III - Insolvencies/Guaranty Funds

ISSUES UPDATES

Insolvencies/Guaranty Funds

THE TOPIC

APRIL 2009

The regulation of insurance company solvency is a function of the state. State regulators monitor the financial health of companies licensed to provide insurance in their state through analysis of the detailed annual financial statements that insurers are required to file and periodic on-site examinations. When a company is found to be in poor financial condition, regulators can take various actions to try to save it. Insolvencies do occur, however, despite the best efforts of regulators.

All states have procedures through which the property/casualty insurance industry covers claims against insolvent insurers. New York has a pre-assessment system, which requires insurers to contribute to a permanent insolvency fund, while the other states have established insurance guaranty associations (known as guaranty funds). Insurers are required to be members of guaranty associations as a condition of licensing. When there is an insolvency, they are assessed based on business they do in that state so that claims can be paid.

The National Association of Insurance Commissioners (NAIC) moved to strengthen solvency regulation in the 1980s. It developed an accreditation program that requires state insurance departments to meet certain prescribed standards. It also established minimum capital requirements for insurers, based on the riskiness of their business, and it continues to refine regulations.

RECENT DEVELOPMENTS

Solvency Modernization: The NAIC has created a high level Solvency Modernization Initiative (SMI) Task Force that will report directly to the Executive Committee, suggesting that work on improving solvency regulation will receive greater prominence. The NAIC began work on its SMI in September 2008, the aim of which is to determine whether current U.S. solvency requirements need to be modified in light of regulations in other countries and the changes now being contemplated in the European Union under Solvency ll. The analysis will include the solvency work of the International Association of Insurance Supervisors, of which NAIC is a member, as well as Solvency II.
Key elements in the EU’s Solvency ll, a project to strengthen and standardize solvency requirements across the European insurance market, had included flexibility to move capital across national boundaries to support solvency requirements within insurance company groups, and group supervision. The concept of group support had been approved by the European Parliament and was favored by the European insurance industry. It is also an issue being studied by the NAIC in the United States. However, some EU member states were concerned that the provision allowing a subsidiary’s capital requirements to be guaranteed by the parent company would result in the withdrawal of funds, usually from the smaller countries where the subsidiary is based to larger states, such as the U.K., France or Germany. Smaller countries believed that such a provision could reduce their ability to oversee these subsidiaries and to protect their policyholders. To break the impasse that could have imperiled Solvency II, the European Parliament agreed at the end of March 2009 to drop group support language from the directive. The effective date of Solvency II is November1, 2012.
American International Group: On September 16, 2008 the Federal Reserve Bank of New York agreed to provide a two-year, $85 billion government bridge loan to American International Group’s (AIG) in return for 80 percent of its stock when it seemed that the company was in danger of becoming insolvent. The loan, which was subsequently increased and restructed, was needed to give the holding company time to overcome serious liquidity problems, regulators said. The National Association of Insurance Commissioners (NAIC) stressed that AIG’s insurance subsidiaries are solvent and able to pay claims. It is the noninsurance parent company, which is a federally regulated entity, that is financially distressed. The insurance subsidiaries are governed by state law designed to protect the interests of policyholders. State regulators will work closely with AIG management and other regulators to ensure that decisions made to resolve the liquidity issues at the holding company fairly compensate its insurance company subsidiaries.
Insolvencies/Impairments: According to an April 2009 A.M. Best report, there were seven property/casualty insolvencies in 2008, four of which were title insurers. Title insurance protects the owner of property or the holder of a mortgage against loss in the event of a property ownership dispute. An analysis by A.M. Best of the cause of these insolvencies shows that, among other things, the title insurance companies grew fast when real estate was booming but then experienced difficulties when the real estate bubble burst and the economy faltered. In addition, when business was growing rapidly, they failed to build adequate reserves to pay future claims. With the rise in foreclosures and mortgage defaults, some of which trigger a title search, they saw their losses increase at a time when their premium income was rapidly declining. Two of the four companies were taken over by another insurer. Title insurance is not generally covered by guaranty funds. The failure of one of the other three insolvent companies, a Texas homeowners and auto insurer, was due in part to large losses associated with Hurricane Ike.
