States

Guaranty Funds

• NAIC – National Association of Insurance Commissioner
  • Financial Condition Committee – (E) – NAIC  —  [BonkNote]
  • Guaranty Fund Issues Working Group – (E) – NAIC  —   [BonkNote]
  • NAIC – Life and Health Insurance Guaranty Association Model Act – 68p
• NCIGF – National Conference of Insurance Guaranty Funds – ncigf.org/   —  [BonkNote]
• NOLHGA – National Organization of Life and Health Insurance Guaranty Associations  —  [BonkNote]
• Penn Treaty

• (p515) – The working group identified several issues relevant to the charges, including:
  • Does the current structure for handling life insurer insolvencies encourage a policyholder “run”?

1995-2, NAIC Proceedings – Guaranty Fund Issues Working Group – (E) – NAIC

• Most insurers face risk and uncertainty from a source not normally covered by classical theory of risk texts. This additional element of risk is insolvency, not of your company, but that of other licensed insurers.

—  Joseph W. LEVIN, not a member of the Society, is a fellow of the Casualty Actuarial Society and Vice President and Actuary of the Employers Reinsurance Corporation. 

1978 – SOA – Capacity and Solvency — The Outside Influence, Society of Actuaries – 20p

• 1978 – SOA – Capacity and Solvency — The Outside Influence, Society of Actuaries – 20p

• 1986 – SOA – Guaranty Funds, Society of Actuaries – 22p

• 1991 0926 – GOV (House) – Resolution of Troubled Insurance Companies and the Role of State Guaranty Associations – [PDF-151p-GooglePlay]
• 1992 – NAIC – Issues Concerning Insurance Guaranty Funds, by Robert Klein – 317p
• 1992 – SOA – Guaranty Fund System, Society of Actuaries – 14p
• 1993 0111 – Ledger-Enquirer – State Guaranty Funds Need to be Overhauled, by Jane Bryant Quinn – [link-newspapers.com]
• 1993 0124 – The Washington Post – States Need to Reform Insurance Guaranty Funds, by Jane Bryant Quinn – [link]
  • To reduce the lottery element of settlements, the National Conference of Insurance Legislators (NCOIL) has proposed a single, interstate guaranty fund.
• 2021 1008 – LC – In Re: Penn Treaty Network America – No. 1 PEN 2009 – Insurance Company in Liquidation Liquidator’s Brief in Support of Exceptions – 456p

• [Re: State Guaranty Funds]
• 2021 1008 – LC – In Re: Penn Treaty Network America – No. 1 PEN 2009 – Insurance Company in Liquidation Liquidator’s Brief in Support of Exceptions – 456p
  • 2015 0511 – Proceedings Taken May 11, 2015
  • THE COURT, Mary Hannah Leavitt: What’s going to happen when the guarantee associations take over these policies is that their policyholders, who had nothing to do with this insolvency, are going to make up the difference.
    • Guarantee associations get their money from insurance companies.
      • Insurance companies get their money from their policyholders; so you are shifting the burden from one set of policyholders to another.
    • That’s a policy decision that’s been made by the legislature, but I think there are problems with holding it up as a model of equity and fairness.
      • In a global sense I don’t think it is very fair; but it doesn’t matter because we are not here to talk about the wisdom of the legislature.
    • We are really here to decide what the legislature has decided we must do in this circumstance.  
  • MS. GLAWE: Exactly right.
    • That burden shifting is what the legislature and 52 jurisdictions have decided.
  • THE COURT: That’s right.
  • MS. GLAWE: So that —
  • THE COURT: I wouldn’t hold it up as a wonderful thing.
    • That’s all I’m saying.
    • For every upside there’s a downside on someone.

• (p588) – Dwight K. Bartlett III (Md.). …told the working group that guaranty associations were developed during a time when “life insurers sold life insurance.”

1995-1, NAIC Proceedings – Guaranty Fund Issues Working Group B of the Insolvency (EX5) Subcommittee – September 11, 1995

• (p16) – Willis B. Howard, Jr. (NOLHGA – National Organization of Life and Health Insurance Guaranty Associations):
  • I’d like to respond briefly to my honorable friend, Commissioner Bartlett.
  • Dwight, the guarantee association system works, and it works well.
• Dwight K. Bartlett III (Maryland Insurance Commissioner):
  • Are you going to tell me, Bill, in all honesty that you really believe that the policyholders of Executive Life and Mutual Benefit Life have been well-served?
  • For example, with Mutual Benefit, if you opted out of that rehabilitation plan you get, as I recall, 55 cents on the dollar of your account value.
    • If you opt into the plan, you agreed to subject yourself to a moratorium period, which means you do not get full access to the cash values of your policy until the next century.
  • Are you going to say that’s meaningful coverage for those policyholders?
  • ⇒  I think that’s ridiculous.

