If your insurance company goes bankrupt, you shouldn't be left high and dry. Insurance companies have to pay into a reserve fund maintained by the state's Department of Insurance in the event of a default. If your insurance policy isn't picked up by another more stable provider, this reserve fund will provide you with a payout if you have to file a claim. This gives you time to find a new insurance company.
What happens if your insurance company goes bankrupt?
If an insurance company is not able to remain solvent, it may inconvenience you, but it shouldn't put you in any real danger. Insurance companies are required by law to hold 10% to 12% of their total asset revenue as reserves in the event of financial difficulties like a default.
Most insurance providers maintain higher reserve levels. This is rarely necessary, as financial management among insurance companies tends to be much more predictable and stable than other financial institutions.
However, if the worst-case scenario does occur, these reserves are crucial. Insurance companies differ from banks in that a bank can lend money at several times the rate of their cash reserve. Insurance companies do not have that option. To maintain operational status in a state, an insurer needs to pay into their insurance guaranty association fund. This fund is regulated by each state's Department of Insurance.
The department will first try to help the insurance provider stabilize its financial strength by putting the company through a rehabilitation process. If this doesn't work, the insurer will be mandated by the state to default and declare bankruptcy. The insurer's remaining assets will then be liquidated. You will be notified of the change and given plenty of time to find a new insurer.
If you have to file a claim during the bankruptcy phase, you will be paid out via the company's reserve by the state. Any policies underwritten by the insurer will then be transferred to a financially stable insurance provider. If this is not an available option, the guaranty association fund will continue to provide coverage to you.
During the bankruptcy process, your insurance coverage will continue and claims will be paid out through the guaranty association reserve funds. Coverage payout limits depend on your state and the type of insurance you have. For example, the National Organization of Life and Health Insurance Guaranty Associations states that guaranteed coverage amounts for health insurance claims vary between $100,000 and $500,000.
How can I find out if my insurance company is stable?
Insurance companies rarely go bankrupt, but there are things you can do to make yourself as safe as possible:
Check with insurance credit rating agencies
The following companies monitor the financial strength of insurance companies and make their findings available to the public:
- A.M. Best
- S&P Global Ratings
Each company uses its own methodologies and rating systems to gauge the financial viability of an insurer. For example, below is A.M. Best's rating scale:
|Source: A.M. Best|
The commonality between the rating systems of each company is that "A+" tends to be the highest and "D" the lowest, but the difference in calculation factors may result in each rating company's grade meaning the same thing. Be sure to understand the methodologies of each rating company you use.
If your insurer shows a lowering of their financial strength rating, it could indicate trouble. At worst, A.M. Best's and Standard & Poor's "D" rating means the company is in default. Moody's "C" rating represents a default as well. At any time, you should be able to contact your insurer to find out their current financial rating, or on the insurer's website..
Review customer satisfaction trends
On top of financial stability, getting an idea of how an insurer treats its policyholders and takes care of claims can be a strong indicator of their strength. The National Association of Insurance Commissioners (NAIC) puts out an annual Complaint Index that reflects how many consumer complaints an insurer receives based on its size.
The NAIC calculates this rate by taking a company's total complaints in a particular year and dividing that number by the total number of policies underwritten in the same year. Learning your insurance company's Complaint Index rating can give you an idea of how well the insurer handles claims and, by extension, how they retain policyholders and remain solvent.
J.D. Power is a market research firm that focuses on consumer intelligence analytics to review and rank various industries, including insurance. Its rating system considers many factors, including billing and claims process, customer service and policy offerings. This rating, like the NAIC Complaint Index, can give you an insight into your insurer's customer retention capability.
If your insurance company goes bankrupt, the worst you should have to go through is finding a new provider. Take this opportunity to compare quotes from multiple insurance companies to find the best, cheapest replacement insurer you can.
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