The impairment rate has been declining, according to A.M Best, because of the industry’s improved profitability and capital position, but that trend may not last in the current economic downturn and soft market. Growing competition and a large number of catastrophes could cause an increase in the number of impairments. The slight increase in insolvencies for 2008 pushed the average impairment rate for the period 1969 to 2008 to 0.23 percent, up from 0.17 percent in 2007.
The reopening of claims filed by policyholders of the failed Poe Financial Group of Florida and a surge in new claims has forced the state’s Guaranty Fund Association, which pays the claims of insolvent companies, to ask for more funds. As of January 2008, the fund had paid out $123.5 million. The insurance department said in April that an additional $790 million might be needed. In January 2008 a 2 percent surcharge was imposed on Florida homeowners policies and all other lines covered by the guaranty funds, except auto and workers compensation. The surcharge is added as policies come up for renewal. This was the third time assessments had been imposed to pay for Poe claims. In 2006 there were two assessments. Losses stemming from the very active hurricane seasons of 2004 and 2005 were largely responsible for the insolvency of Poe, which was Florida’s third largest insurance group.
The failure of the three insurance companies that made up the Poe Financial Group represented the largest loss of insurance capacity in Florida since Hurricane Andrew in 1992, when 10 Florida insurance companies became insolvent. Like Vanguard, which became insolvent in 2007, see above, Poe had assumed high-risk property insurance policies from Citizens in return for a bonus payment under a program designed to reduce the size of the pool.
Midland Insurance Company has been in liquidation since 1986, see Background section. Now New York insurance regulators are planning to auction off the company to the highest bidder, even though the liquidation process has not yet been completed. The winding down of the company has already taken more than 20 years because the insurer wrote a large amount of liability insurance, so-called long tail lines such as products liability or medical malpractice where it make take a decade or more before the harm done (by a new medication, for example) is evident and injury claims are filed and settled. A private company (as opposed to a government entity) may have more speedy options for settling the remaining claims, New York regulators believe.
Guaranty Funds: A new proposal introduced in Congress in April 2009 to grant insurance companies the option of being federally regulated, would create a guaranty fund to protect consumers against the insolvency of a federally regulated insurer. Federally regulated companies would have to pay into the federal guaranty fund as well as pay insolvency assessments levied by the state guaranty funds in which they were licensed to do business.
The New York Insurance Department issued a report on the condition of the state’s three guaranty funds in May 2006 and made several recommendations to help correct their weaknesses, including greater access to actuaries to better manage existing funds and project future funding needs. The report indicates that the workers compensation account will remain impaired for several years to come and suggests adding the State Insurance Fund, the state-administered provider of workers compensation coverage, to the entities that can be assessed. The fund provides a large portion of the workers compensation insurance purchased by the state’s businesses. The report also suggests lowering the cap on claims payments. At $1 million, New York has the most generous payments of all the guaranty funds. Workers compensation guaranty funds in a number of states have experienced financial problems due to the high number of insolvencies in this line or type of insurance in the early part of the decade.
State guaranty funds assessed insurers $600.7 million to pay for insolvencies in 2006, the last year for which complete data are available, see below. Assessments on insurance premiums may fund earlier insolvency expenditures as well as current year costs.

GUARANTY FUND NET ASSESSMENTS, 1978-2006 (1)

Year	Net assessment (2)	Year	Net assessment (2)
1978	$139,349,343	1996	$95,320,605
1980	17,771,834	1997	236,319,208
1985	292,417,521	1998	239,212,254
1986	509,409,508	1999	179,283,004
1987	903,228,359	2000	306,444,534
1988	464,840,383	2001	712,776,721
1989	713,869,682	2002	1,184,153,880 (4)
1990	433,562,308	2003	874,499,309 (4)
1991	434,845,812	2004	952,695,278
1992	383,735,932	2005	916,130,812
1993	520,215,101 (3)	2006	600,740,172
1994	497,752,370 (3)	Total, 1978-2006	$11,951,942,952
1995	66,562,926 (3)
(1) Excludes New York and Workers Compensation Security Funds in New Jersey and Pennsylvania. (2) Assessments less refunds. (3) Includes separate assessments for insolvencies due to Hurricane Andrew totaling $248,542,070. (4) Excludes data for the Louisiana Insurance Guaranty Association. Source: National Conference of Insurance Guaranty Funds.

