Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.
Updated March 31, 2023 Reviewed by Reviewed by Robert C. KellyRobert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.
An insurance guaranty association is a state-sanctioned organization that protects policyholders and claimants in the event of an insurance company’s impairment or insolvency. Insurance guaranty associations are legal entities whose members make guarantees and provide a mechanism to resolve claims.
The failure of an insurance company is different from the failure of other firms because insurance companies are regulated by the states in which they are registered to do business and are not protected by federal bankruptcy laws. State insurance commissioners are charged with reviewing the financial health of insurance companies operating in their state. If one becomes insolvent—lacking funds to pay debts and obligations—the commissioner must act as the estate administrator.
Insurance guaranty associations are given their powers by the state insurance commissioner, with their duties and obligations outlined in a plan of operation. All U.S. states have an insurance guaranty association. A board of directors (BoD) is appointed to each to ensure the organization can effectively and efficiently meet the statutory expectations listed in the plan of operation.
Each association presents an annual report to the state insurance commissioner, outlining the activities it undertook during the year, its income, and any disbursements it may have made.
Insurers are required to participate in a guaranty fund of the state where they are licensed.
If a company appears to be at risk of meeting its financial obligations, it can be deemed impaired, in which case the commissioner will determine the steps the insurance company must take to reduce its risk over a reasonable time frame. This period is called a rehabilitation period.
If that doesn't work and the insurance company still fails to meet its obligations, it is considered insolvent. At this point, the state insurance commissioner, the state insurance guaranty association’s board, and the courts are required to determine how to pay the covered claims of the insurer.
There are a few options the association has at its disposal to pay these claims. First, the association's shares of any remaining assets are used to help pay covered claims. Then, insurance companies in that state are assessed and assigned a share of the remaining covered claims. Their share amounts are determined by the amount of premiums they collect in the state.
Other options include extending policy coverage through the association itself or allowing other insurance companies to take over the existing policies of insolvent companies.
Insurance companies in rehabilitation are not considered insolvent, so state guaranty funds do not pay any unpaid claims.
Coverages provided by guaranty associations differ from state to state. However, most states offer at least the following amounts of coverage, which are specified in the National Association of Insurance Commissioners’ (NAIC) Life and Health Insurance Guaranty Association Model Law:
Most states impose an overall cap of $300,000 in total benefits for any individual with one or multiple policies with the insolvent insurer.
An insurance guaranty association makes sure that insurance customers have coverage even if their insurance provider runs out of money and can't pay its debts and obligations.
Insurance guaranty associations protect policyholders by ensuring their claims are covered if an insurance company goes out of business.
The maximum an association can pay differs in every state, but many states follow the NAIC model.
Insurance guaranty associations protect consumer interests by overseeing insurance companies whose financial structure has failed. If a failing company cannot be rescued, it is liquidated. Customers are paid from the remaining assets and by other insurance companies in the state the original insurance provider operated in.