This time the Life Insurance market we go down and as you see on TV, ads for Life Insurance are subpriming just like the mortgage market---anyone with a pulse can buy life insurance. This is because they are securitizing Life Insurance policies---bundling them with differing Tranches rating AAA as with subprime mortgage loans. It is the mirror of the housing frauds from last decades. As with people flipping houses having no income----people are now flipping life insurance policies and Wall Street bundles them and bets go around the world. Life Insurance Corporations are being allowed to enter high-risk investments and the bond market where insurance has always invested because of stability is collapsing with the majority of consumers' payments.
BOND MARKET CRASH WITH INSURANCE CORPORATIONS INVESTED HEAVILY WITH HIGHER RISK.
If you are that TV watcher signing up for life insurance with $10 a month payments and no health check up----that small amount of money is being used to leverage the insurance corporation assets beyond its means. That's why they are selling these subprime policies---to get real cash for leverage. This economic crash comes and that insurance policy will disappear as will most of these insurance corporations.
Insurance companies are big investors in the bond market.
Insurance is a big business. In the United States approximately 1,800 insurance companies offer a range of product lines from property and casualty protection, such as homeowners and auto insurance, to life and health insurance. In exchange for regular payments, or premiums, insurers indemnify individuals, businesses and governments against losses. To operate profitably, insurers must earn more from premiums, which are invested across a range of asset classes, than they pay out in claims.
Internal vs. External Managers
Insurance companies face a choice when it comes to investing policyholders' premiums. The first option is to build a team of in-house investment professionals assembled from existing or new staff. This approach is often taken by larger insurance companies with multibillion dollar balance sheets. In contrast, smaller insurance companies usually find it more economical to appoint external investment managers. In some cases, insurers may adopt a hybrid model, keeping some investment functions in house while outsourcing others.
Asset ClassesThe insurance industry invests colossal amounts across a range of asset classes. In 2012, U.S. insurers held $5.4 trillion in assets, a 2.3 percent increase from the previous year. The largest asset type is bonds, totaling $3.7 trillion, or 68.4 percent of total assets.
Bond Investments by Type
Bonds are attractive to insurance companies because regular principal and interest payments can be matched against expected claims. Corporate bonds represent the lion's share of the industry's bond investments, amounting to $1.9 trillion, or 51.6 percent of bond holdings. Municipal bonds represent the second-largest bond type, amounting to $524 billion, or 14.3 percent of bond holdings. Other fixed-income investments include U.S. Treasury bonds as well as agency-backed and private label mortgage-backed securities.
Bond Investments by Rating and IndustryInsurance companies are inherently conservative, with 94 percent of their bond holdings funneled into investment-grade securities -- those bonds carrying credit ratings of at least BBB- by Standard & Poor's and Baa3 by Moody's. Bonds from financial services companies represent the largest portion: $447 billion, or 23.7 percent of total bond holdings. Other significant industry exposures include utilities ($264 billion), energy ($223 billion) and industrials ($172 billion).
Below you see the 'NEW' AIG----hawking more leverage in the insurance industry and you see the securitization that is sending the same bundled securities to an insurance corporation like this 'NEW' AIG only this time it is life insurance.
Right after the 2008 crash you had the financial markets demand this bond market deregulation involving tranches in the bond market. As with the stock market-----Wall Street creates vehicles that assure the rich investors and investment firms are covered 100% while the rest of us see our investments move to these investors to assure it. That was supposedly why AIG credit default swaps were paid at 100% while people victimized by the mortgage fraud got nothing. Below you see they have installed the laws that will now allow this to happen in the bond market -----as the bond market crashes----government municipal bonds will default while the investment firms tied to these bonds with be insured and covered 100%. So, in Baltimore the Baltimore City School building bond leverage will see the city default on those bonds but the investors tied to these school bonds will be protected.
YOUR MARYLAND AND BALTIMORE POLS KNOW EACH TIME THEY DO THIS THE MONEY WILL GO TO WALL STREET AND INVESTMENT FIRMS.
