Insurance Firms Against Insolvency - Research Paper Example

GOVERNMENT PROTECTION OF INSURANCE FIRMS AGAINST INSOLVENCY. Insurance companies in the US, including the largest ones sometimes gets themselves at the verge of collapse. This implies that they are unable settle their dues thus facing the risk of liquidation in order to cover the money for the policyholders as well as settle claims by claimants. It is the obligation of the government to come up with solutions for such kind of situations or chip in to alleviate the crucial situation. American insurance Group, AIG for instance, has been at the risk of collapsing early this year until the US government intervened and bailed it out of the risk with $85 billion package. This still did not prove to be sufficient to set the company into a stable position. The government had therefore to dig in deeper and provide some $150 billions. Other major insurance firms have been reporting some big losses which have been largely attributed to the on going financial crisis. Insurance company insolvency would result from a sudden big loss or continued losses f or some time. This financial problem facing insurance companies raises the debate of what is supposed to be done when the insurance company faces the risks of insolvency. The solution to this questions lies within the control of the insurance industry. The government would be in a better position to assist the insurance firms during financial crisis if there is a well installed financial regulation procedure which involves safety-and-soundness compliance and regulation system. This system aims at safeguarding creditors from losses that might occur due to insolvency of insurance institutions as well as maintaining financial stability in these firms. For the insurance industry, this is carried out by the Federal Deposit Insurance Corporate (FDIC). The government has also created some other small agencies such as the insurance guaranty funds, investor protection funds and deposit insurance as an appropriate approach to protect creditors against big financial losses if there is unavoidable circumstance of insolvency of an insurance firm (Schweller, 2008). It’s also the obligation of the government to ensure that these firms remain solvent: that their assets’ value remains more than their liabilities as well as their liquidity: that the firms can meet requests for payments in terms of insurance claims if presented. The state should also see to it the solvency regulation are strictly put in place by employing examiners who are charged with the responsibility of assessing the value of a firm’s assets and examining its scope of liabilities.. Another major remedy to the several insolvency in the insurance industry is through maintenance of the deposit insurance for credit unions that is supposed that assists members to get credit for protection. National Association of Mutual Insurance Companies (2007) argues that the insurance industry is covered by some state laws and regulation policies that are generally having a lot of impracticalities as well as inefficiencies. Many insurance experts have claimed that the state have the major obligation in safeguarding the insurance business against insolvency. Others have preferred to let separate insurance businesses to adapt the oversight of the federal state although this has not been legalized and there is also the fear of creating battles that involves vigorous lobbying. Most of the insurance firms in the US when they get into financial crisis will have the control of their insolvent insurer sized by the state insurance department with an aim of liquidating or rehabilitating. Liquidation comes in where rehabilitation fails to take place or becomes impossible. After this the company receives some funds from the state guarantee funds which are supposed to cover the firm up to the limits defined by the law. In case the state guarantee fund fails to provide the funds to cover the insolvent firm, it will have no option but to assess some fine against in-state insurers. The creation of insolvency laws to cover insurance firms has played a crucial role in the country’s insurance industry. They provide investors as well as lenders with some security for consumer and commercial borrowing. The effect of this has been felt by the risks involved in the credit market where the credit availability and cost have been influenced. The insolvency system has played a critical role in the commercial world by attracting both domestic and foreign investors in addition to giving chance to innovation and entrepreneurship for growing businessmen. There should be some responsible state supervision of the insurance firms that would safeguard the clients from much financial losses and protect the companies from insolvency. To help cub the situation of sinking insurance firms, just like banks, the insurance sector should have an emergency reserve to keep the financial stability of the companies and ensure that policyholders are safeguarded. The state should come up with special resolution scheme which would efficiently safeguard the insurers and the policyholders during financial crisis periods. In some cases where the situation is worse and the insurance company has to be liquidated, the state then should put full law in order to help protect the benefits of the policyholders and claimants. The government is obligated to create an insolvency process that is efficient and fair to all investors and clients in the insurance industry. There is the necessity of quickly redeploying these assets from businesses that are insolvent to new and profitable investments. This decision would help the insolvency system to make significant contribution