Insurance Guaranty Association: Meaning, Requirements, FAQs

What Is an Insurance Guaranty Association?

An insurance guaranty association is a state-sanctioned organization that protects policyholders and claimants in the event of an insurance company’s impairment or insolvency. Insurance guaranty associations are legal entities whose members make guarantees and provide a mechanism to resolve claims.

Understanding Insurance Guaranty Associations

The failure of an insurance company is different from the failure of other firms because insurance companies are regulated by the states in which they are registered to do business and are not protected by federal bankruptcy laws. State insurance commissioners are charged with reviewing the financial health of insurance companies operating in their state. If one becomes insolvent—lacking funds to pay debts and obligations—the commissioner must act as the estate administrator.

Insurance guaranty associations are given their powers by the state insurance commissioner, with their duties and obligations outlined in a plan of operation. All U.S. states have an insurance guaranty association. A board of directors (BoD) is appointed to each to ensure the organization can effectively and efficiently meet the statutory expectations listed in the plan of operation.

Each association presents an annual report to the state insurance commissioner, outlining the activities it undertook during the year, its income, and any disbursements it may have made.

Insurance Guaranty Association Requirements

If a company appears to be at risk of meeting its financial obligations, it can be deemed impaired, in which case the commissioner will determine the steps the insurance company must take to reduce its risk over a reasonable time frame. This period is called a rehabilitation period.

If that doesn't work and the insurance company still fails to meet its obligations, it is considered insolvent. At this point, the state insurance commissioner, the state insurance guaranty association’s board, and the courts are required to determine how to pay the covered claims of the insurer.

There are a few options the association has at its disposal to pay these claims. First, the association's shares of any remaining assets are used to help pay covered claims. Then, insurance companies in that state are assessed and assigned a share of the remaining covered claims. Their share amounts are determined by the amount of premiums they collect in the state.

Other options include extending policy coverage through the association itself or allowing other insurance companies to take over the existing policies of insolvent companies.

Special Considerations

Coverages provided by guaranty associations differ from state to state. However, most states offer at least the following amounts of coverage, which are specified in the National Association of Insurance Commissioners’ (NAIC) Life and Health Insurance Guaranty Association Model Law:

• $300,000 in life insurance death benefits
• $100,000 in net cash surrender or withdrawal values for life insurance
• $300,000 in disability income (DI) insurance benefits
• $300,000 in long-term care (LTC) insurance benefits
• $500,000 in medical, hospital, and surgical policy benefits
• $250,000 in the present value (PV) of annuity benefits, including cash surrender and withdrawal values—payees of structured settlement annuities are also entitled to $250,000 of coverage
• $100,000 for coverages not defined as DI insurance, health benefit plans, or LTC insurance

Most states impose an overall cap of $300,000 in total benefits for any individual with one or multiple policies with the insolvent insurer.

The Bottom Line

Insurance guaranty associations protect consumer interests by overseeing insurance companies whose financial structure has failed. If a failing company cannot be rescued, it is liquidated. Customers are paid from the remaining assets and by other insurance companies in the state the original insurance provider operated in.