PROPERTY/CASUALTY GUARANTY FUND NET ASSESSMENTS BY STATE, 2006

State	Net assessment (1)	State	Net assessment (1)
Alabama	$4,026,533	Nebraska	$2,450,000
Alaska	0	Nevada	0
Arizona	0	New Hampshire	1,390,495
Arkansas	0	New Jersey	0
California	0	New Jersey Workers Compensation	0
Colorado	7,140,000	New Mexico	0
Connecticut	-619,004	New York	0
Delaware	0	North Carolina	0
D.C.	-1,568,953	North Dakota	0
Florida	451,198,272	Ohio	0
Florida Workers Compensation	0	Oklahoma	0
Georgia	0	Oregon	0
Hawaii	34,196,897	Pennsylvania (2)	0
Idaho	0	Pennsylvania Workers Compensation	0
Illinois	0	Puerto Rico	8,148,397
Indiana	4,000,000	Rhode Island	-9,827,142
Iowa	0	South Carolina	0
Kansas	0	South Dakota	1,294,105
Kentucky	0	Tennessee	0
Louisiana	0	Texas	50,000,000
Maine	1,793,960	Utah	0
Maryland	10,000,000	Vermont	-1,205,082
Massachusetts	5,383,252	Virginia	18,727,489
Michigan	12,194,803	Washington	0
Minnesota	0	West Virginia	-500,000
Mississippi	0	Wisconsin	0
Missouri	2,516,150	Wyoming	0
Montana	0	United States	$600,740,172
(1) Assessments less refunds. Negative numbers represent net refunds. (2) Excludes Workers Compensation Security Funds. Source: National Conference of Insurance Guaranty Funds.

Chart Notes: The two charts above are the yearly totals for insurance company payments to state post-assessment guaranty funds and a state-by-state chart showing assessment amounts. (The figures do not include assessments made under New York's pre-assessment insolvency fund nor payments made by individual companies under the insolvency provision of the uninsured motorist endorsement to auto insurance policies. They also do not take into consideration recoupments available through premium tax offsets and policyholder surcharges.) Net assessments in 2003 represented only 0.2 percent of the property/casualty insurance industry's net premiums written. Assessments include monies needed to pay claims against companies that became insolvent in the past as well as current insolvencies.

BACKGROUND

Regulation for Solvency: State insurance departments monitor the financial health of insurance companies through regular in-depth financial analyses and periodic on-site examinations. The National Association of Insurance Commissioner’s (NAIC) uses a series of tests—the Insurance Regulatory Information System (IRIS)—to help identify companies in trouble. All insurers are required to file annual financial statements with regulators in all states in which they are licensed to do business. Statistical data taken from these statements are run through IRIS tests. If the tests indicate a company's financial ratios are outside the normal range in more than four areas, its finances are reviewed in greater detail to determine whether it is in need of immediate regulatory attention.

State insurance departments must meet certain standards to ensure they have the capacity to oversee the financial condition of the insurers they regulate. Under state accreditation program rules, accredited states are subject to a full review every five years and a lesser audit every year. However, accreditation may be suspended at any time, after notice to the state and a hearing, if regulators become aware that a state is no longer in compliance with certification standards.

Risk-Based Capital Standards: The NAIC has been strengthening solvency regulation since the early 1990s. Among other things, it adopted risk-based capital (RBC) standards for the property/casualty industry, which took effect for the 1994 annual financial reports filed with regulators in March 1995. RBC standards replaced individual state surplus and capital requirements, which varied widely from state to state and had been criticized as being too low and too simplistic to be meaningful thresholds for capital adequacy. In some states, a large insurer could have been insolvent while still meeting the minimum requirements.

