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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 up to 1.5% of their annual premiums.
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 $132 million through December 2006. Most 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 or visit www.ohioga.org.
Source: Excerpts from "Issues Updates," Insurance Information Institute
Recent Ohio legislation
The Ohio General Assembly passed legislation (SB 279) to amend the Ohio Insurance Guaranty Association (OIGA) statute in response to an August 2004 Ohio Supreme Court ruling (Katz v. Ohio Insurance Guaranty Association). This ruling allowed the OIGA’s $300,000 claim cap to be “stacked” for multiple wrongful death beneficiaries and other derivative claims.
Since its inception, the OIGA has handled claims as though only one cap applies to injury or death of one person, and this was never seriously challenged until the PIE Mutual insolvency in 1998.
Senate Bill 279 was signed by the Governor in December 2006 and became effective in March 2007. The bill:
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Specifies that all claims filed with the Ohio Insurance Guaranty Association arising out of bodily injury or death to any one person constitute a single claim for purposes of claims exceeding $300,000.
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Excludes from the definition of "covered claim" a claim due an insured whose net worth exceeds $50 million, except in specified cases concerning the insured's insolvency.
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Narrows the exemption under the Guaranty Association Law for reciprocal or interinsurance exchange contracts by limiting the exemption to only those reciprocal or interinsurance contracts for medical malpractice where the reciprocal or interinsurance exchange is not subject to the risk-based capital requirements in effect in the state of domicile of the reciprocal or interinsurance exchange.
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. |
