I. The Commentators. The following comments are delivered jointly by the
National Conference of Insurance Guaranty Funds (NCIGF) and the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA) pursuant
to the Request for Comments issued by the Department of the Treasury on October 11,
II. The Interests of the Commentators. NCIGF and NOLHGA are both deeply
involved in a specialized area of the financial services regulatory structure: coordinating
the provision by their memberships of specified protections to insurance consumers in
situations where the insurer owing obligations to consumers has entered insolvency
(liquidation) proceedings. In some ways, NCIGF and NOLHGA and their members
perform a function in the insurance market that is roughly analogous to the function of
the FDIC with respect to its member and insured depository institutions. NCIGF’s
members are principally concerned with protecting consumers of failed property and
casualty insurers. NOLHGA’s members are principally concerned with protecting
consumers of failed life or health insurers.
NCIGF and NOLHGA neither support nor oppose any specific regulatory reform
proposals that have to date been the subject of public discussion within Congress or the
Department of the Treasury. However, in light of the increasing attention given in recent
years to the possibility of an augmented federal role in supervising (or directly providing)
regulation of the business of insurance, NCIGF and NOLHGA believe it important that
the Department and other interested parties have a clear understanding of the nature of
the current guaranty protection mechanisms protecting insurance consumers; the track
record, resources, and financial capacity of those mechanisms; the ability of those
mechanisms to adapt to various proposals for regulatory change; and the implications for
consumers and others of certain specific concepts for establishing alternative consumer
“safety net” mechanisms.
III. Further Inquiries Invited. The information contained in this response is
necessarily concise and summary in form. Representatives of NCIGF and NOLHGA
would be happy to respond – in writing or in person – to any specific requests for followup
information or data.
IV. Summary of Commentators’ Perspective. NCIGF and NOLHGA take no
position on legislation permitting “optional federal chartering” (OFC) for insurers, nor
any other specific proposals for insurance regulatory reform at the federal level.
However, NCIGF and NOLHGA believe that, should OFC legislation be adopted, the
optimal approach to providing a financial safety net for insurance consumers whose
companies fail would involve continued reliance on the current guaranty system, both for
companies keeping their state charters as well as for those opting for a federal charter.
The same conclusion has been reached by the drafters of OFC bills currently introduced
in the Senate and the House. That conclusion is sound for the following reasons: (i) the
current system has been tested and proven successful in hundreds of insurer insolvencies
over the past four decades; (ii) the system is experienced and fully staffed with
experienced personnel in place in every state; (iii) the system has ample financial and
operational capacity; (iv) reliance on the current system would eliminate the need to
expend federal tax dollars to create, staff, and maintain a new federal bureaucracy; and
(v) the current system could easily, logically, and fairly be adapted to cover companies
choosing a federal charter, since it currently covers the companies that would elect such a
V. Background Information. In order to understand the current insurance safety
net system, it is important to understand several background facts about the system and
the environment in which it operates. The following are among the more critical facts:
History of State Regulation. Insurance has been regulated almost entirely at the state
level throughout U.S. history. Initially, that was at least in part a consequence of an 1869
ruling of the United States Supreme Court (Paul v. Virginia, 75 U.S. (8 Wall) 168
(1869)) to the effect that the transaction of insurance business did not involve “interstate
commerce” and, therefore, was beyond federal regulatory authority. When the Supreme
Court reversed the holding of Paul v. Virginia in 1944, holding insurance to be “interstate
commerce” in the case of United States v. Southeastern Underwriters, 322 U.S. 533
(1944), it became clear that the federal government had the power to regulate insurance.
However, Congress opted largely to maintain the status quo – state regulation – by
enacting the McCarran-Ferguson Act in 1945, 15 U.S.C. §§ 1011-15, under which
Congress re-established the primacy of state insurance regulation except to the extent
Congress might explicitly choose to regulate the field. OFC legislation would constitute
such an express Congressional decision to regulate insurance.