The old blanket minimum requirements were replaced with standards geared to the specific characteristics of the company and its business, a move designed to improve solvency regulation. With formulas that reflect individual capital needs, examiners can more quickly identify insurers that are under financial pressure and take action earlier to avert insolvency.

Capital adequacy is linked to the riskiness of an insurer's business activities. An insurance company that insures medical device manufacturers or high-rise buildings along California's earthquake faults needs a larger cushion of capital than a company specializing in Main Street businesses in Michigan, for example. A company that is heavily reinsured may have more security than a similar one that is not, but what happens if its reinsurer is in poor financial health when it comes time to honor the reinsurance contract?

RBC formulas therefore set out minimum levels of capital that will help maintain solvency in the event of a serious miscalculation. The likelihood and extent of these errors are built into the formulas for various elements of an insurer's business. These include the risk that loss reserves set aside for future claims will be inadequate. (Loss reserve risk is tied to the kind of business the company underwrites. There is more uncertainty in liability than property lines of insurance because of the long-tail nature of claims, where it may take years to arrive at a settlement for injuries.) In addition there is credit risk—the chance that an insurance agent or reinsurer will default on monies owed under contracts. Premium risk assesses the degree to which insurance policy prices may inadequately reflect the cost of claims. Capital levels are also established for investment and off-balance sheet risks. An allowance is made in the calculations for the fact that everything is unlikely to go wrong at the same time.

The adequacy of a company's capital is assessed by comparing its total adjusted capital, which is basically its net worth, with its RBC—an amount of capital that reflects the level of risk the company has assumed. The greater the total riskiness, the greater the minimum financial cushion must be. The result is expressed as the company's RBC ratio. Ratios are categorized in six levels, or zones, that run from adequate (125 percent and higher) to mandatory control or below 35 percent, at which point the insurance commissioner is authorized to seize the company, unless there is some reasonable expectation that the circumstances that caused the depletion of capital will be remedied within 90 days.

Insurance companies are required to disclose in financial statements filed with regulators their total adjusted capital and their “authorized control level” of risk-based capital. This is one level above mandatory control, the point at which a regulator may take control of the company if it is deemed to be in the best interests of the policyholders, creditors and the general public. However, when RBC ratios are published outside of the annual statement, they usually refer to the "company action level," (75-99 percent), where a company is required to file a plan with regulators to correct its capital deficiencies.

RBC data are not a measure of financial performance. They are designed to help identify companies whose capital has fallen below regulatory-determined minimums rather than assess the financial strength of adequately capitalized insurers as rating agencies do from reviews of both financial data and discussion with company management. A company that fails the RBC tests may not be on the brink of insolvency and it is possible for a company in poor financial shape to pass the tests.

Insolvencies: A 1987 General Accountability Office (GAO) report on insolvencies noted that insolvencies generally follow the property/casualty insurance company profitability cycle. The GAO report also pointed out that the profile of insolvent companies has changed over the years. In the late 1960s and 1970s, insolvencies occurred mainly among small auto insurers with a limited geographical span. Since that period, the characteristics of insolvent insurers has become more diverse and has included some large multistate companies. The incidence of large company insolvencies has raised concerns over the ability of the guaranty fund system to pay all covered claims.

The insolvencies of four large insurers and the fallout from the savings and loan crisis in the 1980s prompted a Congressional study, which culminated in the February 1990 report "Failed Promises: Insurance Company Insolvencies." Known as the Dingell report, after the chairman of the committee that investigated the insolvency cases, Rep. John Dingell (D-MI), the study looked at the insolvencies of four companies: Mission Insurance Co. and Transit Casualty Co., both with headquarters in California, although Transit Casualty was chartered in Missouri; Integrity Insurance Co. of New Jersey; and Anglo-American Insurance Co. of Texas. The report found what it called "disturbing" parallels between the mismanagement and fraudulent activity that led to the four insurer insolvencies and the factors that precipitated the savings and loan crisis. Specifically, it attributed the insurance company failures to rapid expansion, unsupervised delegation of authority, extensive and complex reinsurance arrangements, underpricing, reserve problems, false reports, reckless management, incompetence, fraud, greed and self-dealing.

