What Happens If Your Insurance Company Goes Out Of Business?
As more businesses shut their doors forever due to fallout from coronavirus, you may be concerned that your insurer could eventually go bankrupt. Luckily, insurance companies are regulated at the state level and all 50 states have systems in place to help protect policyholders if their insurer ends up going out of business.
Let’s have a look at the processes that kick in if an insurer is in financial trouble as well as what steps you should take if your insurer appears to be having financial difficulties.
How Insurance Companies Go Out of Business
Despite the fact that the insurance industry is very highly regulated, insurance companies do go under for a variety of reasons. As an example, Penn Treaty went under in 2017, mainly because they underpriced their insurance premiums and had a high number of claims that year, the failure of Penn Treaty was one of the largest insurance company failures in U.S. history.
Insurer insolvencies were much more common in the 1990’s with over 50 companies declaring bankruptcy or shutting their doors in 1992. This number has dropped dramatically in more recent years with less than 10 insurers going out of business each year. However, some states, particularly Florida have seen a number of insurers become insolvent over the last few years.
While insurance company bankruptcies have declined over the years, that fact will bring little comfort if the insurer that is failing is yours. The pandemic and the accompanying economic fallout may lead to more insurance company failures in the coming years.
How states protect policyholders when their insurer fails
All 50 states have insurance guaranty associations which step in when an insurance company that has its headquarters in that state is in financial trouble. The majority of states have a guaranty association that covers most insurance products such as life, health, disability, as well as property, automotive, homeowners and casualty.
All insurers that operate in the state must be members of the guaranty association and pay into a guaranty fund that helps protect policyholders when an insurance company is in financial trouble.
When an insurance company finds itself unable to pay policyholder claims, the insurance commissioner of the state will put the company into receivership. This process typically involves the commissioner trying to find a way for the company to improve its financial situation and stay solvent. If this process is unsuccessful the commissioner will declare the company insolvent and sell off its assets.
What You Can Expect if Your Insurance Company Ends Up Failing
Once an insurance company is declared insolvent, the state guaranty association will take over. They guaranty association will transfer the policies of the insolvent company to other insurance companies or if necessary, the guaranty association continues to provide coverage itself. Due to this, policyholders should continue to pay their premiums even if their insurer is taken over by the guaranty association. By paying your premiums you keep your coverage intact.
The guaranty association will pay policyholder claims out of the company’s funds and if and when that money is gone, they will sell assets to cover remaining claims. Many states do put a cap on the amount they will pay out for different types of claims once a company has gone into receivership. While caps will vary by state, the following are fairly common limits:
- $300,000 in life insurance death benefits
- $100,000 in cash surrender or withdrawal for life insurance
- $250,000 in present value annuity benefits
- $500,000 in major medical or hospital benefits
- $100,000 in other health insurance benefits
- $300,000 in long-term care insurance benefits
- $300,000 in disability insurance benefits
- $300,000 for property and casualty claims
If your claim exceeds these limits or the specific limits set by your state, you will be out of luck as far as recovering the full amount.
How to Determine if Your Insurer is Financially Stable
Before purchasing a policy from any insurer, you should check on their financial stability. Insurers are rated on their financial strength by a variety of independent agencies. The five major rating agencies are:
- A.M. Best ratings range from A++ to D-
- Fitch ratings range from AAA to D
- Kroll Bond Rating Agency ratings range from AAA to D
- Moody’s ratings range from AAA to C
- Standard & Poor’s ratings range from AAA to D
Insurers that the rating company feel are in the best position to handle all of their financial obligations are given the highest ratings while insurers who have a poor ability to cover their financial obligations will be given a lower rating.
You can check ratings on the rating companies’ websites, you may need to register or even pay a small fee to view the ratings. It is always a good idea to check ratings from more than one rating company.
If your insurance company has recently had its financial strength downgraded, this can be a warning sign and you should consider switching insurance companies. Read the rating agencies reason for the downgrade and then make a decision as to whether or not you feel comfortable keeping your coverage with them.
If you decide to stay, keep a close eye on your insurers rating and if they are downgraded again you should consider moving to a new insurer. If you decide to move on, shop at least five different insurance companies and always make sure you are comparing apples to apples when it comes to coverage levels and deductibles.