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What Do You Do When Your Insurance Company Goes Under?

By John Dietz - Email Editor

Date : March 31, 2009

Dear Valued Reader,

Your insurance company going under might be worse than getting a computer virus. You hope you do not lose everything, and you scramble to find your backup. If you have ever had a computer virus you know that after the initial trouble, you have to access the damage for long-term consequences. There is a process to get everything back to normal. If your insurance company goes under, you may be going through a similar process, diagnosing, waiting and mending, and you might have to scramble for more backup.

If this writing spurs you to question your insurance and your policies, it is going to require some diligence on your part; but this is worth your time and effort. This particular writing concentrates on the company rather than the policy and relates to a company that may become insolvent. I am sure many of you are thinking about AIG right now. The events in the markets over financial liquidity challenges have alarmed and forewarned us regarding companies whose status may change overnight while we sleep. No one knows what the underwriters and actuaries are claiming behind closed doors.

Starting with a little background, domestic insurance is regulated by your state. Even though the company is national, All State, State Farm, Geico, Mutual of Omaha, Minnesota Mutual and the like, each state regulates the rules on the policies. Insurance is considered NOT to be a tangible good. Until recently, banks could choose to be regulated by the state or the federal government; the next phase legislation may change. Insurance companies do not have this choice. For now, there is no national insurance market, and therefore, you can think of it as if there are 50 insurance markets, one in every state.

There are two prevalent types of companies, stock companies and mutual companies. A stock company is what you expect: The company is formed with stock. Ownership and policyholders are totally separated. With a mutual company there is no stock; the policyholders collectively are the owners of the company. As owners, they can vote to elect the management of the company. Profits are returned to the “insureds” in the form of dividends or reductions in future premiums.

Most mutual companies are advancing premium companies that charge non-assessable premiums; a condition under which an insurance company is sufficiently sound so that policyholders are not obligated to pay additional money for past losses for which reserves are inadequate.

However, some companies are assessment companies and charge members pro rata share assessments, which could be on the losses of the each policy period. Many insurance experts have lobbied Congress to push (or encourage the option) for a more globally efficient insurance regulation in the U.S., which is a financial burden that may weigh too heavy upon the states. To avoid losses on pro rata investments made to mutual companies many businesses and physicians are looking into captive insurance companies which are offered in some states.

The federal and state governments also provide insurance or sorts. The federal government has provided catastrophe insurance; crop insurance, nuclear energy liability insurance. The states have pooled to organize insurance such as medical malpractice, unemployment coverage, insurance for some specific professions and in some cases disability compensation.

There actually is a third type of company called a Lloyd’s Association; you have heard of Lloyds of London. This type of company represents syndicate groups who take responsibility to share syndicate or underwrite individual contracts. Recently, the state of New York has taken steps in legislation to encourage this type of insurance.

The Gramm-Leach-Bliley Financial Services Modernization Act was passed in 1999. This law was created to remove the distinctions between insurance companies, investment services and insurance companies in order that financial service providers could provide better, less expensive and more comprehensive investment products. The act also created obligation for greater regulation of the insurance industry. Now there is another push for reform, which would be nationalization. Underwriters are reporting stress; stress of a system that requires change before it breaks.

As these cycles take place outside of the control of the common citizen, we need to revive our documents and study the companies that take fiduciary control over these policies. I hope that you have an advisor or investment counselor who can answer your questions because this is only a general guide and not specific insurance or legal advice. The answers are going to guide you to determine the risk within the actual insurance companies or carriers and perhaps the analysis will lead you to determine if you are over-exposed in areas to which insurance will provide relief.

Practical Considerations

1. Find out the names of all of the companies who insure you. Make a list of the type of company and the type of policy. Then start your homework and make sure to consult with your insurance broker and asset protection planner.

Make a list of everything that you are covered for: health, automobile, homeowners, life, annuities, unemployment, disability, death etc. Are there any areas you completely missing, such as disability?

2. Begin to Determine the Financial Health of Each Company

• Type in the company name on a simple search (like Google) to see if any flagrant or foul details appear that might cause alarm. This could be an occurrence like filing insolvency, a merger, sale or some news worthy event that popular media reports about. This is just a temperature gauge.
• Find out if the carrier has been downgraded recently. If you do not know, ask your advisor. Ask your insurance brokers to periodically evaluate ratings data and other financial information (including media reports, press releases, public filings and analyst reports) to evaluate their creditworthiness.
• If any of your insurers are at risk, ask your financial advisor to recommend a company to insure you against this ensuing risk. In many cases, you will not be able to transfer or cancel the policy without penalty or without loss.
• If the policy is up for renewal, check everything. Get a second opinion if necessary. Are there better options? Have laws changed? Is my insurer creditworthy?

What happens if my company goes into receivership?

Insurance companies may not be debtors under the federal bankruptcy laws, although non-insurer affiliates of an insurance company may be debtors under the federal bankruptcy laws.

It brings to the forefront of questions: Why was everyone concluding that the government should have permitted AIG to go bankrupt?

When an insurance company is placed into receivership, it is called conservation. During this occasion, policyholder benefits may be canceled or delayed for any length of time. The state must then decide the insolvency process, which would be similar to the federal bankruptcy process. The state will attempt to protect the policy owners and the policy owners are supposed to be the top priority. However, this priority may be based on the various types of policies; no one knows until it happens.

The process is lengthy because the state will then look for companies to step in and ensure the payments to all policyholders’ claims subject to certain limits either by directly taking over the policies or transferring the policies to more stable entities. Guarantee associations or funds have been established in every state to protect holders of life, health, annuity, property or casualty insurance policies, to varying degrees, if an insurer becomes insolvent. Normally the amounts guaranteed are discounted and selective and policyholders will likely suffer.

Answering the question on AIG, which is regulated by the states like every other insurance company, AIG might be considered an insurance company holding system, which regulates inter-company transactions. In this situation, the state insurance regulation body would have the authority and duty to review transactions between an insurance company and its non-insurer affiliates. An insurance company's assets should not be inappropriately transferred to its non-insurer affiliates to the detriment of its policyholders, creditors and creditors of the insurer's affiliate.

This information is general and is not intended to be specific insurance advice or legal advice, you must consult professionals. We truly believe that insurance is an integral aspect of Asset Protection and hope that you also will consider this an important topic. If you follow subsequent articles coming in April we will give you details specifically as to what to look for for security and more information on captive insurance, domestically and offshore.

Until next time,

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