Property & Casualty Insurance Exam (National Portion)Insurance RegulationMedium
A small insurance company is facing financial difficulties and is declared insolvent by the state Department of Insurance. Policyholders are concerned about the status of their existing claims and the return of unearned premiums. Which entity is responsible for stepping in to pay covered claims and protect policyholders in such a situation?
- AThe State Guaranty Association
- BThe insolvent insurance company's reinsurance carrier
- CThe National Association of Insurance Commissioners (NAIC)
- DThe Federal Deposit Insurance Corporation (FDIC)
Show answer & explanationAnswer & explanation
Correct answer: A. The State Guaranty Association
State Guaranty Associations are non-profit entities created by state law to protect policyholders of insolvent insurance companies by covering claims and unearned premiums up to certain limits.
Why the other options are wrong
- B. Reinsurance protects the primary insurer, but once the primary insurer is insolvent, the Guaranty Association takes over policyholder protection.
- C. The NAIC provides model laws but does not pay claims for insolvent insurers.
- D. The FDIC insures bank deposits, not insurance policies.
State Guaranty Association
A State Guaranty Association is a non-profit, state-mandated organization that protects policyholders in the event an insurance company becomes insolvent. It pays covered claims and returns unearned premiums up to specified limits.
- Protects policyholders from insurer insolvency.
- Funded by assessments on solvent insurers.
- Covers claims and unearned premiums up to state-mandated limits.
- Exists in every state.
Memory trick: When an insurer 'Fails', the 'State' 'Guarantees' policyholder 'Claims'.