1994 – SOA – Valuation Actuary – Symposium Proceedings – Session 1 – Introduction and Overview, Society of Actuaries – 110p

• **David B. ATKINSON. (Executive Vice President, Reinsurance Group of America (RGA), on behalf of the Reinsurance Association of America (RAA)) –
  • There have been insolvencies. We do have a State guarantee system that backs up
• Spencer BACHUS (R-AL) –  So there were no losses? 
• Mr. ATKINSON. Insolvency regulation has worked well. It has been a success.  (p75)

2009 1006 – GOV (House) – Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, And Creating a National Insurance Office – [PDF-325p]

• The thing that concerned us, because we did not have an FDIC behind us, we have a system of guaranty funds in the states, if there were a run on life insurance companies, what would that do to us as an industry?

—  Frank Keating, ACLI, President and CEO

2009 1026 – InsuranceNewsNet – Relieved to Have Survived a Dangerous Year, ACLI Members Look Ahead, By Ron Panko, Senior Associate Editor, Best’s Review – [link]

• Cardiss Collins (D-IL) – Chair
  • (p107) – Our first witness illustrates the importance of an adequate guaranty fund system.
    • Olga Pegelow’s Executive Life annuity has been reduced 30 percent.
  • (p108) – While insurance companies pay into guaranty funds, it is often the taxpayers who actually pay for insolvencies.
• Mrs. Olga Pegelow, Policyholder,  Chicago
  • (p111-112) – Since April 1991, I am only receiving 70 percent of my check, while 30 percent is being withheld from each monthly payment and credited to my account with the current interest.
  • But you know, I don’t believe them.
    • Any day I expect to get a notice that Executive Life is bankrupt.
  • I know the State Department of Insurance in Springfield, Ill., is one of the 48 States that belongs to a guaranty fund, but I need my income now, as do all of us in my generation.
  • We elect our Representatives and expect them to do their job to protect us.
    • Where has everybody been since 1984 ?
  • l realize that this will affect all of you, and that is why I am here.
    • I am not only talking for our generation.
    • I am talking for your generation.
  • I just hope that you will be able to insure the future for our young people. 
  • —  Thank you for listening to me.

• (p118) – Mrs. Olga Pegelow, Policyholder, Chicago  – May I ask a question? — I know there is a guaranty fund in 48 States, but in that guaranty fund, is the money there?
• Alex MCMILLAN (R-NC).  Well, that is another question.  — In most cases, since it is a guarantee.
• Mrs. PEGELOW.  But the money is not there. — The money has to first be collected.
• Mr. McMILLAN. But that means that those who participate in that State in the sale of insurance are obligated to pay into the fund.
• Mrs. PEGELOW. In other words, all the other insurance companies that are solvent in that State will have to donate the money or pay the money to this guaranty fund;
  • …. it isn’t like the FDIC where the money is there.
• Mr. McMILLAN. I wish it were.
• Mrs. PEGELOW. Right. So there is that difference. There is a guaranty fund, but there is no life —
• Mr. McMILLAN. Those are based on guarantees too. The fact of the matter is —
• Mrs. PEGELOW. But the Government is behind the FDIC.
• Mr. McMILLAN. The reason why the taxpayers are having to pay off S&L depositors is because the fund wasn’t adequate to meet the guarantee of the deposits.
• Mrs. PEGELOW. Correct. And this is the same problem with the insurance money.
  • The money isn’t there.
• Mr. McMILLAN . You obviously make a very valid point.

1991 0717 and 0724 – GOV (House) – Life Insurance Solvency Issues – Cardiss Collins (D-IL)  —  [BonkNote]

• Although the guaranty funds are designed so that the industry initially pays for the costs of failed companies, in the event of widespread guaranty fund capacity problems a potential liability for the states may exist.