Bifurcation of the Consumer Insurance Markets. Although it is customary to refer to
the insurance industry as though it were monolithic, in fact the industry is divided into
several quite distinct segments. The most significant and clearest distinction is between
those companies writing direct property and casualty business, on the one hand; and those
writing direct life and annuity business, on the other. While a relatively small number of
insurance holding company structures include separate subsidiaries that write both life
and annuity and property/casualty business, for the most part companies specialize in one
such line or the other. The contractual commitments embodied in property/casualty
contracts are fundamentally different than those embodied in life and annuity contracts.
Those fundamental differences are reflected in completely different systems for
marketing, operations, accounting, and investments; and also in separate and distinct
regulatory frameworks for property/casualty and life and annuity insurers. In addition,
the financial safety net system currently in place across the country is similarly
bifurcated: the property and casualty insurance guaranty associations that comprise
NCIGF’s membership operate separately from the life annuity and health insurance
guaranty associations that comprise the membership of NOLHGA.
The Executory Nature of Insurance Contracts. Insurance contracts typically comprise a
complex of promises to insurance consumers that, taken as a whole, are quite different in
nature from the simple commitment inherent in, for example, a depository account with a
bank or thrift institution. In the case of a deposit account (savings or checking), a
primary consideration is the availability of funds on a “demand” basis to meet current
daily needs of the depositor. As a consequence, the primary objective of a consumer
“safety net” system, as provided by the FDIC for federally insured depository institutions,
is the provision (within program limits or “caps”) of immediate liquidity for the account.
When a bank fails, in effect the FDIC replaces dollars with dollars, which permits
fulfillment of the deposit account promise of immediate liquidity.
By contrast, the principal objectives of most insurance contracts – whether
property/casualty or life and annuity – have little to do with current liquidity and
everything to do with protection against events that may occur long after the financial
failure of a consumer’s insurance company. The protections vary tremendously with the
type of insurance contract written and the facts of the consumer’s situation, and may
range from the provision of legal defense or indemnity for a consumer owning a
homeowner’s policy to the continued provision of life insurance at stable rates (perhaps
established decades earlier) for a consumer who may be medically uninsurable at the time
his life insurance company fails.
In order to fulfill the promise embodied in an insurance contract, it is not enough merely
to replace dollars with dollars; instead, it is necessary to replace insurance with insurance,
which is the role served by the current guaranty association system.
Safety Net Requirements When an Insurer Fails. In order to meet the fundamental
requirement of the banking safety net – assuring depositor liquidity by being able to
replace dollars with dollars almost instantaneously – the FDIC requires a high level of
pre-funding and a relatively low level of operational banking expertise and resources.
However, since the focus of an insurance consumer safety net is not liquidity protection
but rather the performance, over a number of years, of the executory contracts in force
when an insurer fails, the focus of an insurance safety net must be on the delivery of
technical insurance expertise backed by sufficient financial resources to honor the
contractual commitments of the failed insurer as they come due over a period of years.
That is precisely the focus of the current guaranty association system.
The Current System for Insurer Insolvency Administration. Just as insurance
companies are regulated almost entirely at the state level, it is also at the state level where
the current regulatory system provides for the receivership of a failed insurer and for the
related consumer “safety net” provided by the members of NCIGF and NOLHGA. In
particular, the receivership of a failed insurance company is administered by the
insurance commissioner of the single state where the company is chartered – in effect, its
state of incorporation – pursuant to the insurance receivership laws of that state, and
under the supervision of a court in that state.
The Elements of the Current Insurance Guaranty System. Individual insurance
consumers today are protected against specified losses from an insurer’s insolvency by
the guaranty associations that now exist in each state.
1 Protection for consumers
generally is provided by the guaranty association of the state where the consumer resides
or, in the case of property insurance, where the property is located. When insurers doing
business in multiple states fail, the activities of the multiple affected guaranty
associations are coordinated by their national membership organizations – NCIGF, in the
case of property and casualty insurers, and NOLHGA, in the case of life and health
Thus, although the receivership of a failed company may be administered by an entirely
different state – the state where the company was chartered or “domiciled” – and
although primary responsibility for regulating the financial health of the failed company
is also vested in the state where it was domiciled – each individual guaranty association
responds to an insolvency by protecting the residents of that association’s state, wherever
the failed company may have been domiciled, regulated, or placed in receivership. To
illustrate, while a failed insurer that did business nationwide may have been domiciled in
one state, e.g., Illinois, its consumers receive “safety net” protection from the guaranty
associations in the states where they reside (or where the insured property is located).
