The Marketing and Selling of Insurance GUARANTY FUNDS

Each state has an insurance guaranty fund. Each operates in substantially the same way. In the event of insolvency of an insurer whose policies are covered by the guaranty fund (i.e., an admitted insurer in that state), policyholders of that insolvent insurer are covered up to the statutory limit. This limit varies from state to state, but is sufficient to cover most anticipated property claims and all the genuinely catastrophic liability claims. In addition, the guaranty fund statutes provide for defense of liability claims in addition to paying judgments or settlements up to the amount of the statutory limit. The protection offered by the guaranty fund is not perfect protection. But, the protection offered is far better than having none and is a substantial reason to purchase insurance coverage from an admitted insurer as opposed to a nonadmitted insurer. Guaranty funds are funded by you and every other policyholder in your state. You are all providing protection for each other. The initial capitalization (i.e., start-up funds) for guaranty funds comes from assessments of all admitted insurers doing business in that state, in proportion to the respective amount of premiums written by each insurer in that state. Under the guaranty funds statutes of all states, the insurers that have paid these assessments to provide the start-up capital to establish the guaranty fund were, and The Marketing and Selling of Insurance 23 are, entitled to recover the costs of those assessments. This is recovered by premium surcharges on all of their policyholders. If you were to examine your premium billing notice over a period of time, you will notice such surcharges, typically between $1 and $5. This charge is imposed by your insurer proportionately on all of its policyholders to cover the costs of assessments it has been obligated to pay to fund the guaranty fund in your state. The guaranty fund in each state operates much like an insurance company. Guaranty funds set reserves, retain defense counsel, and settle and defend claims. They also adjust property claims. The primary difference is in the source of their funding. Insurance companies fund their operations primarily by charging premiums and by realizing investment income on their reserves (premium reserves and loss, loss adjustment expense, and other reserves). Guaranty funds likewise generate income by investments received on reserves. They do not have, however, premium income as a source of income. Nor do guaranty funds have the overhead associated with marketing and selling policies, as do insurance companies. When an insurance guaranty fund needs to generate income because the claims it has paid are depleting it imposes assessments on all admitted insurers doing business within the state.

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