With a two year long pandemic, wildfires scorching cities, and hurricanes slamming coasts, the U.S has had its fair share of catastrophes recently. Millions of businesses across the country are struggling to keep their doors open in the face of these disasters.
Insurance is all about helping individuals and businesses protect themselves from the risks associated with these types of disasters. But, with so many individuals filing claims, what happens when insurers run out of funds and can no longer pay their policyholders? Turns out, not even an industry as highly regulated as insurance is safe from insolvency.
What is solvency in insurance?
Solvency is a fancy term for the ability to pay off one’s debts. When it comes to insurance, solvency refers to the ability of an insurer to pay claims. When disaster strikes, individuals rely on their insurer to hold up their end of the deal and pay what they owe. If the company is unable to pay up, it is declared insolvent.
A company’s solvency can be calculated using the solvency ratio. An insurance carrier’s solvency ratio takes multiple factors into account, but essentially it can be calculated by dividing a company’s capital by its liabilities.
How does an insurer become insolvent?
Insurance is a highly regulated industry, but that doesn’t mean it’s failure-proof. There are a number of reasons why insurers become insolvent. One possibility is that they’re under-pricing their products and receiving claims far higher than expected. This was the case for long-term care insurer Penn Treaty whose 2017 liquidation was considered one of the biggest in U.S. history. Insurers at the company figured a large volume of coverages would go unused and were caught off guard when claims began piling up and they were unable to pay.
Another, more unfortunate, reason for insurance companies to become insolvent is due to widespread disaster. In late August of 2021, Hurricane Ida made landfall on the Louisiana coast. The storm, which reached Category 4 intensity, was second only to Hurricane Katrina in the amount of death and destruction it brought the state. After the storm, thousands of Louisiana residents filed claims for the damage Ida caused to their homes. As a result, multiple Louisiana insurers, still struggling to pay claims from last season’s hurricanes, were declared insolvent.
What about the policyholders?
When natural disasters strike and insurers are unable to pay the massive number of claims they receive, what happens to policyholders? In order to protect policyholders, a common practice in these situations is to place the insolvent insurers into receivership, which was the case for two insurers affected by Hurricane Ida whose insolvency left 30,000 residents in need of new coverage.
The Louisiana Department of Insurance placed Access Home Insurance Co. and State National Fire Insurance Co. into receivership after it became clear both companies were unable to pay their policyholders. The insurers were put under new, temporary management so a plan could be made for paying claims.
Luckily for policyholders, insurance laws offer some degree of protection when this worst-case scenario happens. Ideally, insurance carriers can weather the storm of high claims volume because they have enough of a financial buffer.
In the case of Access Home Insurance Co. and State National Fire Insurance Co., Louisiana ultimately placed policies in the care of SafePoint Insurance Co., which will cover all 30,000 policyholders without them needing to find new coverage. A state court approved the transfer plan from the state in late December, 2022. According to the Louisiana Insurance Department, had the court not approved the transfer, the policies would have been moved to a state-sponsored insurer for coverage.
Of course, for the excess claims that pushed these insurers into insolvency, the state guaranty association and guaranty fund will step in to help. The overall aim of state regulations regarding insolvency and the entire process is meant to guarantee policyholders still get paid for at least some of their claims, no matter what.
An exception: Admitted vs. non-admitted insurance.
It’s important to note there is an exception to the amount of help a policyholder will get from the state should their insurance company fail to pay. It all comes down to whether someone’s insurance is admitted or non-admitted. We’ve written a whole article about the difference between the two, but for the sake of this one, we’ll just mention one important fact. Non-admitted insurance policies have far less legal protection and guarantees than admitted insurance. That means there is a lot more personal risk for someone with non-admitted insurance should their insurance company become insolvent.
One significant piece of protection is in regard to solvency. If a non-admitted insurer becomes insolvent, policyholders don’t have legal recourse to recover their claims. And, if an admitted insurer becomes insolvent, those who hold non-admitted policies through those carriers will still not be subject to state guaranty fund protections.
Reducing expenses helps solvency
With catastrophic events happening more than ever, insurance companies are experiencing losses they weren’t built to withstand. Regulations keep most insurance premiums capped, so a carrier can’t simply raise rates indefinitely to make up for catastrophic losses.
But, there is something you can do to help cut operational costs and keep more premium dollars going toward paying claims. Adopting modern technology can reduce the number of people it takes to perform internal processes and operations, allowing your people to spend their time on things that bring in revenue.
Free up your team to do high-impact work; see AgentSync in action today.