The protections provided from as many as 50 or more guaranty associations are
coordinated through NOLHGA and NCIGF.
The Guaranty System in the Context of the Overall Regulatory Scheme. Guaranty
associations are creatures of state statute whose responsibilities to protect consumers are
“triggered” by the entry of a court order placing an insurer into liquidation proceedings
when the insurer is found insolvent. Delivery of the protections mandated by statute is
generally administered by a state guaranty association executive director (often assisted
by staff or outside consultants), working in coordination with the receiver of the failed
insurer. Performance of those guaranty association functions is overseen and guided by
independent Boards of Directors drawn from the insurance companies doing business in
the states, and funded in the first instance by assessments levied upon those insurers
doing business in the state. Although most guaranty associations are subject to the
supervisory oversight of their state insurance commissioner, they are not generally
1 Every state has an insurance guaranty association that provides protection for the failure of a property or
casualty insurer, and also an association that protects against the failure of a life or health insurer. One
state (Wisconsin) combines those functions within a single association, while a few other states have
additional guaranty associations providing protections for certain specific types of business. 2 The form of most insurance guaranty associations is that of a special, non-governmental, not-for-profit
corporation established by specific state enabling legislation. However, in four states (Arizona, Arkansas,
any meaningful sense operated by state government, and they do not have a role (even in
their own states) in monitoring or policing the solvency of insurers. Similarly, guaranty
associations almost never serve as the receiver of a failed insurer. Instead, the receiver of
a failed insurer is by statute the insurance commissioner of the state where the insurer
was granted its charter, and most commissioners in that role appoint a “special deputy
receiver” to handle the details of receivership administration.
VI. The Current Guaranty System and Financial Institution Regulatory Structure.
At page 3 of the Request for Comments, the Department states that it is important to
evaluate financial institution regulatory structure and “(C)onsider ways to improve
efficiency, reduce overlap, strengthen consumer and investor protection, and ensure that
financial institutions have the ability to adapt to evolving market dynamics… .”
The nature of a financial safety net mechanism developed in conjunction with an overall
scheme of financial institution regulation bears directly on the measure of protection
afforded consumers. The nature and operation of the system (currently and historically)
also bears a relationship to the efficiency of the regulatory system; the extent of overlap it
contains; and its ability to adapt to future developments. Several topics raised by the
Request for Comments are to some extent addressed generally in the background
summary, “Overview of the Current Insurance Guaranty System,” attached as
Appendix A. Other more specific issues raised by the Request for Comments are
Consumer Protections Provided by the Current Guaranty System. The current system
provides insurance guaranty association protection for individual insurance consumers
purchasing traditional personal lines contracts in amounts at least equal to, and in many
cases, substantially higher than, current levels of protection afforded to insured bank and
thrift depositors. (Details of benefit levels are described generally in Appendix A.)
However, guaranty association protection of insurance benefits is essentially different
from bank deposit insurance in the sense that the principal focus of the insurance safety
net is the fulfillment of the insurance promise to the consumer, and not merely the
assurance of liquidity of deposited funds. See “Background Information – The Executory
Nature of Insurance Contracts,” above.
The current system is funded in the first instance by assessments levied by each state
guaranty association upon the insurers who do business in that state, up to annual
statutory limits that are a percentage of a company’s recent premium volume in the state.
New York and Pennsylvania), at least some elements of the guaranty mechanism are operated as part of
state government. 3 Guaranty associations also fund the performance of their obligations to some extent through the
application of subrogation rights; i.e., they “step into the shoes” of consumers they protect and, having
discharged the duties owed the consumers by the failed insurer, take the consumers’ place as creditors of
the insolvent insurer. Consequently, guaranty associations often receive distributions of some assets that
eventually become available over the course of a receivership, although those distributions seldom fully
satisfy the claims owed to guaranty associations, and usually are paid – to whatever extent they are paid –
years after the guaranty associations have satisfied their obligations to consumers.