According to a November 2005 A.M. Best study of insolvencies from 1969 to 2005, the leading cause of collapse was inadequate reserves for claims, which accounted for more than 38 percent of impairments among the 984 insolvencies studied. Rapid growth also played a major role, accounting for 16.5 percent of failures over the period studied, particularly during soft markets. Most insolvencies, Best says, were related to some form of mismanagement. Data for the period 2003-2005, which was also analyzed separately, shows that fraud can play a substantial role.

Solvency Oversight Process: Regulators monitor the financial condition of all insurance companies. If a company appears to be in poor financial health, regulators are empowered to take certain steps to strengthen the insurer's position and, if all else fails, to liquidate it.

The first indication of a possible problem frequently is a company's failure to pass four or more of the 11 financial tests that regulators administer as part of the normal monitoring process. Failure may trigger special audits or a requirement that the company begin to report its financial data on a quarterly basis instead of annually. These initial steps are precautionary in nature and serve as a warning to the company to put its financial affairs in order.

If there is no improvement, more formal steps may be taken to bolster the company's financial condition. The regulator may order the company to raise its rates, increase its capital, restructure its investments or take other corrective measures, depending on the nature and severity of the problem. To protect the company from "run-on-the-bank" type reactions, these remedial actions are not made public except at the company's request. If the deterioration continues, the next step is rehabilitation, a move that becomes part of the public record. The insurance department in the company's domiciliary state, the state in which the insurer is incorporated or organized, obtains a court order allowing it to take more specific steps to shore up the troubled company. These may include suspending claim payments, placing a stay on lawsuits against the company and searching for additional sources of capital—a merger prospect, for example.

The next step is conservation, under which the conservator takes possession of the insurer’s assets and administers the company while collecting information on the company’s condition, a move that becomes part of the public record. Based on the conservator’s recommendation, the company is either placed in rehabilitation or in liquidation. The rehabilitator may file a plan for rehabilitation or decide, after all, that rehabilitation would be futile in that it would increase the risk of losses to policyholders and creditors.

The final step is liquidation, which enables the insurance department, as liquidator, or the department's appointed deputy, to wind up the company's affairs by selling its assets and settling claims upon those assets. After obtaining the liquidation order, the liquidator notifies insurance departments in other states of the liquidation proceedings. State guaranty associations also will be notified. Since liquidations of insurance companies are not subject to the provisions of the Federal Bankruptcy Code but to each state's liquidation statutes, the process of liquidation may vary from state to state.

Insolvency Data: The National Association of Insurance Commissioners (NAIC) considers a company insolvent when the state insurance commissioner has taken legal action against a company to place it in conservatorship, rehabilitation or liquidation. (The difference between conservatorship and rehabilitation is one of degree. According to the NAIC, the state insurance department guides the operations of a company in conservatorship but directs the operations of one in rehabilitation.) Each state has laws that govern what triggers the guaranty funds, generally a final order of liquidation and/or a finding of insolvency.

There is a wide variation among states as to what is included in their list of insolvencies. Some states count ancillary receiverships, for example. Ancillaries are set up because when an insurer domiciled in another state becomes insolvent an ancillary receivership order is needed to release guaranty funds. Some states charge insurance departments with the task of liquidating insurance-related entities such as insurance agencies and home and auto warranty firms. These, too, may be included in the state’s list of insurer insolvencies. In addition, due to the complexity of the issues involved, litigation and other problems, some companies remain on a state’s receivership list for many years.

Guaranty Funds: The first guaranty funds were narrow in focus and covered a particular line or area of insurance such as workers compensation, which was the first coverage to be made compulsory. In the 1940s and 1950s a few states created auto insurance guaranty funds. Among them was New York, whose Motor Vehicle Liability Security Fund, created in 1947, was expanded to cover other areas of insurance in 1969 when the NAIC proposed its model guaranty fund program. The guaranty fund concept was gradually adopted and by the end of 1982, all 50 states, the District of Columbia and Puerto Rico had established procedures under which solvent property/casualty insurance companies absorb losses of claimants against insolvent insurers.