'If bonds in the trust were to default, BondFactor would intercept the cash flow from the junior portion to repay the senior portion.
If the junior portion is not enough to compensate the senior tranche, then BondFactor would intercept payments from the junior portions in other pools to repay the senior portion in the pool with the default.
That way, all the senior tranches are senior to all the junior tranches. And no uninsured bondholder in the trust would be paid until all the insured bondholders were paid first'.
CHARLES “CHUCK” VANDEVANDER serves as senior vice president, advanced marketing and conceptual product strategies for AIG Global Consumer Insurance, the
consumer insurance business of American International Group,
Inc. (AIG). In this role, he is responsible for creating product
concepts to drive sales growth and educate the organization’s
distribution partners on these solutions.
Van Devander joined AIG Global Consumer Insurance in
June 2013 and brought nearly 20 years of insurance industry
Leverage Life Insurance
For example, a particular
guaranteed universal life insurance policy,
when properly structured and funded
Betting on Death
Network News Washington Post
By Benjamin Popper Sunday, June 21, 2009
Investors love a sure thing, and in this life, it doesn't get more certain than death. So it's no surprise that in recent years the market for investing in life settlements -- buying a stake in someone else's insurance and collecting the reward when he or she dies -- has grown tenfold to nearly $20 billion.
Life settlements can offer legitimate value to investors and policyholders, but the industry remains largely unregulated. And just like the overheated mortgage securities market, they've given rise to a flood of fraudulent policies, this time on people's lives.
A life settlement occurs when someone decides to sell his life insurance policy. Perhaps he can no longer afford the premiums or the beneficiary has passed away. Through a broker, he sells the policy for a percentage of the death benefit. The policy is then passed on to investors who pay the premiums until the policy matures and collect the death benefit as a return on their investment. A life settlement typically pays more to the policyholder than surrendering the insurance back to the company that issued it.
More than a dozen multimillion-dollar life settlement scams have come under investigation in states across the country since the start of 2008.
"Life settlements serve a useful purpose by enhancing the value and liquidity of life insurance policies," said Fred Joseph, president of the North American Securities Administrators Association. "But they also pose significant risks. Thousands of investors have been victimized through fraud and abuse in life settlements."
The industry for buying up others' life insurance policies first sprang up during the AIDS epidemic of the late 1980s.
"Companies loved AIDS because it was a predictable death sentence," says Gloria Wolk, a life settlement expert who learned about the practice while volunteering at AIDS services clinics. The shorter and more certain the life expectancy, the higher the returns promised to investors and the greater the lump sum offered to patients.
The turning point came in 1996, when new antiviral drugs destroyed the market for AIDS policies. But by 1999 the industry had reformed, offering its services to seniors instead of the terminally ill. Since then, it has experienced rapid growth. In 2002, it was valued at $2 billion. Now that number is closer to $20 billion.
"When you look at the age of the population in the United States and the amount of life insurance in force [$15 trillion], you realize that the life settlement market is just the tip of the iceberg," said Zohar Elhanani, chief operating officer of Legacy Benefits, which runs exclusively on institutional capital and is one of the oldest life settlement firms in the nation.
Just as the overheated market for securities backed by people's homes generated a wave of subprime mortgages, the market on people's lives has created a boom in fraudulent insurance policies known as "stranger originated life insurance," or STOLI.
STOLI is illegal. It begins with a life insurance agent, who in many cases is now also a life settlement broker. The agent persuades elderly seniors to take out large policies by offering meals, trips and cash. The agent or life settlement firm agrees to pay the premiums. Ownership is then quickly and quietly transferred, often to a trust, where it is sold on the open market.
A recent industry study found that more than 50 percent of life settlements were on policies less than four years old, and the vast majority of those were on policies two to three years old.
Complex financial transactions means----we are committing fraud and making it hard for you to prove it.
Maryland does all of its dealing using this complex transaction model. Keep in mind that when moving to implode the bond market they knew this was where most of American's savings and retirements not in Federal Trusts would be found.
