An insurance company — like any other business — can go under. An insurer can be purchased by and incorporated into a larger company. Even larger insurance companies aren’t immune to the possibility of being acquired or simply failing altogether. So what happens if your insurance company suddenly ceases to exist?
There are a few scenarios that can lead to this happening. We’ll review each and explain your responsibilities, steps to take, and how you can protect yourself.
What happens if an insurance company is bought by another company?
This happens on a fairly regular basis. Smaller insurance companies are often acquired by larger companies. This usually occurs when one company wants to expand its reach or branch out into new lines of insurance. For instance, Progressive acquired home insurance company ASI in order to expand its home, condo, and renters insurance options. Similarly, insurance company Kemper acquired Infinity to expand its reach into non-standard car insurance.
This is a fairly common practice and usually doesn’t disrupt clients' coverage. You will typically be notified of a company’s closure or merger well ahead of time. Any action that you need to take will be communicated to you. You will likely have the option to transfer your coverage to the new company, though you might need to enroll again. In some cases, it may be beneficial to shop around for a new policy at this time.
What happens if an insurance company fails?
This is more troublesome. Though this circumstance is uncommon, insurance companies have been known to fail. This can happen for a number of reasons, each leading to problems for policyholders.
However, you are not without protection. In the event that an insurer goes bankrupt, your state’s guaranty association steps in. Similar to how the FDIC protects bank customers, state guaranty associations pay in the event that your insurance company is declared insolvent and enters bankruptcy. The state may try to move your policy to more stable insurers. If unable to do so, the guaranty association will continue to fulfill the policy, though with limitations that vary by state.
The guaranty association works to rehabilitate the insurer first, but if this is not possible, the company moves into bankruptcy. The company’s assets are then liquidated and the proceeds go to pay any outstanding claims or to repay the state guaranty association for claims that they pay on behalf of the failing company. You are usually given a fair amount of advance warning, which can give you time to make necessary arrangements for new coverage.
One such example occurred when insurance company Merced Property & Casualty was seized by the state of California after the devastating wildfires of 2018. Thousands of homes were wiped out. The company simply couldn’t afford to pay out all the claims, leaving policyholders uncertain of whether they would receive a payout. In this case, the state of California had to step in.
The state seized the company and liquidated its assets. Customer policy details were given to the state’s guaranty association, CIGA, which began processing and paying out claims. Policyholders who weren’t affected were given a set amount of time to find new coverage before their policies expired.
The above example is a fairly typical example of what happens when an insurance company goes under. The most important step to take is to file any necessary claims within the timeline provided. Also, if needed, seek out a new policy as quickly as possible.
Steps you can take to protect yourself
The thought of an insurance company failing may seem frustrating, as the reason for having insurance is to protect you and your assets should the worst of circumstances arise. However, there are some things that you can do to measure your company’s likelihood of staying solvent.
Check on financial strength
One of the things that you want to look for is the financial strength of your insurance company. The financial viability of an insurance company isn’t usually on people’s radar. Most customers are just looking for good rates. If you want to gauge your company's ability to pay out claims, resources are available.
The Zebra's ranking of best car insurance companies incorporate financial strength as part of our overall ratings. Furthermore, the National Association of Insurance Commissioners (NAIC) keeps accurate financial information, including income, total premiums, and available assets which are equal to the total amount of liabilities and capital and surplus funds. Furthermore, AM Best, Moody’s, and Standard & Poor’s each rate the financial strength of insurance companies.
Assess your risk
If your insurance company provides coverage in high-risk areas (such as fire coverage in rural California) you may run the risk of them going under should a catastrophic event occur. This is especially true of smaller companies that simply do not have the reserve funds available to pay in the case of a large-scale peril.
Review customer complaints
If a large proportion of customers aren’t happy with their insurance company, something isn’t right. This is not a good sign and could signify larger issues down the line. The NAIC provides customer complaint information on every insurance company through its Complaint Ratio Trend Report. This report takes the total number of complaints a company receives and divides them by the number of premiums the company has, giving consumers a good way to compare customer satisfaction regardless of the size of the insurer.
What to consider
It’s important to remember that insurance is a business and that businesses sometimes fail. State regulations are usually such that this happens only in rare instances, however. Still, when searching for home, car, or other lines of insurance, it pays to do some homework on the company in which you are putting your trust. This can help protect you and avoid a situation where your property could be put at risk.
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