What Victims Are Entitled To in a Collapse of an Insurance Company

Of all the things that fail, the failure of a trusted one gives the most devastating results. This case is particularly true when it comes to financial institution insolvencies. These financial institutions are the ones held responsible for accounting and securing the different transactions they have with those hopeful individuals. In return, they have the authority to get a hold of those billions of cash and have the sole right on how they plan to invest it. The thing is, no matter how we cross our fingers away from risks, chances of failure will always be there.

Just like any other company, those in the financial institutions aren’t immune to insolvencies. There are already around hundreds of them that have gone bankrupt and the insurance sector isn’t resolutely a stranger to that fact. With the failure of an insurance company,the first concern that comes  into our minds is the thought of how tragic our life could become after all those spending for a guaranteed policy. Will they all be gone to thin air? Is that what really happens in times of an insurance company insolvency?

Well, cases like this would really hurt a number of people and would really pose a threat to the name of every insurance companies. And that’s why different measures and troubleshooting strategies are always planned ahead to cater to the needs of those that will be affected. But first, let’s review the cases where an insurance company could fail.

There are a lot of reasons why these companies might end up to insolvency but let’s take a look at those that are in all-time high for the recent years.

  1. First in the list is the company’s tendency to do “under-reserving”. These are cases when the company isn’t able to meet up with the liabilities they have on their policyholders since they have inadequate amount reserved for them.

  2. The second one is mismanagement. Well, every company can fail under this kind of case and for an insurance company to not have a proper risk management already guarantees a certain failure. The reason for this is that the cases of emerging risks are out of their control and without a proper assessment on what future claims could happen, the worst would be expected.

  3. The third one is the inside and outside fraud. This could be inside jobs or simply the greediness of the ones in the higher positions to hoard up big sums of money. Another case is for those that are influenced by the individuals outside the premises such as the scammers and robbers.

Once the insurance company fails, they readily are subdued to a certain protocol. This protocol involves several safety measures that raises the concerns regarding the bankruptcy.

Every insurance company is being monitored and regulated by the state with the sole aim to protect the policyholders in cases of haywires. When a company suffers an ill fate, the insurance commissioner in the company’s home state initiates the process whereby the government will aid them to regain its financial footing. This phase is the rehabilitation. When rehabilitation doesn’t work anymore, insolvency happens.

The state government will then be the one in-charge of the company’s liabilities. Well, such liability won’t exactly be a burden to the state when it comes to money given that the amount needed to settle such cases would be taken from the association of insurance companies’ funds. It’s like the insurance pool for insurance companies. But before using such funds, the aim to resell the company to another private sector interested to establish an insurance company is first followed.

If no private sector will be able to buy the insolvent company and claims are already needed by the policyholders, the funds will then be used to cater them, under certain limits. Different amount will be guaranteed upon the policyholders depending on the type of coverage and on the state. For most cases, these are the limits for the most common policies.

  • $300,000 for life insurance death benefits
  • $100,000 in cash surrender or withdrawal value for  life insurance
  • $100,000 in withdrawal and cash values for annuities
  • $100,000 in health insurance policies benefits

So far, these are the amounts that the government has stated, which can potentially be lower compared to the coverage you’re supposed to be receiving. So it would really be better if a new private sector will be able to claim on the bankrupt one. Entitlements, however, cannot be neglected by the insurance company. Otherwise, they can be legally sued for such action. If not a changed plan, like educational plan being changed to consumer goods instead, anything lower than that is not acceptable for any policy holder.

There are things to look at when a take-over happens. The bad thing about the taking over of a new company is that their policies could potentially not coincide with what the previous company has promised. The good thing, on the other hand, is that you would have the option to transfer your policy to another insurance company with lesser hassle of getting back from the scratch in building your profile. This is the reason why there’s an exclusive value in applying for insurance premiums in state-subsidized insurance companies.

Cases of insolvencies in the financial institution are really rare when compared to other companies. But as what we’ve mentioned, no one can really tell given the economic vulnerabilities of any financial sector. So better hope and cross your fingers that your chosen company won’t experience this fate or better shop for the best one and avoid those that are showing some hints of inconsistencies.

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