The higher the risk the higher the return and the more 'complex' these deals become. The mortgage securitization fraud involved many home mortgage originators but took AIG global insurance corporation as the insurer of these deals. We can expect most of the expose to the coming bond collapse to fall on a few global insurance corporations ----maybe TransAmerica for example.....THE NEXT AIG???
What do you want to bet that TransAmerica will see the same spin-off of assets just as this coming economic crash by imploding bond market occurs with Ivy League endowments like Johns Hopkins tied to the spin-offs and the senior tranches.
A member of the Transamerica Asset Management, the Transamerica Series Trust offers over 40 individual fund options that can be utilized by insurance companies for variable annuity and variable universal life products.
On October 1, 2014, Western Reserve Life Assurance Co. of Ohio merged into Transamerica Premier Life Insurance Company. The Merger and name changes may not be effective in all states at the time of publication.
The New Frontier
Life insurance securitizations are complex transactions,
given the nature of the business involved. In
the near term, these transactions will continue to be
time consuming and costly due to the intricate modeling
and analyses required. Moreover, as new players
and non-insurance investors try to get through
the initial learning curve, additional time and cost
may be required. A company needs to be prepared
for the scrutiny of its business and practices by actuaries,
accountants, lawyers, investment bankers, rating
agencies, regulators and financial guarantors.
The development of sound actuarial models,
assumptions and experience studies is crucial.
Processes and controls must be top notch in this new
frontier in life insurance company capital management.
The fact that a number of transactions has
been completed to date is a good indication of the
capital markets’ growing acceptance of the inherent
insurance risks involved.
XXX and AXXX securitizations are two of the many
forms of securitizations in the United States allowing
the life insurance industry to tap into the vast capital
market for funding. Many European companies
have used securitization to allow for more efficient
use of capital, such as embedded value securitizations.
The current activities in the United States could catapult securitization to be a leading capital
solution for the life insurance industry.
>> Demystifying Life Insurance Securitization ...
A company doing a securitization needs to be
prepared for the scrutiny of its business and practices by actuaries, accountants, lawyers, investment bankers, rating agencies, regulators and financial guarantors.
In the plan to take out all of American people's wealth the insurance industries will be taken into bankruptcy. Remember, Bain's Capital bankruptcies take all the assets of a company out and then send the rest of the company to bankruptcy leaving creditors and workers to lose everything. That was what AIG insurance agency did when it insured what everyone knew was toxic, fraudulent mortgage loans----it spun off all the profits from the fraud and then allowed the taxpayers to bail out the company. This is all a long-term plan by Clinton neo-liberals and Bush neo-cons. As I showed it is the Ivy League endowments and investment firms like High Star that take the money and run. Well, this coming economic crash will do the same---only this time the people's savings will be attacked by pension collapse and Life Insurance corporation market collapse, and municipal bond collapse.
Since Johns Hopkins brought TransAmerica to Baltimore I suspect this is one of the corporations slated to launder all of this bond industry fraud and will take with it Life Insurance assets. All major Life Insurance corporations have been allowed to leverage their financial assets just like a Wall Street bank and they have done so just as the article below shows was done in 1991. An insurance corporation collapsing because of real estate investments---just like subprime mortgage loans.
THIS TIME IT WILL BE THE BOND MARKET AND THEY PLANNED THIS. DELIBERATE, WILLFUL, AND WITH MALICE FRAUD AGAINST THESE CONSUMER VEHICLES.
Mutual Benefit Insurance Fails After Run on Assets : Economy: It is the largest such collapse in U.S. The New Jersey company cites bad real estate investments
.July 16, 1991|VICTOR F. ZONANA and KATHY KRISTOF | TIMES STAFF WRITERS
New Jersey Insurance Commissioner Samuel Fortunato will submit a plan today in state Superior Court to rehabilitate the firm. The proposal, which needs court approval, would allow the company to continue paying death benefits, health and accident claims and annuity payments but would halt all loans and other withdrawals by policyholders.
The collapse of Mutual Benefit is the latest blow to the nation's life insurance industry and follows the failures of Executive Life Insurance Co. and First Capital Life Co., the Los Angeles-based companies that were brought down by junk-bond investments earlier this year.
