Question

Life insurance

Solvency

What protection is there for persons who own policies in shaky or financially insolvent companies? (Please point out the two ways that persons are protected and analyzing these two protections.)

Answer 1

When insurance company goes insolvent -

• insurance company is declared insolvent, the state guaranty association and guaranty fund swing into action
• insurance company doesn’t have enough funds to pay policyholder claims, the guaranty association will use what assets the company has and the guaranty funds to pay claims

Here is a structure of how the insurance industry actually works-

So each insurance company in turn is insured and backed by Reinsure and further by a Retrocessionaire.

So when a particular insurance company fails the reinsurer is under the legal obligation to transfer the insured party to subsequent insurance company held under them.

Further the Retrocessionaire is a bigger umbrella where all the insurance companies are bundled into to neutralize the probability of insolvency.