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Difficulty: MediumGuaranty Associations and Solvency

Crestview Life Insurance Company has been declared financially insolvent and ordered into liquidation by a state court. Sarah, a resident of the state, holds a $1,000,000 life insurance policy issued by Crestview and contacts the state Department of Insurance with concerns about her coverage. Which of the following accurately describes how the State Life and Health Insurance Guaranty Association will handle Sarah's policy?

  1. A
    The Association will mandate that the insolvent company's reinsurers assume direct liability and pay the entire $1,000,000 claim directly to the policyholder.
  2. B
    The Association will transfer the policy to a federal insolvency program, which will guarantee the full $1,000,000 face amount without any statutory limits.
  3. The Association will protect the death benefit up to a statutory maximum limit, using funds assessed from other authorized member insurers operating in the state.Answer
  4. D
    Because mutual insurers are owned by shareholders, the Association will require the liquidation of shareholder equity to pay the claim in full before intervening.

Answer

The Association will protect the death benefit up to a statutory maximum limit, using funds assessed from other authorized member insurers operating in the state.
State Life and Health Insurance Guaranty Associations are established to protect policyholders from severe financial loss if their insurer becomes insolvent. The protection is subject to statutory maximum limits defined by state law. To generate the capital needed to pay these covered claims, the Association levies post-insolvency assessments on all other authorized member insurers operating within the state.

Step-by-Step Solution

1
Analyze the state's mechanism for handling insurer insolvencies.
Identify that the State Life and Health Insurance Guaranty Association steps in to protect resident policyholders when an insurer goes into liquidation.
To determine the responsible entity for managing the outstanding policy obligations.
2
Evaluate the limits of Guaranty Association coverage.
Recognize that coverage is not unlimited; it is capped at a statutory maximum established by state law, meaning the full $1,000,000 may not be fully covered.
To address the large face amount mentioned in the scenario and understand the extent of consumer protection.
3
Identify the funding source for the Guaranty Association.
Recall that the Association is funded by mandatory, post-insolvency assessments levied on all other authorized member insurers operating in the state.
To accurately describe how the Association acquires the capital necessary to pay out covered claims.

Key Concept

Guaranty Association Solvency and Funding Mechanisms
Estimated Time:1m 30s
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Topics

Guaranty Associations and Solvency

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