Porter - Guaranty Funds

Question 1

Purpose of Guaranty Funds

Answer 1

Established to protect policyholders from inability of insolvent insurer to pay claims
Funds pay most claims and a portion of UEP

Question 2

Limitations of Guaranty Fund coverage

Answer 2

Lines covered (must be licensed insurers)
Maximum covered claim (excl. WC)
Claim deductible in addition to policy deductible
Refunds of UEP, often with stated limit
Large net worth deductible
Most only available for insurer after court has placed in liquidation

Question 3

Operation of Guaranty Funds

Answer 3

All covered insurers automatically become members
Directors have broad authority
Most expertise in settling claims
Assessments made on basis of premiums written (usually capped at 2%)
Wait for insolvency to occur
Only used to pay obligations to policyholders, not creditors

Question 4

Guaranty Funds can suspend or revoke license

Answer 4

If insurer fails to pay assessment

Question 5

Insurers in multiple states, guaranty funds

Answer 5

State of domicile has primary authority

Differing guaranty fund coverages and laws

Question 6

Guaranty fund effect on consumers

Answer 6

Claims benefit
Indirect cost of funds on consumers is hidden (partly in form of higher rates)
Incentive to “shop the market” for financially sound insurers removed

Question 7

Guaranty fund effect on insurance industry

Answer 7

High costs of paying for insolvencies through guaranty funds motivate insurers to promote strong financial regulation
Price for insolvencies is high

Question 8

Reasons price of insolvencies is high

Answer 8

Competition distorted (less fear)
Insurers are directly assessed for operation of funds

Question 9

LOBs excluded from guaranty fund

Answer 9

Title
Credit
Mortgage
Ocean Marine
Reinsurance
Surplus
Employee Pension

Question 10

Allocation of insolvent insurer liabilities

Answer 10

Based on market share, excluding insolvent insurer