Insurance Guaranty Funds (CRS Report for Congress)
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| Release Date |
Revised Feb. 27, 2008 |
| Report Number |
RL32175 |
| Report Type |
Report |
| Authors |
Baird Webel, Government and Finance Division |
| Source Agency |
Congressional Research Service |
| Older Revisions |
-
Premium Nov. 30, 2003 (13 pages, $24.95)
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Summary:
Some constituencies are urging Congress to allow insurers to become federally regulated, like banks. Other constituencies are urging Congress to instead ratify its 1945 delegation of insurance regulation to the states. In the past few years, various pieces of legislation have been introduced to implement some form of federal charter for insurance companies. The latest such legislation is the National Insurance Act of 2007 (S. 40 and H.R. 3200).
How to protect insurance policyholders in the event of their insurer's insolvency is among the thorniest issues in insurance regulation, whether federal or state-based. The current system of protection for insurance policyholders is called "insurance guaranty funds." This interdependent system is a cooperative effort among regulators and insurers in the states where the insolvent insurer operated. It is administered state-by-state and funded by assessments on insurers. Though it has developed relatively recently, the system has provided some protection for policyholders of both large and small insolvent insurers.
If Congress were to consider regulating insurers federally, it would confront the issues of whether and how to provide that policyholder protection. Should Congress wish to protect insurance policyholders in an insolvency, it might choose to establish or expand a federal program like the Federal Deposit Insurance Corporation, the Pension Benefit Guaranty Corporation, or the National Credit Union Share Insurance Fund. Another option would be to require federally regulated insurers to participate in the state-based guaranty fund system.
Establishing federal protection for policyholders of insolvent federally regulated insurers would have costs and benefits. Direct costs would include, at the least, the costs of establishing and administering the system. Costs could also include funding of catastrophic shortfalls, as happened in the savings and loan crisis in the 1980s. Indirect costs could include inefficiencies that might result from dampening market discipline. The measure of benefit to policyholders would depend on the scope of protection offered. The potential benefit to the U.S. economy would require further analysis.
Requiring federally regulated insurers to participate in state guaranty funds would have costs and benefits as well. The costs would include the economic inefficiencies created by externalizing the costs of ineffective solvency regulation. The benefits would be simplicity and a consolidated assessment base.
This report describes generally how state-based insurance guaranty funds operate currently. It also compares the extant insurance system to protections offered bank depositors, potential and current pensioners, and credit union participants. It was originally prepared by Carolyn Cobb, Insurance Consultant, Government and Finance Division, and will be updated as warranted by legislative events.