to the economy. The laws governing insolvency in the insurance sector of the economy should be honest, but some people facing serious financial crisis encounters difficulties in discharging their debts and setting a fresh start in the business lives. In the United States, insurance firms are usually under the control of the states instead of the federal government. This situation allows different states to come up with different regulations, rules as well as statutes governing the respective insurance companies. Despite the fact that the states’ regulatory rules vary, most of are almost the same especially the ones concerning the insolvency of the insurance companies. Once the insurance regulator finds out that an insurance firm in the state is might be insolvent, its commissioner is obliged to request for a court order that puts the firm into liquidation. An insurance company is seen as insolvent if it has more liabilities than it’s the sum of its assets, capital and surplus or if it is not in position to meet its due debts. The court issues a liquidation order that makes the commissioner of insurance the liquidities of the firm. This takes place after the state court reaches an agreement with the petition filed by the commissioner or if the company’s board of directors of the insurance company takes part in the petition. The liquidation goes on under the states statute of liquidation. States statutes of liquidation are in line with the Insurers Supervision, Rehabilitation and Liquidation Act (NAIC Act) modeled by the National Association of Insurance Commissioners. The Liquidation of an insurance firm is equivalent to chapter 7 proceeding as in the Bankruptcy Code. In some cases, the insurance firm happens to be part of a holding company chain where the prime firm and some other related firms may not be involved in insurance business. Under such cases where the non- insurance organization faces insolvency, the case would proceed in a federal bankruptcy courts. Meanwhile the insurance company’s insolvency in the system takes place in a liquidation proceeding by the state. The federal bankruptcy of the prime firm can not lead to the liquidation of a subsidiary company, unless an appropriate state court considers the subsidiary firm insolvent. Several statutes regarding state liquidation demands that all the wealth and casualty policies of the company to be liquidated must be cancelled one month prior to the issuance of liquidation order date. The policy can still end a few days before thirty days are over. This takes place when the normal expiration date of the policy is less than thirty days or if the company businesses are endorsed to another insurance firm in less than one month. Some insurance such as life and health insurance annuities or policies still keep on being in force for that identified duration of time under the stipulated conditions given by the guaranty association statute that might be the annuities or policies termination date several years after the liquidation order date. The annuities or policies will terminate on the same month or in a less duration of time as casualty insurance and property policies if they don’t have coverage of guaranty association. Once given the liquidation order, the operation of law grants the liquidator the rights to all the wealth, contracts as well as rights of taking appropriate action of the liquidated insurance firm. The liquidator from there possesses the firm’s offices, assets, equipment as well as records. In addition to this, the liquidator has the right gather the assets associated with the company and as well liquidate them to cash and pay all the company’s claimants. This operation is carried out under the supervision of the court. Once issued the liquidation order hinders any body from prosecuting civil claim against the liquidator or the insurer or making any sort sorts of interference with the liquidation process as well as the control of the assets by the insurer. The government should ensure that the claimants of the insolvent company are alerted once the liquidation order has been given out informing them of how to follow their potential claims against the assets of the insolvent firm. The claimants must as well file their claims with the liquidator accompanied by sufficient proof within the stipulated duration set for filling the claims. All the possible claimants are required to issue to the liquidator claim forms that must be approved by liquidator all relevant claims even the ones given to the insurer before being put under liquidation. During the liquidation proceedings, the liquidator evaluates the proofs of claims presented by the claimants in time and classifies them according to claim priority as demanded by the statute of liquidation. The liquidator after this, requests for liquidation approval from the liquidation court and goes ahead to create disbursement of the property regarding the claims priorities. First class involves the settling the estate expenses, after which the liquidator pays for claims for benefits that lye under the insurance contracts or policies by the company. The amount collected by the liquidator determines the amount to be disbursed to the claims as well as the amount associated with each claim in all classes of priorities. The highest class of priority is given the first priority in making the payments. In case the collected amount is not sufficient to cater for the payments of every claim, the claimants falling in that particular class will have to share the amount on a basis of pro rata. This is based on the available resources and the total amount gotten from the liquidation of the assets. There is the need to safeguard the