It doesn’t seem to matter how high the insurance companies were rated. Sometimes, downturns occurred so quickly that rating agencies didn’t have the time to respond. Many of the original agents who wrote the policies for that Insurance Company are no longer with us. Who will notify policyholders? The insurance companies are not going to be notified. Among the companies that are starting to fall include some founded over 100 years ago. Some were only formed in recent years. Market changes can have a negative impact on profitability. There are many companies that are too steeped in tradition to change or stop selling certain products. Insurers are also quick to test hot markets, where stability and profitability of new types of insurance coverage is still not established.
All types of Insurance Companies have had difficulties paying claims over the past 20-years. The problem arises often when claims pile up faster than new premiums and the built-up reserves are not sufficient to pay claims. Companies offer policies at extremely low prices in order to attract new clients. This makes it harder for competitors to get new clients. This practice is also known as buying customers. As such, the growth rate may be too high. The future claim amount is also not calculated correctly. When claims began to rise, premiums were still too low to offset the incoming claim obligations. Policy reserves have not had enough time to build up.
The property and casualty insurance firms were the worst hit in the insurance industry. They account for a large percentage of companies that have been liquidated in the last 20 years. Many high-rated homeowners policies companies were affected by severe weather. Several states, entire zip codes and metropolitan areas were declared disaster zones. The insurance company’s future and claim reserves were rapidly depleted. Look at the damage Hurricane Katrina caused to people and their insurance companies. Just a few years ago, Hurricane Andrew had left its mark in Florida.
There is no single method of selling insurance policies. It is impossible to pinpoint the distribution of insurance products by troubled companies. There are many ways policies can be sold. Some policies could only be purchased from the home office. Other times, the home office used direct mailing to solicit new business. Insurance companies had a network of captive agents who could sell and distribute their policies. The policies were sold by independent agents or brokers in different situations. Others used a variety of distribution channels.
There are many steps that must be taken to save an insurance company when it comes time for liquidation. A company that is an insurance company cannot file for bankruptcy. The state regulates insurance. Federal government intervention is not required. This means that each state will have different consumer protection levels. Some states also respond faster to companies that are operating in financial insecure ways or engaging in illegal sales practices.
The state will usually issue an order directing the insurance company to stop writing new insurance. The state insurance department might issue a rehabilitation order after further inspection. The state insurance department may issue a rehabilitation order. This means that the insurance company is still operational, but the power has been transferred to the insurance commissioner. The company is managed by the insurance commissioner until financial problems are rectified. In the event that this is not possible, an order will be issued for liquidation. The liquidation process begins by collecting all assets remaining. The liquidation process can take anywhere from five to nine years.
In a forthcoming report, we will discuss how consumers are protected and how much can be recovered. HMO’s (health maintenance organizations) and PPO’s (preferential provider organizations) are not covered by state guarantee payments.