What Happens When Your Insurer Goes Bankrupt?

I listened with interest to the politicians and talking heads on the networks last night. Most predicting that a bailout of American International Group (AIG) was necessary to protect all of the company's insureds.

Insureds had little to worry about. This was political speak to sell an $85 million loan to a failing holding company to the American public. Much like FDIC insurance for bank deposits in the case of a bank failure, significant regulation and state guarantee funds protect insureds to a large extent.

State and federal regulations generally assure that AIG subsidiaries (the AIG "Hydra") are solvent and able to pay claims. If that is not the case, subsidiary assets are sold and state guarantee funds assist in claims pay outs. You can review the comments of NAIC President and Kansas Insurance Commissioner, Sandy Praeger, in my article on insurer bankruptcy.

The biggest threat to insureds is the potential of losing coverage at the renewal period if the insurer is insolvent and leaves the market. That is especially true of specialized or risky markets. As an example of what "could happen," in my state of Ohio, in December 1997, the Ohio Department of Insurance put the medical malpractice carrier, P.I.E. Mutual Insurance in rehabilitation and determined the carrier was insolvent. This led to a market gap for medical malpractice insurance and significant exposure to physicians who had liability insurance limited to a $300,000 claim cap. But, eventually other insurers filled the market vacancy. AIG business insurance products are, for the most part, not so specialized and business owners can and will look to other insurers.