Life insurance companies are uniquely positioned to ride out periods of financial uncertainty. During the 2008/2009 market crash, no structured settlement recipient missed any payments; the same holds true for the current COVID-19 crisis. Structured settlement payments remain safe, secure and paid on time. This is due to the conservative nature of their assets (mainly investment grade bonds) and how life insurance companies manage their portfolio, in addition to the extensive regulatory safeguards surrounding the life insurance industry. Only one life insurer in the country (not involved with structured settlements) went into receivership during the prior financial crisis while over 600 banks became impaired in the first few years of the Great Recession, according to the FDIC. The number of problem banks during that crisis peaked in 2011 when nearly 900 banks, or 12% of all FDIC insured institutions, were considered to be troubled (Crisis and Response: An FDIC History 2008-2013).
State insurance regulators, specifically the states’ Departments of Insurance, are charged with guarding insurance companies’ financial health. Each state has its own insurance laws and regulations, under which the regulators supervise how an insurance company operates within that state. The Insurance Department will license all insurance companies transacting business within its boundaries, review and approve all policies offered for sale in its state, and require annual statements of all insurers’ financial positions so that the state regulators can evaluate each insurance company’s solvency and compliance with insurance laws. These regulators also perform periodic reviews and exhaustive audits of the insurance companies’ financial position on a regular basis.
One of the strongest safeguards for annuitants is the annuity reserve, a legal reserving system developed by regulators to protect contract owners and annuitants through prudent, conservative asset management and accounting practices, and to ensure that insurance companies always have sufficient assets to pay claims and other commitments when they are due. Every life insurance company must establish an annuity reserve to protect its contracts and contract owners. The insurer’s required statutory reserve is based on the contractual provisions of its annuity contracts, which must be approved by state regulators. This reserve represents the liability of the life insurance company and is established as a way of determining or measuring the amount of assets the company must maintain in order to be able to meet its future commitments under the annuity policies it has issued.
An additional measure of safety is surplus. Surplus is the amount by which a life insurance company’s assets exceed its liabilities. The surplus protects the policyholders and third parties against any deficiency in the insurer’s provisions for meeting its obligations. The determination of the optimum amount of surplus a company will retain must be based on experience, current conditions, and the primary goal of maintaining a strong company that is able to pay all claims as they arise. A.M. Best, one of the primary insurance company rating agencies, assigns a Financial Size Category rating, or FSC, to insurance companies. The FSC is designed to provide a convenient indicator of the size of a company in terms of its statutory surplus, and ranges from Class I (less than $1 million in surplus) to Class XV (more than $2 billion in surplus).
If an insurer appears to be at risk of not being able to pay its obligations, state regulators can take control of the company. The regulators are charged with supervising the company’s turnaround, which can include selling it to another company, putting it into liquidation or into runoff. If a company enters liquidation, the regulators in charge make sure that policyholders are paid first before most other creditors. With a structured settlement annuity, the policyholder is the life insurer’s assignment company, a special-purpose company that only accepts structured settlement obligations and owns the annuities that precisely match those obligations. It engages in no other risk-taking activities and does not take on any obligations aside from those precisely matched with the annuities.
If the company does not have enough money to pay all of its claims, regulators turn to the state guaranty funds to make up the difference up to the limits specified by that state’s guaranty fund. All 50 states and the District of Columbia have guaranty funds that may cover the claims of insolvent insurance companies. All insurance companies that do business in the state pay into the fund, so regulators have a pool of money to use when necessary. Coverage for annuities varies by type of annuity and by state, and typical coverage amounts range between $250,000 and $500,000.
Through strict state insurance department regulations, the establishment of state insurance guaranty associations and because of the insurance industry’s history of financial stability, structured settlement annuity policies are secured by many state and industry safeguards.
For more information on A.M. Best ratings on various life insurance companies, visit the A.M. Best website.
For more information on your state’s insurance department, visit the NAIC website.
For more information on state laws regarding guaranty funds for annuities, visit the NOLHGA.