Seven non-life insurance companies became insolvent in the second quarter of 2013–two more than the total number of liquidations in 2012, shows a report by the National Conference of Insurance Guaranty Funds (NCIGF).
Twenty-five P&C funds were liquidated from 2011 to the second quarter of 2013. Florida guaranty funds were especially hard-hit because the state’s hurricane-prone location caused regional companies to fold (Hurricane Irene caused $800 million of damage in the state), with six out of 11 occurrences of insolvency affecting Florida insurers in 2011.
Guaranty funds are safety nets administered by U.S. states to protect policyholders in case an insurance company fails. When a state court liquidates an insurance company, its qualified claims are paid from money consisting of the company’s remaining assets, statutory deposits, and taxes on the state’s insurers. Since their establishment in 1969, guaranty funds have paid $27 million to claimants and beneficiaries of more than 550 disassembled companies.
1992 tallied the most insolvencies per year in the past two decades, with its 46 closures dwarfing the eight and seven that occurred in 1995 and 1996, respectively. Since 2007, insolvency incidences have been significantly lower than the annual average of about 15.
The distribution of an insolvent estate’s remaining assets are critical to state’s ability to pay the claims of a failed insurance company, writes the NCIGF. In 2011 and 2012, more than $475 million and $456 million of funds were recovered from estate assets, respectively. So far in 2013, the total distributions received or proposed to guaranty associations are more than $66.5 million.
Currently, the liquidator for Ohio’s Credit General Insurance Company and Credit General Indemnity expects to propose a plan for estate closure by the end of the year. The insolvency of American Mutual, 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 open claims such as long-term workers’ compensation cases.
Several pieces of state legislation have been enacted or proposed 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 an actuarial opinion on the amount in the fund that is available for the payment of WC claims; this may take place in 2014.
Oklahoma has enacted a bill to privatize its state-run guaranty fund, ComSource, and make it a member of its P&C guaranty fund in 2015. It also enacted legislation to permit employers to opt out of the WC system entirely to purchase alternative insurance or to self-insure; the state’s guaranty association would create a special fund for companies choosing this road.
Washington State has introduced legislation to make the state’s workers’ compensation fund a competitive rather than monopolistic fund. Claims from private carrier insolvencies would flow to the Washington Insurance Guaranty Association.
Vermont is trying to clarify what happens to non-admitted closed blocks of commercial policies and reinsurance agreements since guaranty funds don’t usually cover reinsurance and surplus claims, says the NCIGF. If that transaction is approved, a fee and tax would apply to any non-admitted block of business that is transferred to a company licensed to do business in the state.
On a national level, the National Association of Insurance Commissioners (NAIC) has adopted a guideline to assist states in modifying their insurance liquidation acts to deal with the closure of a systemically important insurance company. So far, California and Texas have adopted these guidelines. Earlier this month, the G-20 Financial Stability Board named nine insurers, including AIG, Metlife and Prudential, as systemically important to the global financial system.