In effect, the system allocates the cost of providing the consumer safety net ratably
among the insurers in the state, based upon insurers’ relative market shares of business.
Applying the statutory limits on permitted assessments determines how much funding is
available for a given state guaranty association. That funding has almost always proved
considerably more than adequate to meet all financial requirements of all guaranty
associations in all insolvencies.4 In the several instances where extreme catastrophes
(e.g., Hurricane Andrew and its effects in Florida) have tested the financial capacity of
the guaranty association in an individual state, the system has responded with creative
solutions that assured full and prompt protection of every consumer at the full, statutorily
Efficiency and the Current Guaranty System. Efficiency in this context is best
considered by asking where and how must consumer protection be determined; how it is
in fact determined under the current system; and whether the delivery of such protection
involves a prompt, direct, effective path to protecting the consumer, rather than redundant
or duplicative bureaucracies or impediments to and delays in protection.
Insurer insolvencies are fundamentally different from bank failures, particularly on the
liability side of the balance sheet. Insurer liabilities primarily comprise the multidimensional
promises made to consumers under many types of insurance contracts,
typically employing a number of different, non-standardized policy forms even within a
5 By contrast, bank liabilities represented by deposit accounts are
considerably simpler, essentially one-dimensional, and relatively homogenous.
Moreover, in the case of failed insurers – particularly property/casualty insurers – the
liabilities (promises to consumers) are intricately involved with local property conditions
and the local tort, health-services delivery, and judicial systems.
Any insurance safety net system would have to specify ex ante the benefits that would be
made available to consumers were an insurer to fail. Then it would have to provide for
the delivery of the benefits in individual cases of insurer failures.
The definition of benefits is relatively straightforward. Under the current system,
benefits are defined in the state law establishing each individual guaranty association.
Those laws, in turn, are adapted to local conditions by each state legislature from model
legislation promulgated by the National Association of Insurance Commissioners
In addition, in some states, insurance companies are entitled to some measure of state tax relief in respect
of assessments that they pay to state insurance guaranty associations. 4 In 2006, the last year for which such figures were available, the aggregate assessable premium (i.e., the
financial capacity to assess for that single year) for NOLHGA’s member guaranty associations was $8.1
billion, and the costs actually required in order for life and health guaranty associations to protect
consumers in that year were $25.5 million. In 2005, the last year for which such figures were available, the
aggregate assessable premium for NCIGF’s member guaranty associations was $6.8 billion , and the
assessments actually required in order for property/casualty guaranty associations to protect consumers in
that year were $989 million. 5 It is assumed for purposes of this discussion (though perhaps debatable) that asset challenges in an insurer
receivership are roughly comparable to asset challenges in the liquidation of a commercial bank.
6 Some details of the benefits provided under the current system are described in
However, while the definition of safety net benefits may be fairly simple, the delivery of
those benefits is inherently quite complex. Under both the current system and under any
other hypothetical insurance safety net model, delivery of benefits requires the provider
of the safety net to work closely with the receiver of each individual failed company to
determine, on a contract-by-contract basis, the contractual liability of the failed insurer to
each consumer, as well as the proper application of safety net protections (e.g., the
statutory obligations of a guaranty association) to that consumer’s contractual claim
which in turn depends on considerations of law and other factors unique to the state
where the claim arises.
The resolution of the consumer’s claim against insurer assets and the application of safety
net benefits to that claim involve an irreducible quantum of technical analysis that is
required under the current system and that would be required under any competing
model. However, it must be noted that the current system has an infrastructure of
experienced analysts and administrators on the ground now in every state: individuals
experienced both in working with receivers to analyze insurance contractual
commitments to consumers and the application of safety net benefits to such consumers.
Moreover, those individuals trained in the current system are also familiar with the
complex of local laws and conditions that affect or define the benefits owed to
consumers. Even under a federal regulatory model, the claims of consumers in a
receivership would still largely turn on local conditions and laws, meaning that a federal
safety net essentially would have to replicate the knowledge and experience bank of the
current system in order to protect consumers.
