JIF 2020 Insights: Insurance guaranty funds – an essential safety net you may not have heard of

By Loretta Worters, Vice President, Media Relations, Insurance Information Institute
Roger Schmelzer, president of the National Conference of Insurance Guaranty Funds (NCIGF), was on hand at the Joint Industry Forum (JIF), Thursday, January 16, to discuss the organization’s role in economic resilience, an important insurance industry theme.

“At the heart of every property and casualty insurance contract lies a promise that if misfortune occurs, insurance will step in to soften the blow by covering outstanding claims,” said Schmelzer.  “But what happens when an insurance company becomes financially troubled, fails, and is no longer able to uphold its end of the bargain?”

According to Schmelzer, that’s when the state property and casualty guaranty fund system – a system few know much about – steps in.

“Put simply, guaranty funds provide an essential safety net for policyholders, one that meets the needs of those least able to deal with losses should their insurance company fail,” he told reporters.  “Guaranty funds are part of the resilience formula in the insurance industry.”

How Is the System Funded?

The property and casualty guaranty fund system is a non-profit statutory structure funded by the proceeds of failed insurance companies and assessments on operating insurers that provides coordination to property and casualty guaranty funds in each of the 50 states and the District of Columbia. The system pays covered claims up to a state’s legally allowable limits and has safeguarded countless policyholders who might otherwise have faced financial ruin because of unpaid claims related to an insolvency.

“For nearly five decades, the guaranty fund system has paid out more than $35 billion to cover claims against about 600 insolvencies,” said Schmelzer. “Through the years, the system has successfully met every challenge that’s come its way and has been instrumental in supporting that insurance promise.”

What about life and health insurers?

A state life and health insurance guaranty fund system also exists, but it operates independently from the property and casualty system. NCIGF’s counterpart is the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), a voluntary association made up of the life and health insurance guaranty associations of all 50 states and the District of Columbia.  NOLGHA was founded in 1983 when the state guaranty associations determined that there was a need for a mechanism to help coordinate their efforts to provide protection to policyholders when a life or health insurance company insolvency affects people in many states.