(p12) – Johnny C. Finch (GAO – Director for Planning and Reporting, General Government Division, General Accounting Office)

• Who Pays for the Guaranty Association Protection?
  • (p154) – The funds necessary to fulfill an insolvent insurer’s obligations are obtained by assessments levied against other insurance companies doing business in the state.
  • (p155) – State law also provides that an assessment may be waived for an individual insurer if the commissioner of that state determines that payment of the assessment would endanger the insurer’s ability to meet its own obligations.
    • Assessments waived for an individual insurer are paid by the remaining insurers doing business in the state.

—  (p154) – Statement of The American Council of Life Insurance (ACLI),  Marcia Horton – Lincoln National Life Insurance Company

1991 0227, 0507, 0509, 0523 – GOV (House) – Insurance Company Solvency, Cardiss Collins (D-IL)  —  [BonkNote]

• (p247) – Senator Richard BRYAN (D-NV) – There is generally no public membership?
• Mr. SARFATY – (NOLHGA) –  Yes, right.

• (p247) – Senator BRYAN. Now, you talked about the cost.
  • How are the costs passed along to the public?
• …
• (p247) – Senator BRYAN.  How are the costs passed on?
  • You talked about the enormous costs that are involved, and very clearly there are substantial costs when you have a big failure like this.
    • How are those passed on?
• Mr. SARFATY. Well, it does depend on a number of things.
  • It depends on the line of insurance, the type of policy.
  • It depends on whether there is a tax offset provision in the statute for that particular State, and what the characteristics of that statute are, et cetera .
    • In other words, some of the cost is in effect reflected in increased premiums.
  • There are obviously many types of contracts, like life insurance contracts where you cannot raise the premium, the premium is fixed.
    • So that would then be passed on to new policyholders in higher premiums, offset against the tax over an extended period, along the lines of the deductibility of a bank’s FDIC premium.
    • That same general idea, if that is available in that State.
      • Lower interest rates on interest-sensitive products is another way it gets passed on.
      • Lower dividends.
      • So, naturally it spreads through the entire system.
    • There is simply no free money.
• Senator BRYAN. So, ultimately the public does-
• Mr. SARFATY. Ultimately the public pays for everything.
• Senator BRYAN [continuing]. Either in the form of lower dividends, lower interest rates, perhaps higher premium, depending upon the product.
• Mr. SARFATY. That is correct. That is absolutely right.
• Senator BRYAN. And ultimately the general fund of those States that permit offsets would have an affect.
• Mr. SARFATY. That is absolutely right.

1991 0227, 0507, 0509, 0523 – GOV (House) – Insurance Company Solvency, Cardiss Collins (D-IL)  —  [BonkNote]

• (p29) – Senator Richard SHELBY (R-AL).  Mr. Hunter, do you agree with his statement [Michael McRaith (Illinois Insurance Commissioner / NAIC)]?
  • What is your take on it.
•  J. Robert HUNTER (CFA).  I didn’t hear him answer the question.
• Chairman Chris DODD (D-CT). He did–
• Mr. HUNTER. I don’t think it could handle-I don’t think the guaranty funds could handle it, no.
• Senator SHELBY. Couldn’t handle it–
• Mr. HUNTER. That was your question, and I don’t think they–
• Senator SHELBY. It would be too big for them to handle, would it not?
• Mr. HUNTER. Of course. Yes.
• Senator SHELBY. I thought so, too. Thank you.

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

• In the U.S., many states have laws that permit insurers to offset a portion of their future premium, income and/or franchise tax liabilities by the amount of the guaranty association assessments they have paid (e.g., 20% over 5 years).
  • This, in turn, reduces the tax bases of those states.  (p4)

2018 0223 – Letter –  ACLI to FSB (Financial Stability Board) – re: Key Attributes Assessment Methodology for the Insurance Sector – 5p

• In order to protect the policyholders and claimants, the liquidator must turn to the State Guaranty Fund.
  • The Guaranty Fund is a kind of insurance for insurance companies.
• All insurance companies must contribute money to the Guaranty Fund to protect legitimate-claimants from the danger of not receiving their claims payments.
• Of course, the payments made by the Guaranty Fund are a cost of companies, and these costs in turn insurance companies to business to insurance are passed on to the consumers of insurance in the form of higher premiums.

