Your Insurance Company announced its sanitization? Is it good or bad? We tell you why it happened, what will happen to the company next and how it will affect customers.
Don’t be alarmed. Sanitation is a procedure of financial recovery. This means that your insurance company is in a difficult financial situation, but the NAIC (National Association of Insurance Commissioners) decided to help it. The regulator will not revoke its license but will conduct “medical procedures.” You, as a customer, will not suffer any losses. Here is everything you need to know!
Why did the insurance company have to be sanitized?
The insurance company’s main task is to cover the losses of customers when the insurance case occurs. For example, if you insured the apartment from the flood and flooded neighbors, the insurer will pay for your repairs. Unfortunately, there are cases when the insurance company does not have enough insurance reserves (money that is deferred for payments) or even equity.
This happens if the insurer misjudged the risks, such as lowering the policies’ prices and collecting fewer insurance premiums than necessary for payments. Or if it unsuccessfully invested insurance reserves and lost some of the money.
Sometimes the company can burn out due to large payments in serious insurance cases. Ideally, this should not be the case, as the insurer should give large risks to reinsurance – in other words, to share them with other insurance companies.
For example, the company insures from a fire a large warehouse with expensive equipment, and the maximum payment under the contract is hundreds of millions of dollars. For the average insurance company, this is a huge amount that can ruin it. Therefore, even at the stage of signing a contract with the warehouse owner, it selects partners – other insurers, who will take part in the risks and receive the appropriate part of the insurance premium.
If the fire does happen, the insurance company will pay the money to the victim and the reinsurance organization – it is part of the insurance amount to the insurer. And for every company, it will be possible with their money. But in reality, insurance companies do not always distribute risks competently and choose reliable partners-reinsurers.
Insurance companies can also systematically suffer losses on compulsory types of insurance, tariffs regulated by the state, and insurers cannot raise them above a certain level.
What happens if the company miscalculated?
In short, the insurance company is on the verge of bankruptcy. Previously, in such situations, the National Association of Insurance Commissioners (NAIC) could only suspend the insurer’s license. After that, the company could not attract new customers but fulfilled its obligations to the old ones.
If the company owners invested in its capital additional money and restored its solvency, the license began to operate again. But if the company’s position did not improve over time, the regulator was forced to revoke its license.
More often than not, after the license was suspended, the company could no longer return to work. The insurer became bankrupt and left the market, and customers were left without protection and lost money. Payments continued only on compulsory types of insurance, where there are special compensation funds.
Now the NAIC has a new tool – sanitization. If financial difficulties have appeared in a socially significant insurance company and cannot cope independently, the NAIC can deal with its financial recovery. But this procedure applies only to companies that are particularly important to their region or even the whole country. Sanctions can also be carried out for companies that deal with compulsory insurance.
During the sanitization, the situation of the insurance company again begins to return to normal. And to suspend, and even more so, to revoke the license is no longer necessary.
What happens to the insurer during the sanitization?
The insurance company continues to work: pays money on insurance cases, concludes new contracts. At the same time, the insurer’s management comes under the control of the NAIC.
For this purpose, the regulator has established the Insurance Sector Consolidation Fund. When the NAIC decides to reinstate the insurer, it allocates money for this sanction to the FCCS. The management company either invests them directly in the insurance company’s capital or gives it a long-term loan. These funds should help the insurance company to get their affairs in order.
Experts of the NAIC develop a financial recovery plan, which the Managing Company executes. A similar scheme the regulator already applies to banks that are on the verge of bankruptcy and need help.
Customers of the company do not lose anything – all their policies continue to operate. But the owners and management of the insurer lose a lot. They are removed from the management of the company, prohibit them from buying shares of the company. The NAIC, the Management Company, or the insurance company itself has the right to demand that they reimburse the sanitization costs.
What will change for the insurance company’s client during the sanitization?
You, as a customer, won’t notice anything. All the terms of your contracts will remain the same – they can only become different for new customers. The company will continue to pay insurance reimbursements or give directions for repairs to service stations.
There is only one limitation. During the sanitization, you will not be able to return part of the insurance premium or receive a redemption amount for long-term life insurance policies if you decide to terminate the insurance contract ahead of time.
As a rule, it is unprofitable to break the contract before it ends. For example, an investment life insurance contract is for a certain period of time. If you break it early, you often lose investment income and even part of the contributions made.
Simultaneously, if there is an insurance case provided by the policy – illness, injury, or death of the insured – the insurance company will pay the money during the rehabilitation.
How does the NAIC choose who to sanitize and who not?
The regulator can not help absolutely all companies that need financial help and pay for their managers’ mistakes.
Therefore, the NAIC assesses the risks for the entire financial market if the company goes bankrupt. If the regulator understands that this will lead to social tension or systemic problems in the insurance market, the scales lean in favor of financial recovery. If not, the insurer will be suspended or revoked.