How Are the State Insurance Guaranty Associations Funded?

State Insurance Guaranty Associations (SIGAs) function as a safety net for policyholders across the United States. These organizations are non-profit entities, established under state law, protecting consumers when an insurance company becomes financially unable to meet its obligations. When an insurer is declared insolvent, SIGAs step in to ensure that covered claims are paid, providing security for policyholders. Their existence helps maintain public confidence in the insurance market.

The Assessment Mechanism

State Insurance Guaranty Associations are funded through mandatory assessments on solvent insurance companies. Insurers licensed in a state for a specific line of insurance are required to be members of that state’s guaranty association. When an insurer is declared insolvent, the SIGA assumes responsibility for covered claims and assesses its member insurers to cover these costs.

These assessments are generally based on the solvent insurers’ direct written premium volume for the relevant lines of business within that state during a specified period, often the three years prior to the insolvency. For instance, if a property and casualty insurer fails, other property and casualty insurers operating in that state will be assessed proportionally to their premium writings. Assessments are mandatory, ensuring funds are available for policyholders of the failed insurer. Most states cap annual assessments, often at 1% or 2% of an insurer’s net direct written premiums. This limit manages the financial burden on solvent insurers, though assessments may be levied over several years in significant insolvency events.

Categories of Assessments

Assessments can be categorized by timing and purpose. The most common type is the special or post-insolvency assessment, levied after an insurer is declared insolvent and claims need to be paid. These “ex post” assessments are the predominant funding method, directly addressing the financial shortfall.

A few states use regular or pre-insolvency assessments, collecting funds to build a reserve for future insolvencies. This pre-funding approach is less common but provides a ready pool of capital. Assessments are also segregated by insurance business type. Most states have separate guaranty associations or accounts for life and health insurance versus property and casualty insurance, meaning insurers are only assessed for the lines they write. Assessments can be classified as Class A (administrative and legal costs) or Class B (paying covered policyholder claims).

Recoupment and Tax Offsets

Member insurers can recover some or all assessment costs. One common method is premium surcharges. Many states permit property and casualty insurers to add a surcharge to policyholders’ premiums to offset assessments. This surcharge is displayed separately on the policyholder’s billing statement, making the cost transparent.

Another method is the premium tax offset. Many states allow insurers to offset a portion of assessments against their state premium tax liabilities over years. For example, an insurer might offset 20% of an assessment against its premium tax liability for five years. Specific percentages and durations vary by state law. While these recovery provisions mitigate the financial impact on insurers, the ultimate cost of insolvencies can indirectly be borne by policyholders or the state’s general revenue.