—  1988 0809 – NAIC – Testimony – GOV – John Washburn, Illinois Insurance Commission – Comments on H.R. 4923 – 13p

• In contrast, every state except New York (which has a FDIC like pre-loss insurance fund)¹⁷ uses an ex post assessment on healthy insurers to fund any insurable loss not payable by the bankrupt insurer.
• Each state’s insurance guarantee fund has the power to assess the remaining insurers based on their premium volume.
  • ¹⁷ New York’s fund is funded by assessments every year. If the insured losses increase, the New York guarantee fund can increase assessments.
    • However, it does not have statutory access to the state treasury to make up shortfalls. See e.g. The Life Insurance Company Guaranty Corporation of New York Act, 77 N. Y. Comp. Codes R. & Regs.

2010 – AP – The Insurance Industry and Systemic Risk: Evidence and Discussion, by Martin F. Grace – 41p – ssrn.com – link 

• 1995-1, NAIC Proceedings – Guaranty Fund Issues Working Group B of the Insolvency (EX5) Subcommittee – September 11, 1995
  • (p588) – The first person to testify was Commissioner Dwight K. Bartlett III (Md.).
  • Commissioner Bartlett told the working group that guaranty associations were developed during a time when “life insurers sold life insurance.”
    • He cited the recent rehabilitation of Mutual Benefit Life Insurance Company as an example of the shortcomings of the present guaranty association system.
    • The receiver and guaranty associations did the best job possible within the current framework, but policyholders were forced to bear a disproportionate share of the costs involved, he said.
    • Commissioner Bartlett characterized his proposal as representing a middle ground between the current system and a system like the Federal Deposit Insurance Corporation (FDIC) advocated by some.
  • …
  • (p588) – Len Stillman (Utah) asked why consumers who purchase investment type insurance products should be afforded protection that other investors are not offered.

• • Commissioner Bartlett responded that there is a perception that products offered by life insurers are more secure than other investments.
  • …

• • (p589) – Ms. Pruitt said that some limitation on policy restructuring is fair, but that the working group should note that some insolvencies have been caused by insurers issuing policies containing unrealistic promises and guarantees.

[Words: “run on the bank.”, 1. Moratoria on Surrenders and Withdrawals of Cash Values, ]

• 1995-2, NAIC Proceedings – Guaranty Fund Issues Working Group
• (p515) – The working group identified several issues relevant to the charges, including:
  • …are the current limitations on moratoria sufficient?
  • What degree of discretion should the receiver and the supervising court be given to enable them to deal with the unique circumstances of each insolvency?
  • What obligations do guaranty associations have to policyholders in the event a moratorium exceeds six months?
  • Are the hardship criteria in use in most insolvencies adequate to address the needs of policyholders?
  • What factors should be considered by the supervising court with regard to extension of a moratorium?
  • Does the current structure for handling life insurer insolvencies encourage a policyholder “run”?
  • Are the shortcomings of the post insolvency assessment state-based guaranty fund system sufficient to justify serious consideration of alternative systems, or can the problems be fixed? 

• Policyholder Protection In Insurance Company Failures
  • ATTACHMENT FOUR-C – Statement of The American Council of Life Insurance, ACLI – Before The Guaranty Fund Issues (EX5) Working Group B – September 11, 1995

1995-3, NAIC Proceedings 

• Further, state guaranty funds protect policyholders from any shortfalls. (p2)

— Vaughan, McCarty, etc., NAIC, Insurance Commissioners

2010 0420 – Letter – NAIC to Senators – re: Restoring American Financial Stability Act of 2010 (RAFSA) – 4p

• GUARANTY FUND (EX4) TASK FORCE
  • Brian Quigley (Travelers) …..noted that the task force should be aware that the trend is toward no coverage for GICs.

1987-2, NAIC Proceedings

• With several life insurers in trouble today, the life insurance guaranty associations nationwide could muster under $9 billion if they were called upon.
  • As I put it in my testimony, that would hardly pay the bonuses that these companies are offering.

—  J. Robert Hunter, Director of Insurance, The Consumer Federation of America

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

• Despite unfounded concerns from some circles, our state guaranty fund system has robust capacity to resolve insurance company failures and provides an important incentive to the insurance industry to manage risk and promote solvency, as insurers are assessed for the failures of their fellow competitors.
  • Given that policyholder dollars are paid into a proven system of resolution (coupled with appropriate solvency standards), these policyholder dollars should not also be used to pay for the failure of systemically risky entities within the new federal authority.

