Seven non-life insurance companies became insolvent in thesecond quarter of 2013–two more than the total number ofliquidations in 2012, shows a report by the NationalConference of Insurance Guaranty Funds (NCIGF).  

Twenty-five P&C funds were liquidated from 2011 tothe second quarter of 2013. Florida guaranty funds were especiallyhard-hit because the state's hurricane-prone location causedregional companies to fold (Hurricane Irene caused $800 million ofdamage in the state), with six out of 11 occurrences of insolvencyaffecting Florida insurers in 2011.

Guaranty funds are safety nets administered by U.S. states toprotect policyholders in case an insurance company fails. When a state court liquidates an insurance company, its qualifiedclaims are paid from money consisting of the company's remainingassets, statutory deposits, and taxes on the state's insurers.Since their establishment in 1969, guaranty funds have paid $27million to claimants and beneficiaries of more than 550disassembled companies.

1992 tallied the most insolvencies per year in the past twodecades, with its 46 closures dwarfing the eight and seven thatoccurred in 1995 and 1996, respectively. Since 2007, insolvencyincidences have been significantly lower than the annual average ofabout 15.

The distribution of an insolvent estate's remaining assets arecritical to state's ability to pay the claims of a failed insurancecompany, writes the NCIGF. In 2011 and 2012, more than $475 millionand $456 million of funds were recovered from estate assets,respectively. So far in 2013, the total distributions received orproposed to guaranty associations are more than $66.5 million. 

Currently, the liquidator for Ohio's Credit General InsuranceCompany and Credit General Indemnity expects to propose a plan forestate closure by the end of the year. The insolvency of AmericanMutual, which distributed $110 million to guaranty funds in 2011,was court-approved to put away an additional $50 million in 2011.In both cases, the receivers needed to settle on the value of openclaims such as long-term workers' compensation cases. 

Several pieces of state legislation have been enacted orproposed this year in regards to guaranty funds, reports the NCIGF.Arizona is considering the transfer of its workers' compensation"special funds" to its P&C Guaranty Fund after it receives anactuarial opinion on the amount in the fund that is available forthe payment of WC claims; this may take place in 2014.

Oklahoma has enacted a bill to privatize its state-run guarantyfund, ComSource, and make it a member of its P&C guaranty fundin 2015. It also enacted legislation to permit employers to opt outof the WC system entirely to purchase alternative insurance or toself-insure; the state's guaranty association would create aspecial fund for companies choosing this road.

Washington State has introduced legislation to make the state'sworkers' compensation fund a competitive rather than monopolisticfund. Claims from private carrier insolvencies would flow to theWashington Insurance Guaranty Association.

Vermont is trying to clarify what happens to non-admitted closedblocks of commercial policies and reinsurance agreements sinceguaranty funds don't usually cover reinsurance and surplus claims,says the NCIGF. If that transaction is approved, a fee and taxwould apply to any non-admitted block of business that istransferred to a company licensed to do business in the state. 

On a national level, the National Association of InsuranceCommissioners (NAIC) has adopted a guideline to assist states inmodifying their insurance liquidation acts to deal with the closureof a systemically important insurance company. So far, Californiaand Texas have adopted these guidelines. Earlier this month, theG-20 Financial Stability Board named nine insurers, including AIG, Metlife and Prudential, assystemically important to the global financial system.