Insurance regulation in a nutshell

(g)Status of Policies of Failed Insurer

In insurer receiverships, policies of property/casualty insurers are usually cancelled on notice and property/casualty insurers are usually liquidated (if they cannot be rehabilitated) while the business of life insurers is continued and sold by the receiver to other solvent insurers. The policy behind this is that property/casualty insurance policies are generally short-term liabilities (policies of a 12-month duration or less) and can easily be replaced while life insurance policies are generally long-term liabilities and cannot easily be replaced (e.g. the insureds are older and may no longer be insurable).

ARTICLE IX

State Guaranty Association Laws

Section IX.1.Purpose of Guaranty Associations

When an insurer fails and is placed into rehabilitation or liquidation, claims under the policies of the failed insurer may be paid, in part, by state guaranty associations – non-profit legal entities created under state law whose members are licensed insurers that transact insurance in the state.

Section IX.2.Kinds of Guaranty Associations

There are usually two guaranty associations created in each state – one for property/casualty insurance and one for life and health insurance.

Section IX.3.Life and Health Guaranty Association

(a)Member Insurers

Under the NAIC Life and Health Insurance Guaranty Association Model Act, a “member insurer” of the life and health guaranty association is defined to mean an insurer licensed to transact in the state any kind of insurance for which coverage is provided by the guaranty association. This includes an insurer whose license in the state has been suspended, revoked, not renewed or voluntarily withdrawn. However, a member insurer excludes certain entities including health maintenance organizations and fraternal benefit societies.¹²⁸

(b)Coverage

Under the Model Act, the life and health guaranty association is created and coverage is provided for (i) direct, non-group life, health, or annuity policies or contracts (and supplemental contracts to all of these), (ii) certificates under direct group policies and contracts, and (iii) unallocated annuity contracts, in each case issued by member insurers.¹²⁹ A member insurer means an insurer licensed to transact in the state any kind of insurance for which coverage is provided by the guaranty association. This includes an insurer whose license in the state has been suspended, revoked, not renewed or voluntarily withdrawn. Member insurers exclude certain entities including health maintenance organizations and fraternal benefit societies.
Persons covered under the Model Act are persons who, regardless of where they reside (except for nonresident certificate holders under group policies or contracts), are the beneficiaries, assignees or payees of the following persons: (i) persons who are owners of or certificate holders under the policies or contracts (other than unallocated annuity contracts, and structured settlement annuities) and in each case who (a) are residents, or (b) are not residents, but only under all of the following conditions: (x) the insurer that issued the policies or contracts is domiciled in the state, (y) the states in which the persons reside have associations similar to the association created by the Model Act, and (z) the persons are not eligible for coverage by an association in any other state due to the fact that the insurer was not licensed in the state at the time specified in the state’s guaranty association law.¹³⁰