2010 0603 – Letter – NAIC to GOV (Frank, Bachus, Dodd, Shelby) – re: Conference on Financial Regulatory Reform Legislation – 4p

• Meanwhile, the state guaranty funds may create the illusion of safety where it does not exist.
  • While the funds might be able to absorb the failure of a single large insurer, it is almost certain that they would not be able to handle the simultaneous failure of several large insurers in a timely fashion.²  (p4)

—  J. Robert Hunter, Director of Insurance – Consumer Federation of America – Testimony – 47p

2009 0317 – GOV (Senate) – Perspectives on Modernizing Insurance Regulation, Chris Dodd (D-CT)  —  [BonkNote]

• Mark SOUDER (R-IN). If I was trying to go through the different guarantee funds and so on, if insurance companies would start to need to be rescued, do you have a fee much like do we for FDIC–
• Eric DINALLO (New York State Superintendent of Insurance.)  Yes.
• Mr. SOUDER. And others like the insurance companies would kick in?
• Mr. DINALLO. Yes, we have what’s called a guarantee fund.
• Mr. SOUDER. Do you have right now-……
• Mr. DINALLO. Yes.

2008 1007 – GOV (House) – The Causes and Effects of the AIG Bailout- AIG Bailout Oversight Hearing, Henry Waxman (D-CA) – Panel 1 —  [BonkNote]

• 2010 0526 – COP – Hearing – TARP and Other Government Assistance for AIG, Congressional Oversight Panel  —  [BonkNote]
  • (p144) – Damon SILVERS (COP Member / policy director for the AFL-CIO):  [continuing]. You-it has been represented to us, and I think you heard some of it this morning, that absent what the Fed did and precisely the way it did it, there would have been a crisis for the insurance subsidiaries and their ability to maintain their business, pay their obligations, and the like, a crisis that’s so serious that it was absolutely necessary to rescue the parent in the manner the parent was rescued in order to avoid such an outcome.
    • I think there is a kind of implicit analysis made by the Federal Reserve and the Treasury in saying so, that whatever problems might have arisen in the insured subsidiaries, they would have been beyond the ability of the state insurance regulation and guarantee system to manage.
    • What is your response to both those propositions and specifically what was the view of the New York State Insurance regulators and the-I forget the term of art now, but there’s a sort of coordinating body of state insurance regulators. 
    • What was your view during the so-called Lehman weekend around these questions?
  • Michael MORIARTY (New York State Insurance Department, Deputy Superintendent)
    • Sure. I’d like to bifurcate my answer into two parts.
      • We do not believe that the existing policyholders of the AIG property and casualty companies for sure or even the life insurance companies would have suffered any losses should there-would there have been a bankruptcy of the AIG holding company system.
      • State insurance laws through the McCarran-Ferguson Act clearly give the states the authority to regulate insurance companies and to rehabilitate and liquidate them, which is a different process from a bankruptcy.
      • So we would maintain that the existing policyholders would have been made whole, even if there was a bankruptcy.
      • The life insurance subsidiaries would have suffered significant losses and the cushion, which we call surplus, which is effectively capital between assets and liabilities, would have taken a severe hit, but we still think it would have been positive.
    • Now, when we look at AIG as a going concern that would have been a problem

• In the early 1990s, there were a number of large insolvencies.
• …
• This led to creative solutions to some of the major insolvencies, such as establishing the Guaranty Reassurance Corporation, which was formed to take over the assets and liabilities of the insolvent Guaranty Security Life.
  • In this plan, there was a 25% moratorium surrender charge assessed against policyholders who wished to surrender.
  • These graded off over a five-year period.

• The funding of the guaranty associations’ obligations for Guaranty Re was also spread over a five-year period.
  • They funded them, in effect, with notes at the beginning of the 1993 Reassurance Plan.
• As many of you know, the funding for Executive Life was also spread out over a number of years.
• Who bears the cost?
• …

• To determine the cost of recent insolvencies, and how long has it taken to resolve them, let’s define a major insolvency as one that has policyholder obligations of more than $100 million.
• There have been 14 of these in the last 10 years, including three big ones:
  1. Confederation Life,
  2. Executive Life, and
  3. Mutual Benefit.
• Total policyholder obligations were $28 billion as of the date of the liquidation order.

—  Willis B. Howard Jr., NOLHGA – National Organization of Life and Health Insurance Guaranty Associations

1998 – SOA – Once in a Hundred Years, Society of Actuaries – 22p