Because Mutual Benefit was seen as a conservative, blue-chip company, its woes sent shudders through the executive suites of even the soundest insurance firms.
The expected state seizure of Mutual Benefit comes in the wake of a run on the institution by worried policyholders. The nation's 18th largest life insurer, with assets of $13.8 billion, was inundated by customer requests to cash in about $1 billion in policies in recent weeks.
More than 37,000 of Mutual Benefit's 400,000 individual life insurance customers live in California. The company also insures an unknown number of Californians through 2,796 group policies, said Bill Schulz, a spokesman for Insurance Commissioner John Garamendi.
In addition, more than 200,000 people nationwide belong to pension plans that own Mutual Benefit annuities.
New Jersey officials said Mutual Benefit remains solvent and that the freeze on loans and withdrawals would pose only "a temporary hardship" to policyholders.
Still, the expected seizure of Mutual Benefit--the equivalent of a bank holiday designed to cool off the run on assets--added fuel to the panic that has already consumed many policyholders, industry experts said. It also raises questions about the crazy-quilt of state insurance regulations and the safety net of state guarantee funds to protect policyholders.
Mutual Benefit's woes also cast a harsh light on an insurance company rating system that is supposed to guide consumers toward the soundest underwriters. Until 11 days ago, Mutual Benefit enjoyed a top A+ rating from A.M. Best Co., the industry's oldest and most respected rating agency.
"There is something happening out there that is akin to what happened in the early part of the Great Depression," said William O'Neill, vice president of Standard & Poor's Insurance Rating Services in New York.
"Whenever there is even an inkling of financial stress at a company, people are panicking and pulling their money out. And that tends to become a self-fulfilling prophecy. No financial institution can withstand a sustained run on the bank."
Unlike Executive Life and First Capital, Mutual Benefit has always enjoyed a blue-chip reputation as a conservative, well-run company. Where Mutual Benefit went wrong was in commercial real estate as it put $5.1 billion--nearly 40% of its assets--into a portfolio of mortgage loans and properties, much of which has since gone sour.
Mutual Benefit is the sixth large life insurer to be taken over by state regulators this year. The previous largest failure was Executive Life, which had assets of $10.2 billion. The failed insurers have combined assets of $40 billion.
Since Friday, when Mutual Benefit's woes were splashed across the front page of the Bergen Record in New Jersy, concerned policyholders descended upon Mutual Benefit's home office here in vain attempts to pull their money out.
Regulators say it is skittish investors who have forced virtually all of the insurance company seizures this year by straining companies' balance sheets to the breaking point.
Over time--possibly several years time--policyholders will find that the regulatory system works and that people's life savings do not get wiped out in insurance company failures, other experts maintain. But, for the moment, the psychology of panic is prevalent.
Part of the problem, too, is that many of these seized insurers, including Executive Life, received high marks from the nation's best known insurance rating firms until right before they collapsed.
Mutual Benefit was no exception. Indeed, though recently downgraded, the company still carries a "Contingent A" rating from A.M. Best Co. Standard & Poor's, meanwhile, gave the company an AA+--also one of its highest scores--until late May when Mutual Benefit was "downgraded" to a single A.
Those are still high marks, executives at both firms acknowledge. However, they maintain that Mutual is still a reasonably strong company. There is still a good chance that all the company's policyholders will be paid 100 cents on the dollar.
Nevertheless, industry spokesmen say that the bulk of the nation's life insurers remains healthy.
Mutual Benefit's woes are also shining a spotlight on state regulatory systems and guarantee funds. Most states have guarantee funds that protect at least a portion of the cash surrender value and death benefits promised in a life insurance policy.
Guarantee fund coverage would only come into play if Mutual Benefit were found insolvent and could not be sold--an unlikely possibility, industry experts maintain.
Zonana reported from Newark and Kristof from Los Angeles.
The failure of insurance agencies that were once regulated and required to keep policy holdings safe are the same as what will happen to the bond market----it was all completely deregulated and allowed to do anything with its money even if everyone knows the investments are bad----full of fraud and corruption. THIS IS LIBERTARIANISM-----NEO-LIBERALISM----NEO-CONSERVATISM.
