Where do guaranty funds get the money to pay the claims?
Guaranty funds are largely funded by insurance industry assessments, which are usually collected following insolvencies. These assessments raise funds to pay the claims and operating costs related to the guaranty funds’ claim paying activities. Assessments are typically capped at two percent of a company’s net direct premium written in similar lines of business in a given state during the prior year.
Guaranty funds also recover funds from the assets of the insolvent insurance companies being liquidated. These distributions vary dramatically in amount depending on specific circumstances, anywhere from a very small percentage of the expenses incurred to 80 or 90-percent reimbursement. Any meaningful recovery is typically delayed by several years.
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