policyholders from the uncertainty of if the claims thy have presented would be settled and at what time. This has been covered by establishment of guaranty associations also referred to as guaranty funds. They are non profit entities and are bases on different states, created by the state statute in order to safeguard claimants as well as policy holders within the state from getting financial losses and delay in settling the claims due to the insolvency of the insurance firm. Several states do have more than one guaranty associations; with one for health and life insurance and another one for casualty and property insurance. States should see to it that all insurance companies that have been given license by their respective state to carry out sales of insurance lines that are covered by an association become automatic members of the association. On the other hand, insurers that are not licensed including excess line and surplus insurance firms don’t have the coverage of the guaranty associations. Title, credit, mortgage and ocean marine insurance are not included in casualty and property guaranty associations while members of managed care plans like health maintenance organizations (HMOs) as well as preferred provider organizations (PPOs) are not covered by Health and Life guaranty associations. Policy holders might sometimes b forced to their own defense as well as absorbing any losses. This happens when a guaranty association fails to cover them because of its statutory regulations. These expenditures which were supposed to be under the coverage of the insolvent insurance company would be referred to as class two claims for the policyholder that he would put forward against the insurance firm’s property. According to Radetzki (2003), third party claimants and policyholders are safeguarded by the guaranty associations from insolvency of insurance firms coming into the position of the written policies by the insurance firms. For policies concerning liability, the guaranty association comes into defense of claims put forward against the policyholder if there is an obligation to provide defense in the policy. In case of life insurance, guaranty associations usually under take their obligation by surrendering the responsibility of the policy to a insurance firm that is stable financially. Most stats experience guaranty association coverage being enabled by a court determining an insurer to be insolvent and consequently putting it into liquidation. As per the findings by Scott (2005), the claims put forward are being paid within duration of three months from the date the liquidation order was put in action. The guaranty associations get the amount that is required to settle the claims by assessing the firms that are registered as members. Despite the fact that most claims that are covered gets full payments, some statutory limits regarding payments of guaranty association may vary from one state to the other. For instance, health and health guaranty associations chip in some cash amounting to $ 300,000 to cover life insurance death benefits and some $ 100,000 for covering benefits associated with health insurance benefits. Some states might have higher values for these casualty as well as property. Guaranty associations do demand a range of $ 100,000 to $300,000 to cover al claims excluding worker’s compensation that is has unlimited statutory benefits. Some more $ 100 is deducted by several property and casualty guaranty associations for every claim. These associations also exclude some deductions for policyholders who have big net worth such as $ 25 million. A class two (benefits under policy) claim against the insolvent insurance firm property is forwarded by the guaranty association upon payment of a claim. There is much prevailing speculation that the on going economic crisis would have negative effects to the insurance industry to an extent of risking insolvent. In that case the state ought to streamline the regulatory schemes that would see to it that there is proper approach of ensuring solvency and stability of insurance firms and a way of handling any liquidation in case of insolvency. The schemes should aim at reducing the financial losses that may face the policyholders as well as third party claimants. The government also ought to give full protection to the policyholders and claimants. Some claims directed towards an insolvent insurance company may not have full coverage since they are subjected to guaranty association limits as well as other provisions within the statutory rules. If the situation is worse to an extent of the insurance company being put in liquidation, then the policyholders as well as the claimants should be carefully reading the information and notifications gotten from the liquidator or from the guaranty association as well as being active in following the necessary procedures to see to it that they achieve they have their claims addressed. The policyholders and the claimants should seek the services of some expert counsel to assist them to present their grievances in situations where the claims are significantly big. Bibliography National Association of Mutual Insurance Companies 2007, Insurance regulation, online, retrieved 20 April 2009, from < http://www.namic.org/fedkey/07regulation.asp > Radetzki, M 2003, Genes and insurance: ethical, legal and economics issues. Cambridge, Cambridge University Press. Schweller, G. S 2008, What happens when an insurance company goes bust? online, retrieved 20 April 2009, from < http://www.dinslaw.com/what_happens_when_an-insurance-company_goes_bust > Scott, S. S 2005, Capital adequacy beyond Basel: Banking, security, and insurance. Oxford, Oxford University Press. Read More