Section H Gov't and Industry Programs: Porter 2: Insurance Regulation

Question 1

Purpose of Guaranty Funds:

Answer 1

Established to protect policyholders from inability of an insolvent insurer to pay claims; and refund a portion of the UEPR

Question 2

Limitations on Guaranty fund coverage:

Answer 2

• Lines covered - most direct P/C policies if isssued by insurers licensed to transact insurance in the state (excl. title, credit, mortgage, ocean marine, reinsurance, and surplus lines)
• 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
• 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 3

Explain how Guaranty Funds are operated:

Answer 3

• All insurers selling lines covered by fund automatically become members
• Assessments are commonly made on basis of premiums written divided along lines of insurance
• Post insolvency assessment approach: claims estimated and assessments issued after the insolvency
• Insurers may pass on assessment costs to policyholders in their rates

Question 4

2 Compliance Responsibilities of insurers regarding the Guaranty Funds:

Answer 4

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

Question 5

2 disadvantages of Guaranty Funds to insurers:

Answer 5

1. Insurers are directly assessed for the operation of guaranty funds
2. Competition is distorted: Insurers that can aggressively market or loosely underwrite can gain a greater share of market (people will still purchase the insrurance due to the Guaranty Fund protection)