Today insurance company solvency is the most critical issue in the field of insurance. Anyone who doubts this only needs to look at the Florida Insurance Guaranty Association (FIGA) surcharge which is tacked onto every policy sold in Florida. Insolvencies have become such a problem that FIGA's normal funding system is now inadequate to meet the demand. Yet, as important as this issue is to everyone concerned, there is never an announcement about a troubled company's solvency problem, until after the fact. The result of this is that, the smart insurance buyer has to do his or her own solvency review.

Premium finance companies, agents, bank and even other insurance companies risk their very existence when they operate without keeping their finger on the solvency pulse of their insurance company. After twenty years of managing insurance company receiverships for three different states, I am very familiar with what happens in a liquidation. I assure you, that in an insolvency, everyone loses, especially agents, finance companies and banks.

When state regulators place a company in liquidation, the thing they do is to give policyholders thirty days to find new coverage before all policies are canceled. Suddenly, agents are faced with customers who demand new coverage while the customer's premium money is still tied up in the insolvent company. Premium finance companies, also, find that the money they loaned for premiums is tied up in the company, and it is almost impossible to collect on a premium loan after the insurance has been cancelled. Banks find they have loans on property that is no longer insured and in some cases they even start to worry about loans to premium finance companies.

Once an insurance company has been declared insolvent, it will not be making any premium refund payment or claim payments. FIGA usually becomes the only source for unearned premium refunds, and when they make payment, it may be subject to a $100 deductible on each policy. For agents and lending institutions, an insolvency can be a financial nightmare.

Fortunately, most, but not all companies are covered by FIGA. Yet, no matter how fast FIGA acts, it will not be fast enough to fully protect finance companies, agents, banks and others from loss. Also, it is important to remember that FIGA and the guaranty funds of other states, do not cover all lines of insurance. They do not cover any "Surplus Lines" companies. The only good solution to the insolvency problem is to avoid being caught doing business with a company when it is declared insolvent. To act before the formal declaration of insolvency requires timely and reliable information on the financial status of a company.

Written by Jack Traylor

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