When an insurance company is placed into liquidation by a court of competent jurisdiction the state guaranty funds respond to the insolvency. The primary way that guaranty funds are funded is through the form of assessments on member insurance companies. This will examine how assessments work under the guaranty fund system.

What is a member insurer? A member insurer under the guaranty fund model act is defined as any person who writes any kind of insurance to which the act applies including the exchange of reciprocal or inter-insurance contacts. This excludes insurers who write only non-covered lines of business, such as fidelity or surety bonds, ocean marine, title insurance or warranty only coverages. Life, health and annuity coverages are also excluded under the property & casualty guaranty act, but are covered under the life and health insurance model act and the life and health guaranty funds.

A member insurer who surrenders their license will cease to be a member insurer but will still be responsible for all assessments assessed during the time they were a member insurer or later assessed for insolvencies that occurred during the time they were a member insurer.

Under most guaranty fund statutes assessments are broken down in the following accounts:

  • Auto, includes all personal and commercial auto coverages
  • Other, includes all other lines of "covered" lines except auto & possibly WC (see below)
  • Workers Compensation (in states that utilize a separate WC account or have a separate workers compensation guaranty fund)

When an insolvency occurs that triggers a guaranty fund, the fund will work with the receiver to try and ascertain their liability for the claims and claims handling expenses for the insolvent insurer. This will be the amount necessary to assess member insurers for. It's at best an estimate of the total liabilities of the fund, as there are a number of things that come further into play, such as early access, receipts from other estates, special deposits and any other recoverables.

The guaranty fund's Board of Directors at the recommendation of the President or Head of the guaranty fund will vote an assessment for the insolvent insurer. The assessment will either be collected immediately, partially called (collected) or deferred until such time the guaranty fund needs it. An assessment may be collected in one account such as the auto account when dealing with a multi-line insolvent insurer, and the other account assessment may be deferred for that same insolvency.

An initial assessment will be voted on in the year of the insolvency under most guaranty fund statutes. Some even allow an assessment to be voted prior year end if it appears the guaranty fund will be triggered shortly for new insolvencies, such as was the case in Florida. However, the FIGA statute does not follow Model Act language and has several different provisions.

The assessment will be based upon a certain percentage, usually 2% of annual written premiums in the year prior to the year of the insolvency. Prior year premium is used as the premium base used for assessments is pulled from the regulatory filings insurers make through the NAIC portal.

Schedule "T" of those filings shows the total amount written premium in each state. The filings show further breakdowns by lines of business. Uncovered lines or excluded lines of coverage, such as surety and ocean marine, are pulled out of the assessment base, and the annual premiums in a state are further broken down between the Auto, Other and WC accounts in those states that utilize separate assessment accounts. Then the assessment will be determined for each member insurer.

Assessments statements will be mailed out to the insurers with a set timetable for payment of the assessment, usually 30 to 60 days. Most assessments are paid quickly by insurers, and if an assessment payment is not received within that time period, the guaranty fund will follow up with a second notice. The guaranty fund will also report any insurer who fails to pay an assessment to the department for regulatory action.

Insurers may also dispute the assessment amount, generally on the basis that the premium base used for the calculation is incorrect (especially if the insurer has had to go back and restate their filings) or includes premiums for uncovered lines of business. These disputes will be investigated, and have at times led to litigation.

In the event that an insurer who receives an assessment statement becomes impaired or the payment of the assessment would impair the insurer, the assessment can be deferred due to the impairment. If the insurer ceases to be an impaired insurer, then the deferred assessment would then come due. If the impaired insurer becomes insolvent, then a claim for the unpaid assessment can be filed by the guaranty fund in the liquidation proceedings and should there be any assets available in that asset class, it would be paid pro-rata with all other claims in that class.

Insurers are able to recoup the assessments paid to guaranty funds though premium increases, premium tax offsets or policy surcharges. Insurers should refer to the specific guaranty fund statute and insurance statutes in the states in which they are licensed for the recoupment of guaranty fund assessments method(s) allowed. Insurers that operate in multiple states or all 50 states may have multiple assessments in years of high insolvency activity especially if there is a large widely licensed multi-line insurer insolvency.

Because insurance company insolvencies tend to run in cycles, there will be years of little to no insolvency activity followed by a cycle such as what is being seen in Florida and Louisiana with a greater number of insolvencies primarily in a state or region or in a particular line of business, such as worker compensation insurers. The last large multi-state multi-line insolvencies were the Reliance, Legion and Villanova insolvencies out of Pennsylvania back in 2000 and 2001.

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