Finally, protections provided to consumers under the current system are administered
locally, and not determined or administered by a remote federal bureaucracy. Today, a
consumer’s safety net protection is provided by the guaranty association of the state in
which the consumer (or the insured property) resides, as determined by that state’s
statutes, and as supervised by that state’s insurance commissioner.
Regulatory “Overlap” and the Safety Net Function. Regulatory “overlap” is not an
issue under the current system. The system now provides that the insurance guaranty
association for the state where the consumer resides (or where the insured property is
located) is exclusively responsible for providing the specified consumer safety net
protections. There is no overlapping responsibility for the provision of those protections.
6 The OFC bills pending in the House (H.R. 3200) and Senate (S. 40) would not explicitly mandate the
provision of specific benefits by state guaranty associations, but rather would establish “minimum
standards” that guaranty associations must satisfy in order to achieve “qualified” status. Those standards
are essentially similar to the current NAIC models for state property casualty guaranty funds and life and
health guaranty associations. If a state were to fail to achieve “qualified” status, its consumers would be
protected by a “fallback” federal mechanism, the National Insurance Guaranty Corporation, provided for in
the OFC legislation. Of course, if all states achieved qualified status, that fallback would never be used.
In addition, as noted above, the current guaranty system separates the provision of the
consumer safety net from the financial solvency regulation of insurance companies
whose consumers are protected by the safety net: Financial solvency is regulated
principally by the insurance commissioner for the state where a company is domiciled.7
Suggestions have been made in the past – though not recently – that federal insurance
regulatory reform might include some type of FDIC-type system to provide a consumer
safety net for those whose policies might someday be issued by federally chartered
insurers. Such proposals do carry with them an issue of regulatory overlap, to the extent
they propose the creation of a parallel federal safety net mechanism, separate and apart
from the current guaranty system.
The current system encompasses all companies that are direct writers of insurance in the
United States (including those that might opt for a federal charter, were such an option
available). Proposals for an FDIC-type system contemplate a division of the financial
capacity of the safety net system between a federal system, funded by assessments on
federally chartered companies; and a state system, funded by assessments on statechartered
companies. By “splitting” the capacity now available to the current system into
two (presumably) more limited pools, less funding would be available in both pools to
protect consumers whose companies might fail.
Adaptability of the System to Future Developments. A number of interested observers
have concluded that the current guaranty system is highly adaptable to any of a wide
range of potential developments in the insurance market and in the regulatory
environment. The clearest example is the legislation currently introduced with bipartisan
sponsorship both in the House and the Senate providing insurers with the option
of converting to a federal charter (and back to a state charter), in much the same way that
is now permitted for banks. Both the House and Senate versions of OFC legislation
provide that the insurance consumer safety net would continue to be provided by the
current guaranty system, so long as state guaranty associations “qualify” by not
discriminating between federally- and state-chartered insurers and their consumers, and
so long as state guaranty associations provide a minimum level of protection essentially
similar to that provided now in most states.
The logic of that position follows from several considerations. The first is that the
current system is recognized as tested and proven, having effectively provided protection
for millions of consumers in hundreds of insurance company failures of all types. In
7 No changes to this basic “architecture” would be brought about by the OFC bills now pending in the
House and Senate; under those bills, financial solvency of federally chartered companies would be
regulated by a federal insurance commissioner, and the safety net function would be provided by qualified
state guaranty associations (or, if a state failed to qualify, by the “fallback” National Insurance Guaranty
Corporation). Companies that maintained their current state charters would continue to be regulated for
solvency primarily by the insurance commissioner of their domiciliary state. 8 It might also be asserted that creation of a federal safety net mechanism would implicitly establish a
federal guaranty – presumably backed by federal tax dollars – that would stand behind whatever assessment
funding might be available to the federal mechanism.
addition, the system is in place, experienced, fully staffed, and would require the creation
of no new bureaucracy and no “learning curve” in order to protect consumers. Moreover,
the current system is already protecting consumers of the very companies that likely
would obtain federal charters by opting to convert their current state charters to federal
charters. Furthermore, reliance on the current system would require no federal tax
expenditures for establishment, staffing, and maintenance, and no federal guaranty
(explicit or implicit) of consumer protections. Finally, the current system, as now
constituted, has and would continue to have ample financial capacity to protect
consumers of all companies (whether chartered by states or by a federal regulator).
