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Ohio Insurance Guaranty Association
What happens if an insurance company declares bankruptcy? Would
policyholders be able to recoup any of their premium payments if
the policy period hadn’t expired? Would policyholders and
claimants be compensated for claims in process? To assure that policyholders
aren’t abandoned, each state has a guaranty association to
ensure payment to policyholders who have claims against insolvent
insurers.
Industry regulation
The regulation of insurance company solvency is a function of each
state and will continue to be so under the Gramm-Leach-Bliley Financial
Services Modernization Act passed in 1999. Each state’s insurance
department monitors the financial health of insurers licensed to
transact business in the state. The Ohio Department of Insurance
(ODI) is the state’s regulator of insurance transactions.
For up-to-date information on Ohio-domiciled insurers in rehabilitation
or liquidation, visit www.ohinsliq.com.
To assist regulators in monitoring the financial condition of insurers,
all licensed insurance companies file detailed annual financial
statements with state insurance departments. The statements are
uniform and each insurer writing business in the state is required
to file.
The National Association of Insurance Commissioners (NAIC) has
developed a series of tests—the Insurance Regulatory Information
System (IRIS)—which facilitates the early identification of
companies in financial trouble. Statistical data taken from these
detailed statements are run through IRIS tests. If the tests indicate
a company’s financial ratios are outside the normal range
in more than four areas, its finances are reviewed in greater detail
to determine whether it is in need of immediate regulatory attention.
In addition, insurance department examiners conduct periodic on-site
audits of selected insurers each year, where all financial aspects
of a company are reviewed in detail.
How guaranty associations work
Few other industries have a mechanism in place to provide a “safety
net” for consumers of their product. Insurers are required
to be members of a state’s guaranty association as a condition
of obtaining a license to write insurance in that state. The association
operates through a board of directors composed largely of representatives
of licensed insurers in the state. Its purpose is to reduce or avoid
financial loss to policyholders and claimants resulting from the
liquidation of an insolvent insurer.
The association, created by state law, provides a mechanism to
collect and pool funds from solvent insurers to pay policyholder
claims left unpaid as a result of the insurer insolvency. When an
insurance company is declared insolvent, licensed insurers are assessed
an amount based on their premium volume in that state. Each licensed
insurance company is required to pay their corresponding assessment
to the guaranty association.
This insurance mechanism ensures payment (up to $300,000) to those
policyholders who have claims against the insolvent company. These
could be typical insurance claims from damages caused by a covered
peril under an insurance policy, or a claim against the insurer
for unearned premiums.
More NAIC regulation
The NAIC has strengthened solvency regulation since the early 1990s.
It formally adopted solvency accreditation standards in June 1990
(Ohio was the ninth state certified in December 1991), and adopted
risk-based-capital (RBC) standards effective for P/C insurer 1994
annual financial reports (filed in March 1995).
RBC standards replaced the surplus and capital requirements, which
varied widely by state, with standards geared to specific characteristics
of the company and its business. RBC formulas establish minimum
levels of capital that will help maintain solvency in the event
of a serious miscalculation. With RBC formulas, examiners can identify
insurers under financial pressure and take early action to avert
insolvency.
Ohio Insurance Guaranty Association (OIGA)
Since its establishment in 1970, a total of 13 Ohio domestic P/C
companies have been liquidated. The Ohio fund has assessed member
companies over $172 million through December 2004. Recent liquidations
include Credit General Insurance Company, Acceleration National
Insurance Company, and Proliance Insurance Company, all liquidated
in 2001; LMI Insurance Company, liquidated in 2000; and PIE Mutual
Insurance Company, liquidated in 1998. Prior to this, the most
recent liquidations occurred in 1990.
For more information about
Ohio’s guaranty fund, contact
the Ohio Insurance Guaranty Association, 1840 Mackenzie Drive,
Columbus, OH 43220, 614-442-6601.
Source: Excerpts from "Issues Updates,"
Insurance Information Institute
The rehabilitation and liquidation processes
When an insurance company is placed in rehabilitation, the insurance
department of the state in which the insurer is incorporated seizes
control of the operations of the troubled company. The department
may then take steps, like suspending the payment of claims, searching
for sources of capital and putting on hold any lawsuits against
the company, to help return the company to stability. If the initiated
steps don’t work, the final step would be for the department
to place the company in liquidation. Liquidation means the insurance
department would close the company’s affairs by selling assets
to pay for outstanding claims and obligations.
For up-to-date information on Ohio-domiciled insurers in rehabilitation
or liquidation, visit www.ohinsliq.com.
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