Insurance plays a vital role in the day-to-day lives of nearly all Americans. As consumers, we invest in insurance policies to protect against financial losses due to unforeseen events, such as natural disasters, accidents, or illnesses. However, despite being a highly regulated industry, some insurance carriers ultimately end up failing.
What causes insurance carriers to fail?
Many factors can contribute to an insurance carrier going out of business, including regulatory changes, poor management, or falling victim to fraud. Sometimes, carriers receive an unprecedented number of claims following a catastrophic event, leaving them unable to pay out policyholders – this happens more often in states prone to severe weather such as hurricanes and tornadoes.
Regardless of the reason, all 50 states have systems in place to protect policyholders in the event an insurer goes out of business.
How are policyholders protected?
In order to obtain a license to sell insurance in a particular state, an insurance carrier must participate in the state’s guaranty association and pay into a guaranty fund. Guaranty funds are regulated by state law and serve to pay out active claims that an insurance carrier is unable to fulfill should they become financially impaired. However, it should be noted that many states, including South Carolina, only cover claims up to $300,000. To learn more about the South Carolina Guaranty Association, visit scguaranty.com.
It is possible for an insurance carrier to sell policies through a broker in states where they are not licensed. Commonly referred to as “non-admitted carriers,” these carriers are not required to follow the same state regulations as licensed or “admitted” carriers. Non-admitted carriers offer flexible policies that may be considered too complicated or too high-risk for state-backed carriers. However, it is important to know that claims on these policies will not be paid out by the state if the insurance carrier fails.
Will I be notified if my insurance carrier goes out of business?
Once an insurance carrier decides to cease operations, policyholders will receive notification alerting them of the closure and be given a date which their policies will be cancelled. Those with an open claim will be contacted by the state guaranty association with additional instructions on how to proceed.
What happens next?
If you are notified that your insurance policy is being cancelled due to the carrier going out of business, remember these tips:
- Don’t panic! If you have an active claim, insurance guaranty funds are designed to protect policyholders if an insurer is incapable of paying.
- It is imperative that you continue paying premiums to keep your coverage intact while you search for another insurer. This is especially important if you have an open claim.
Before you shop around for a new policy, contact your South Carolina Federal Insurance Solutions advisor. Our experienced advisors stay up-to-date on carriers entering and exiting the local market and can help you find the best policy for your personal needs and budget.