In effect, the concept reflected in the current OFC bills in the House and Senate
(continued reliance on the existing guaranty system) would simply treat federally
chartered companies as though their charters were issued by a “51st state.” To illustrate,
the Virginia guaranty associations now protect consumers of insurance companies doing
business in Virginia whose charters are issued by the state of Illinois or any other state.
If, under the pending OFC legislation, an Illinois company were to shift its charter to
become regulated at the national level, the same Virginia consumers of that company,
under the same contracts, would continue to be protected at the same levels, by the same
guaranty association, and supported by the same premium base, as was the case before
the company elected to move its charter.
VII. Concluding Observations. The current United States insurance guaranty system
is a proven, mature, capable, flexible, and well-financed system that has protected
millions of insurance consumers for decades and that is well-suited to continue protecting
insurance consumers for the foreseeable future, regardless of how insurance regulation
may develop and evolve.
The commentators would welcome the opportunity to review with the Department in
greater detail any of the matters addressed in these comments.
National Conference of Insurance
300 North Meridian, Suite 1020
Indianapolis, IN 46204
Roger H. Schmelzer
Edward B. Wallis
National Organization of Life and
Health Insurance Guaranty Associations
13873 Park Center Road, Suite 329
Herndon, VA 20171
Peter G. Gallanis
Baker & Daniels LLP
805 15th St., NW, Suite 700
Washington, DC 20005
Charles T. Richardson
Robert J. Kabel
Overview of the Current Insurance Guaranty System
Over the past few years, increasing attention has been given to the possibility of an
alternative federal system for regulating insurers, and a number of hearings on improving
insurance regulation have been held in both the House and Senate. On July 25, 2007,
Representatives Melissa Bean (D-IL) and Ed Royce (R-CA) introduced the “National
Insurance Act of 2007” (H.R. 3200), which would establish a federal chartering option
for life and property/casualty insurance companies and agents. Their 333-page bill is
substantially similar to a Senate bill (S. 40), which Senators Tim Johnson (D-SD) and
John Sununu (R-NH) introduced on May 24.
The particulars of these and other regulatory reform proposals differ, but each is
principally motivated by the desire to create a more uniform and modern regulatory
system to address perceived deficiencies in state regulation. While the existing insurance
guaranty system was not one of those perceived deficiencies, the proposals all recognize
the essential need to provide an insolvency safety net for insurance consumers. The
Congressional bills would rely upon the existing insurance guaranty system to provide
that safety net for policyholders of federally-chartered insurers, in the same manner that
the system currently protects policyholders of state-chartered insurers.
The existing guaranty system is established, experienced, and successful in protecting
policyholders from the adverse financial effects of insurer insolvencies. The experience
gained and efficiencies achieved in the course of protecting policyholders over the past
several decades are substantial. Given this experience, the guaranty system is well
positioned to protect the nation’s insurance consumers, regardless of the system used to
HOW THE INSURANCE GUARANTY SYSTEM WORKS
Guaranty associations are organizations created by state law to protect policyholders if
their insurance company becomes insolvent. If an insurer becomes insolvent and there
are insufficient funds to meet policyholder obligations, the appropriate guaranty
associations assess insurers licensed in their states that write the same type of insurance
written by the insolvent company. The guaranty associations use money collected from
assessments to pay claims and provide other insurance benefits for policyholders of the
insolvent insurer, resident in their states, up to specified limits. When life or health
insurers are liquidated, the life and health insurance guaranty associations arrange for the
continuation of coverage under life and annuity (and certain health) contracts, and the
adjudication and payment of claims on most health contracts issued by the failed carrier.
When property or casualty companies are liquidated, the property/casualty guaranty
associations adjust and pay claims in respect of consumers’ policies, and they also pay or
provide for a legal defense under liability policies.1
1 Under insurance liquidation laws, virtually all property and casualty insurance contracts, and many health
insurance contracts, are cancelled as of the date of liquidation, leaving the guaranty associations
responsible for the adjudication and payment of claims that had accrued prior to liquidation. Life and
GUARANTY ASSOCIATION STRUCTURE
Generally speaking, every state has a property/casualty association, and a life and health
insurance guaranty association each created by state law, overseen by the state’s
insurance regulator, and typically operated as a non-profit association.
