The insurance insolvency laws of today are intended for the fairly simple insolvencies of an earlier period, leaving today's policyholders and claimants underserved.
The guaranty-fund system was created with little debate as to who ought to be covered and how it should function. Soon after its creation, industry and other observers questioned what had been done.
The liquidation of a property/casualty insurer is a complex and difficult process under the best of circumstances. There is a reason companies become insolvent, and it usually relates to poor underwriting, rating, systems, and the breakdown of management processes and controls.
Compounding the challenge is the "brain drain," as those most experienced and knowledgeable about the company's history will look for new employment as soon as the company's financial distress becomes apparent.
Despite the well-intentioned efforts of the National Association of Insurance Commissioners and the National Committee on Insurance Guaranty Funds, the current insolvency system is fragmented, uneven, slow and expensive. The lack of transparency and accountability creates an environment that not only allows inefficiencies to continue, but also poor performance and questionable practices to be hidden. While the guaranty funds have proven successful in protecting policyholders and their beneficiaries from loss, they have had difficulty in addressing some of the large recent insolvencies.
Insurance products not directly addressed by guaranty-fund statutes, most recently high-deductible workers' compensation policies, cause delays while issues are sorted out, not only between individual state guaranty funds, but also with the receiver.
Legalistic debates can override practical solutions in such situations, especially when government is involved. Because it is impractical for guaranty-fund acts to keep up with the marketplace and complex products being sold, these issues will likely increase.
February 1, 2007
Copyright 2007© LRP Publications