Following a series of severe financial impairments, a domestic stock life insurance company is declared legally insolvent and placed into mandatory liquidation by the state Commissioner of Insurance. The carrier leaves behind thousands of active policyholders, unresolved death benefit claims, and several treaty reinsurance agreements. Which of the following accurately describes the mandatory actions and funding structure of the State Guaranty Association in response to this liquidation?
- The Association will protect resident policyholders by paying covered claims up to statutory limits, generating the necessary funds by assessing other authorized member insurers operating in the state.Answer
- BThe Association will provide emergency financial subsidies directly to the insolvent insurer to prevent its final bankruptcy and protect its shareholders from total equity loss.
- CThe Association will assume control of the insolvent carrier's treaties and legally compel the reinsurers to distribute claim payments directly to the individual policyholders.
- DThe Association will first liquidate the insurer's assets and then levy an assessment against the company's mutual policyholders to cover the remaining deficit.
Answer
The Association will protect resident policyholders by paying covered claims up to statutory limits, generating the necessary funds by assessing other authorized member insurers operating in the state.
The correct answer accurately describes both the objective and the operational mechanics of the State Guaranty Association. When an admitted insurer goes into liquidation, the Association steps in to fulfill the carrier's obligations to resident policyholders, subject to statutory maximum caps. To obtain the capital required for these payouts, the Association levies proportional assessments on all other insurance companies that are authorized to write that specific line of business in the state.
Step-by-Step Solution
Key Concept
State Guaranty Association Purpose and Funding