A domestic property and casualty insurer is declared statutorily insolvent and ordered into liquidation by the state courts. Consequently, the State Insurance Guaranty Association is activated to manage and settle the outstanding covered claims. Which of the following correctly describes the financial mechanism the Association uses to obtain the necessary capital to pay these policyholder claims?
- It levies mandatory post-insolvency assessments on all other authorized member insurers writing the same line of business in the state, calculated proportionately based on their written premium volume.Answer
- BIt invokes statutory authority to bypass the insolvent ceding insurer and legally forces the company's reinsurers to pay the original policyholder claims directly.
- CIt utilizes emergency capital allocated from the state's general tax revenue, as the Department of Insurance acts as the ultimate financial guarantor for all admitted carriers.
- DIt issues a mandatory capital call to the insolvent insurer's existing policyholders and shareholders to recover the financial deficit prior to settling any claims.
Answer
It levies mandatory post-insolvency assessments on all other authorized member insurers writing the same line of business in the state, calculated proportionately based on their written premium volume.
The correct answer accurately describes the standard post-insolvency assessment model. When an admitted insurer is liquidated, the Guaranty Association calculates the funds needed to pay covered claims and levies an assessment on all other solvent member insurers. This assessment is restricted to insurers writing the same line of business (e.g., property and casualty insurers pay for P&C insolvencies) and is proportional to the premium volume they write in that state.
Step-by-Step Solution
Key Concept
Guaranty Association Funding via Member Assessments
Estimated Time:1m 30s