2 The membership
of each property/casualty guaranty association comprises the property and casualty
insurance companies licensed to do business in that state, and the membership of each
life and health insurance guaranty association comprises the life and health insurance
companies licensed to do business in that state. Each guaranty association is governed by
a board of directors, the members of which in most states are elected by the association’s
member insurers and approved by the state’s insurance commissioner.
While each state’s law establishes the coverage for the residents of its state, nearly all
states have guaranty association laws adapted to local conditions by each state legislature
from the model property/casualty and life and health guaranty association statutes
promulgated by the National Association of Insurance Commissioners (NAIC). Most
property/casualty guaranty associations provide coverage on a per claim basis for
personal injury and property damages up to $300,000 and provide full benefit coverage
for workers’ compensation claims. Three states provide higher limits, and six states have
somewhat lower limits. Most life and health guaranty associations provide coverage at
limits of at least $300,000 for life insurance death benefits, $100,000 for life insurance
cash surrender values, $100,000 for annuity withdrawal or payment values, and $100,000
for health insurance benefits.3
NATIONAL CONFERENCE OF INSURANCE GUARANTY FUNDS (NCIGF)
NCIGF is an organization of 55 property and casualty insurance guaranty associations,
representing the 50 states, the District of Columbia, and Puerto Rico. NCIGF coordinates
the activities of its member guaranty associations, monitors litigation that may affect
guaranty associations, coordinates with the property and casualty insurance company
trade associations on state legislative matters, conducts education and training seminars
for guaranty associations, provides financial information concerning the guaranty system,
serves as a clearinghouse of relevant information, and provides a national forum for
discussion and liaison with the NAIC and insurance receivers.
annuity contracts covered by guaranty associations typically are not cancelled upon liquidation, and the life
and health guaranty associations (within coverage limits) arrange for those contracts (as well as certain
health insurance contracts) to be honored as long as policyholders choose to keep them in force. 2 In Wisconsin, the property/casualty and life and health guaranty association functions are performed
within a single entity. In addition, several states have separate guaranty mechanisms to provide protection
in respect of certain specific types of benefits or programs, such as workers’ compensation insurance or
health maintenance organizations. In most states, there are two organizations – a property/casualty
guaranty association protecting policyholders of property/casualty insurers, and a life and health guaranty
association protecting policyholders of life and health insurers. 3 Under several of the optional federal charter proposals, life and health guaranty associations will need to
meet “federal minimum standards” for coverage limits. These minimum standards are the same as the
above-cited coverage limits with one exception. That exception is the limit for health insurance coverage,
where the proposed federal minimum standard is set at $500,000 for medical insurance, $300,000 for
disability insurance, and $100,000 for other types of health insurance.
NATIONAL ORGANIZATION OF LIFE AND HEALTH INSURANCE
GUARANTY ASSOCIATIONS (NOLHGA)
NOLHGA, headquartered in Herndon, Virginia, is made up of the nation’s 52 life and
health insurance guaranty associations representing the 50 states, the District of
Columbia, and Puerto Rico. NOLHGA was created in 1983 to act as the national
representative for guaranty associations in developing and coordinating national plans for
resolving the complex issues inherent in protecting policyholders in multi-state
insolvencies. When an insurer is declared insolvent, NOLHGA assembles a task force of
guaranty association members representing the states whose residents are affected by the
insolvency. This task force, with the support of NOLHGA staff and legal, actuarial, and
financial experts, develops a plan for guaranty associations to provide coverage to
policyholders on a consistent, cost-effective, and timely basis. In most cases, this plan
involves the guaranty associations making payment to a financially sound insurance
company to assume the insolvent company’s covered policy obligations. The task force
also supports the receiver’s efforts to realize value in respect of the company’s assets in a
manner that maximizes assets available for creditors. At each step in the process,
NOLHGA works closely with its member guaranty associations, insurance regulators,
receivers, and other interested parties to build consensus on action necessary to protect
policyholders and resolve the insolvency fairly and equitably.