The difference between the insurance collapse you see in the article above in 1991 and today is that Congress has passed laws that will allow insurance corporations brought into bankrutpcy from bad investments to
NOT PAY POLICY OWNERS, CREDITORS--IN OTHER WORDS----THEY WILL KEEP ALL THAT LIFE INSURANCE BALANCE YOU HAVE PAID FOR YEARS AND YOU WILL NOT BE ABLE TO EXIT YOUR ACCOUNT WITHOUT LOSING ALL.
If you read the disclaimers to these subprime life insurance policies being hawked by celebrities we trust-----JEOPARDY'S ALEX TRIBECK!----it states that these accounts will close if payments stop----there will be no getting that money back as they claim.
Bankruptcies may strain insurance fund State's protection fund is flawed, some critics claim.
July 05, 1991|By Thomas W. Waldron | Thomas W. Waldron,Evening Sun Staff
The woman calling the state Insurance Division was worried about her life insurance annuity. Her insurance company had shown no sign of financial troubles, but the daily barrage of bad news about troubled insurers had troubled her.
What happens if my company has trouble, she asked.
Don't worry, said Charles Siegel, an associate insurance commissioner. The policy, he said, will be protected by the state's Life and Health Insurance Guaranty Corp., the private fund set up to protect insurance policies in Maryland.
"She seemed greatly relieved," Siegel recalled.
The relief is well-founded -- probably -- experts say.
But, with several major insurers now in bankruptcy, some critics say Maryland's insurance protection fund -- and similar funds in other states -- are inadequate to cover a major collapse in the insurance industry.
"We think the system is seriously flawed," said Marty Leary, research director with the Southern Finance Project, a non-profit North Carolina group that has studied guaranty funds across the country. "And ultimately they will not be able to stand the test of a big insolvency like Executive Life."
"Certainly we're better off with them than without them," said John A. Donaho, the Maryland insurance commissioner. "The guaranty funds have been extraordinarily helpful. Fortunately, we've never had to really put them to a substantial test."
The two biggest bankruptcies in the history of American insurance -- involving subsidiaries of First Executive Corp. and First Capital Holdings, both of which invested heavily in junk bonds -- have caused a debate in Washington and around the country about the safety of the nation's insurance system.
In Maryland, the focus is on the life and health insurance fund, which the General Assembly established in 1971. The legislature later created a second fund to protect property and casualty insurance policies.
Although created by the legislature, the guaranty funds are private entities, financed and controlled by the insurance industry. Unlike the Federal Deposit Insurance Corp., which is designed to protect bank accounts and is backed by the U.S. government, the guaranty funds are not backed by the state treasury.
If, for example, a life insurance operation that does business in Maryland fails, the guaranty fund can collect an assessment on all Maryland companies that sell life or health insurance or annuities.
Altogether, the fund can collect as much as 2 percent of the industry's total premiums to cover the policies of a failed insurer. The fund can collect the 2 percent assessment every year until all the failed company's policies are honored.
The fund pays out claims on policies held by companies that have failed, or, in the case of a failed life insurer, repays the customer the amount invested in a long-term policy. The fund would protect both term and whole-life insurance policies as well as annuities purchased by individuals.
Since 1971, the two guaranty funds have paid nearly $60 million in claims submitted by people insured by failed companies, according to Joseph R. Petr, the funds' chief administrator.
Neither fund has ever had to assess the full 2 percent premium. In 1989, for instance, the property and casualty fund collected just over one-tenth of 1 percent of the premiums in the automobile insurance industry. State Farm, the largest auto insurer in Maryland, paid the largest assessment, $278,132.
Petr, a lawyer who worked in the insurance business for several years, said Maryland policy-holders are in "pretty good shape," thanks to the guaranty funds.
But Petr pointed out that in the event of a major insolvency the defunct company's policy-holders would have to wait "a period of time," perhaps years, to recoup the money they spent on insurance policies.