The NAIC's Model Property/Casualty Guaranty Association Act recommended that states adopt a post-assessment, or post-insolvency, approach to financing the program, under which assessments are made only after an insurer has been declared insolvent. When a company becomes insolvent, other insurers doing business in the state are assessed the amount needed to pay policyholders and claimants of the insolvent company.

New York is the only state that does not use the post-assessment system for any line of insurance. New York has a "pre-assessment" arrangement. Insurance companies are assessed in advance, according to a percentage of net direct premiums written, and contributions are held against future claims on insolvent companies. The fund halts contributions when the amount held exceeds $200 million and does not call for new payments until the balance falls below $150 million. (Some states, including New Jersey, New York and Pennsylvania, have pre-assessment funds for workers compensation and, in April 1989, Maine created a pre-insolvency fund to pay the claims of insolvent insurers for the first 60 days, by which time funds would have been collected through the regular post-assessment fund system.)

In most post-assessment states, companies can be assessed annually up to a maximum of 2 percent of net written premiums. A few states still have a limit of 1 percent. About one-third of guaranty funds have three accounts, although the number may vary from one to five. The three accounts are automobile, workers compensation and all other lines of insurance covered by the funds. In Florida, auto is separated into liability and physical damage. Assessments are made separately for each account. State legislation is generally required to impose higher assessments temporally if additional monies are needed to pay claims after a surge in insolvencies.

Insurers may recoup guaranty fund assessments. Sixteen states offset insolvency assessments through a reduction in premium taxes—a state tax levied on the amount of insurance premiums paid by the policyholders in the state. Some states raise money through an insurance policy surcharge. Others recoup insolvency assessments through changes in insurance premium rates.

While all state funds cover homeowners and auto insurance claims, some other types of insurance may not be covered. The life/health insurance industry has its own model law and guaranty funds. Some states that do not follow the guidelines of the model law in its entirety may include some of these types of insurance. There also may be other differences. For example, claims may be subject to a deductible, usually $100. Coverage limits exist in most states and these too vary. In Georgia the maximum covered claim, or the largest payment that state's insolvency fund will make, is $100,000. In Arkansas it is $300,000 and in California the maximum figure is $500,000. Most states have no limits on the amount paid to cover workers compensation claims.

State guaranty funds do not generally cover groups that self-insure (assume the financial risk of loss instead of transferring it to an insurance company—see Captives report). Thus, participants in risk retention groups and purchasing groups, such as those established under an amendment to the Risk Retention Act of 1981, would not be able to call on state guaranty funds if their group became insolvent.

There has been discussion about the need or the advisability of establishing a guaranty fund for surplus lines insurers, whose claimants would not be covered by established guaranty funds in states where these companies are not licensed. Although lawmakers have considered such legislation, the only state so far to establish a special fund for surplus lines is New Jersey.

Another question is whether guaranty funds should cover "commercial lines" policyholders. Businesses generally are better equipped than individual consumers to evaluate the financial condition of insurance companies. They often have the in-house expertise to evaluate an insurer's financial data or they can ask a broker to assist them. Responding to the idea that the claims of large, sophisticated commercial policyholders should not be covered by state guaranty funds, in 1986 the NAIC adopted a model law that requires any corporation with a net worth of more than $50 million to reimburse state guaranty funds for liability claim payments made on its behalf. More than 30 states use net worth, though not necessarily as set out in the NAIC model act, to determine eligibility for guaranty fund coverage, and other states have been considering similar measures. In Missouri, for example, under a law that took effect in August 1989, the guaranty fund will not pay the claims of corporate policyholders with a net worth in excess of $25 million.

Many states have incorporated "early-access" provisions into their guaranty fund laws. These statutes require state regulators to share the assets of an insolvent company with guaranty funds at an early stage in the liquidation process so that claimants do not have to "stand in line" with other creditors. Some 40 states now have such provisions.

