new insurer

Question 13

Insolvencies involving insurers writing in multiple states

Answer 13

are difficult

-Each state guaranty fund must decide how much to assess for the policyholders living in its state

Question 14

Insurer’s Compliance Responsibilities for GF

Answer 14

• Insurer can’t use the fact that the guaranty fund exists to help sell business
• Needs to provide new policyholders with a guaranty fund disclaimer

Question 15

GF Effect on Consumers

Answer 15

• Indirect cost of funds on consumers is hidden, but real, passed partly back to consumers in form of higher insurance rates
• Guaranty funds remove incentive for consumers to “shop the market” for financially sound insurers

Question 16

Effect of GF on the Insurance Industry

Answer 16

• High costs of paying for insolvencies through guaranty funds motivate insurers to promote strong financial regulation
• Price for insolvencies is high for two reasons
• Insurers are directly assessed for the operation of guaranty funds
• Competition is distorted, insurers that can aggressively market or loosely UW can gain a greater share of market