The "worst-case scenario," said Petr, would be the collapse of a major company.
But Petr said the industry would not let a major company fail because of the reverberations the collapse would send through the industry. Other insurance companies would probably band together to rescue the company, much as they saved GEICO 20 years ago, he said.
The issue of the guaranty fund's stability is not an academic question for 2,072 Executive Life of California policy-holders in Maryland. Their policies have a total value of almost $720 million.
Three other companies in bankruptcy -- Executive Life of New York, First Capital Life Insurance Co. and Fidelity Bankers Life Insurance Co. -- have more than 3,500 Maryland policy-holders with policies worth a total of more than $550 million, according to Donaho, who has ordered all three to stop writing policies here.
All told, the four companies have more than $1.2 billion in policies in Maryland. By contrast, the state life insurance guaranty fund could assess a total of $47.7 million last year to cover losses. (The amount the fund could collect this year is not yet calculated, Petr said.)
The State of Maryland and Federal government funds these guaranties and the mechanisms in place are sending most of the funds to those Wall Street investment vehicles and executive shareholders to the front and as we all know main street, creditors, and policy-holders are told they get pennies on the dollar. Today, we have insurance corporations deliberately placing themselves in harm's way knowing they will be pushed to bankruptcy and these state guaranties will be sucked dry before any money reaches policy-holders and citizens.
Maryland is controlled by Clinton neo-liberals and Bush neo-cons so you can bet its state guaranty is leveraged to the gills and laws in place to make sure the funds go to the top.
The untold story: state guaranty
funds By Sue McKenna | November 6, 2006
They’re involved with policyholders every day yet too few people know how these safety valves operate
The National Insurance Guaranty Fund program, operating in every state, is the “untold story” in the property casualty industry, one insurance trade executive says.
.“The thing to remember about the guaranty fund system that’s important is that, nationwide, it has met all of its obligations since it came into existence — $17 billion in claims have been paid on 200 insolvencies since 1969,” said Roger Schmelzer, new president of the Indianapolis-based National Conference of Insurance Guaranty Funds (NCIGF) in an interview with Insurance Journal. “Think about it, what other industry funds a ‘bail-out’ program for its customers?”
Despite the quip, Schmelzer takes seriously his new role as president of the NCIGF which he assumed in June 2006. As the leader of a non-lobbying organization, he walked in the door with a wide range of experience including time in the Indiana statehouse and Washington D.C. where he was an aide to U.S. Sen. Richard G. Lugar. His last seven years were spent at another Indiana-based property casualty trade association, the National Association of Mutual Insurance Companies where he was the organization’s public policy leader.
On a mission
Schmelzer has a clear mission as the new president which he says must involve laws being modernized to ensure that the main purpose of the guaranty fund is paying claims for the average homeowner or auto policy impacted by insolvency.
“Guaranty funds were never designed to be a safety net for some of the recent round of insolvencies involving large commercial insurers and high net-worth policyholders, but the guaranty funds have been relied on to back-stop these kinds of insolvencies, creating a real drain on resources,” Schmelzer said.
In recent years large commercial insolvencies such as Reliance, Fremont and Legion have grabbed all the headlines and a lot of the funds.
During the fist 30 years of the guaranty fund system, the nature of the insolvencies did not place a major stress on the system. However, since 2001 there have be a few very significant insolvencies involving insurers writing large amounts of commercial insurance and those have accounted for over half of the $17 billion total, Schmelzer explained.
“We already know public policy changes are needed to ensure that NCIGF and guaranty associations can get back to their original mission. Developing additional answers for the guaranty fund system itself requires sound strategic planning, which our organization will be working on in the coming months,” Schmelzer added.
The National Association of Insurance Commissioners (NAIC) is working on a revision of the Property Casualty Model Guaranty Association Act. Some regulators are questioning the limits paid out that NCIGF believes are essential to preserve capacity for the average insurance consumer. Schmelzer said that as a non-lobbying organization his association wants the word to be spread that modernizing guaranty funds is important and should be done soon — while there is a relatively quiet period.