INSURER INSOLVENCIES AND THE GUARANTY ASSOCIATIONS
Property and casualty insurance companies sell policies that provide coverage for losses
to property, for legal liability to third parties caused by the insured’s conduct, and for the
cost of defending liability claims against the insured. Life and health insurance
companies sell policies of whole-life and term insurance, annuities, and health insurance.
Prior to the establishment of the first modern insurance guaranty associations in about
1970, claimants waited until a liquidation proceeding concluded before receiving even a
fraction of their promised benefits.
Today, every state has a property/casualty insurance guaranty association that steps in
immediately upon liquidation to pay the claims of and defend the lawsuits brought
against the residents of that state for all types of claims covered by the association, up to
the limits of the association’s coverage. Likewise, every state has a life and health
insurance guaranty association that, upon liquidation of an insurer, provides for the
payment of claims on health insurance policies and the continuation of contractual
protections from life and annuity contracts up to the limits of the association’s coverage.
HISTORY OF SUCCESSFUL PROTECTION OF CONSUMERS
The existing insurance guaranty system has a proven track record of protecting
policyholders in the event their insurance company fails. Since the early 1970s, the
property/casualty insurance guaranty system provided protection to policyholders in more
than 450 cases of insurer insolvencies, paying a total of approximately $21 billion in
claims and expenses. Since 1988, the life and health insurance guaranty system has
participated in approximately 100 multi-state insurer insolvencies. In those cases,
guaranty associations have guaranteed more than $21 billion in coverage benefits and
assessed their member insurers over $6 billion to protect more than 2.2 million insurance
consumers. Despite this level of insolvency activity and expense, the insurance guaranty
system has met all of its obligations and promptly provided protection to all consumers
for whom they are responsible in each and every case of insurer failure.
THE GUARANTY SYSTEM IS WELL POSITIONED TO DEAL WITH FUTURE
The nationwide network of life and health insurance and property/casualty insurance
guaranty associations has proven extremely effective at achieving its principal mission !
the protection of policyholders. As with any effective organization, the insurance
guaranty system has evolved over the years and operates with a high level of cooperation,
coordination, and consistency that comes only with experience.
NCIGF and NOLHGA have also evolved over the years into national coordinating
mechanisms that have established effective and credible working relationships with both
insurance regulators and industry members. NCIGF and NOLHGA each employs a
complete complement of full-time staff professionals who are well versed in the technical
and practical complexities inherent in any insolvency.
Among the key benefits of the insurance guaranty system are the efficiency and cost
savings achieved as a result of the functions performed by NCIGF and NOLHGA. The
resources and coordination they provide help minimize costs by facilitating a national
response plan for protecting policyholders in multi-state insolvencies. This coordination
of effort also reduces the length of time it takes to resolve a multi-state insolvency and
provide policyholders their statutorily prescribed benefits.
While NCIGF and NOLHGA serve as the national coordinating bodies for protecting
policyholders, their individual guaranty association members are aware of and sensitive
to local circumstances and respond quickly to the concerns of resident policyholders
when an insolvency occurs. The volume of calls and letters from concerned
policyholders is understandably high in the aftermath of an insolvency. The staffs of the
individual guaranty associations are able to respond quickly to explain coverage benefits
and the claim submission and payment process; provide status reports; and resolve
specific inquiries. NCIGF’s member associations understand their state tort law and
court systems and how to adjudicate claims promptly and efficiently. NOLHGA’s
member associations are familiar with the local standards and practices applicable to
provision of life and health insurance benefits. For these reasons, the existing insurance
guaranty system is able to enjoy the operational efficiencies of a national system, while
effectively responding to the often-local concerns of insurance consumers experiencing
financial and other stresses associated with the failure of their insurance company.
Given its significant experience, operating efficiency, and credibility, the current
insurance guaranty system is well positioned to protect the nation’s insurance consumers
from future insolvencies of life and health and property/casualty insurers, regardless of
whether those insurers may be regulated under a federal system or by the states.