The size of insolvencies is increasing. In the 15 years from 1969 to 1984, the largest assessment was for an insolvency of $88 million for the Reserve Insurance Company, which became insolvent in 1979. Beginning in 1985, assessments for individual company insolvencies jumped into the $200 to $300 million range and rose higher each decade. By 2008, the insolvency of Reliance in 2001 had reached $2.3 billion, but recoveries were more than $1.4 billion. See chart on largest insolvencies below. The final figure may not be known for some time since much of the company’s business was workers compensation insurance and workers compensation claims can take years to settle as more becomes known about the injured workers’ condition.

The Claim Payment Process: When state guaranty fund associations are notified about an insolvency by the liquidator or their state insurance department, they must first determine whether the company was licensed to do business in their state for any of the lines of insurance covered by their guaranty fund. Then they must decide how much to assess other insurance companies doing business in the state to pay the outstanding claims against the insolvent insurer, or, in the case of New York State, whether a new assessment must be made.

To come up with a figure, the association analyzes all available information on the insurer's business, including the financial data the company has submitted to the state's insurance department, claims files or a representative sample of claims, computer print-outs from the liquidator and any other material that would give some indication of outstanding claims and the amounts set aside by the company to pay them. After all the information has been factored in, each insurer is assessed its share of the total amount needed.

Claims are paid as information is received from the liquidator and as soon as each claim is resolved. Only hardship cases are given a priority. The time it takes to arrive at a settlement depends on the nature and complexity of the case, just as it does when a claim is filed with a solvent company. Liability claims tend to take longer to settle than first-party claims—those filed by the policyholder. Where necessary, the guaranty fund provides defense counsel to defendants.

In addition to providing information on the insolvent insurer to state insurance departments and guaranty fund associations, the liquidator is responsible for notifying all agents, policyholders and others who might have claims against the company of its insolvency. Policyholders are given an additional period of insurance coverage, typically 30 days from the date of liquidation, unless their policy would have expired prior to this. The policy period extension protects policyholders while they are shopping for a new insurance company. Policyholders also receive claim forms, known as proof of claim forms, and information on how to fill them out in the event that they have a claim against the insolvent company. (In states where the guaranty fund covers unearned premiums—premiums that the insurance company has collected from the policyholder but has yet to "earn" because the policy period has not yet expired—the majority of policyholders would have reason to file a claim.)

NATIONAL CONFERENCE OF INSURANCE GUARANTY FUNDS (NCIGF), INCEPTION-TO-DATE INSOLVENCY FINANCIAL INFORMATION BY COMPANY, TEN LARGEST INSOLVENCIES (1)

Year	Insolvent company	Payments	Recoveries	Net cost
2001	Reliance Insurance Company	$2,265,845,612	$1,415,385,230	$850,460,383
2002	Legion Insurance Company	1,272,694,066	227,503,349	1,045,190,717
2000	California Compensation Insurance Company	1,049,745,420	327,756,089	721,989,331
2000	Fremont Indemnity Insurance Company	843,405,746	643,377,434	200,028,312
2001	PHICO Insurance Company	699,420,144	205,770,569	493,649,574
1985	Transit Casualty Insurance Company	566,549,902	379,499,906	187,049,996
2000	Superior National Insurance Company	555,797,035	174,168,193	381,628,842
1988	American Mutual Liability Insurance Company	543,085,140	238,199,539	304,885,602
1986	Midland Insurance Company	531,641,477	50,648,348	480,993,129
2006	Southern Family Insurance Company	516,844,804	246,101,399	270,743,405
(1) From year of insolvency to 2008. Ranked by payments. NCIGF Disclaimer: This is not a complete picture. The numbers may be understated as some states have not reported in certain years. Source: The National Conference of Insurance Guaranty Funds.

KEY SOURCES OF ADDITIONAL INFORMATION

"Failed Promises: Insurance Company Insolvencies," Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce, U.S. House of Representatives, February 1990.

"Insurance Failures," General Accounting Office, 1987 (GAO/GGD-87-100).

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