State guaranty funds were created by statute in 1969, and are non-profit systems operating in all 50 states, Washington, D.C., Puerto Rico and the Virgin Islands.
“Prior to 1969 there were states that did try to fill the gap in those rare occasions when you had company insolvencies. There were about 60 private, personal, auto insolvencies in the mid-1960s, and then Congress got interested in it, and said, ‘well maybe we should start a federal guaranty fund,'” Schmelzer said. “The Federal government spurred the National Association of Insurance Commissioners to create a model and then all the states passed it.”
NCIGF though, wasn’t created until 1990. The guaranty fund system existed with informal coordination before 1990, and then folks decided that they needed to have more formal coordination, and that’s what gave birth to his organization, Schmelzer said.
Each state guaranty fund is structured uniquely with boards and assessments (See chart, Net Annual Average Assessment) of companies writing business in the state, usually at around 2 percent. But that percentage can be raised or lowered depending on the size of the safety net needed in that state. Monies from insolvent estates are also used to pay policyholder claims. Lines covered are workers’ compensation, auto and homeowners. The limits of coverage vary by state and lines of business. New York has $1 million limit, but most state adhere to a $300,000 payment limit. (See chart, Claims Payment Limits).
What happens in liquidation?
Exactly what is the process if a company is placed in liquidation? According to Schmelzer if a company is placed into liquidation, the insurance commissioner from the domicile state is appointed as the receiver and begins the process of collecting assets and determining the company’s outstanding liabilities. This can be a long-drawn-out process and in most cases once the receiver determines how much money is ultimately available for distribution, there usually is not enough money to pay claims in full and creditors receive only partial payment on their claims.
Guaranty funds ease the burden on policyholders and claimants of the insolvent company by stepping in and assuming the responsibility for most policy claims immediately following the liquidation. By virtue of their unique role, guaranty funds are able to provide two important benefits: prompt payment of covered claims and payment of the full value of covered claims up to the guaranty fund’s cap. By statute, guaranty funds are limited in the amount they can pay to the amount of coverage provided by the policy or the legal limit (commonly $300,000), whichever is less, Schmelzer said.
The NAIC wants to give more discretion to the receiver or commissioner to determine what claims are paid by guaranty associations, which is opposed by NCIGF on behalf of its members. State law clearly binds the receiver to the associations’ claim determination, Schmelzer said.
Schmelzer says that with this hefty responsibility of paying claims also comes the realization that the guaranty fund system operates as a business.
“Guaranty funds are a big business. If all the guaranty funds in the United States tomorrow had reason to … to assess at the very highest level they could assess — they could raise almost $7 billion. That’s big. That’s a big business,” Schmelzer said.
Another part of the mission at NCIGF, Schmelzer believes, is to make education a top priority. He says most people “kind of know” what a guaranty fund is but don’t have a real understanding of how one works.
“And it’s important for people to understand how the guaranty fund system actually works because it’s very significant public policy, with respect to what happens when there is an insolvency. The industry itself helped create the guaranty fund system in association with state legislators. So it’s really a public/private enterprise that is intended to ensure the credibility of the property/casualty industries,” he said. “Guaranty funds definitely impact the insurance marketplace.”
Schmelzer contends that this system every day is involved in the lives of individual policyholders, on behalf of the insurance industry as a matter of state law. “So that’s really very significant, and we just want to make sure that people understand that,” he said.
With discussions about an optional federal charter brewing in Washington, D.C., and/or if any other form of federal regulation begins to evolve, it’s critical for policy makers to understand how this guaranty fund system works and why it is important to keep it in place, the NCIGF president said. Schmelzer is hopeful state guaranty funds will survive no matter what.
“Our objective is to preserve the state-based guaranty fund system, and that’s not an objective that’s based on preservation for preservation’s sake. It is because it is a system that works. It’s successful, it does help people, it does everything any government entity — whether state or federal — would want to have happen on behalf of policyholders.”
Schmelzer believes that even if a federal oversight program becomes a reality in the future, the state guaranty fund system should be kept intact and permitted to continue to do the job it was designed to do.