WASHINGTON BUREAU — Guaranty fund trade groups are urging members of the Senate Banking, Housing and Urban Affairs Committee Committee to leave insurers out of any bill that would create a separate resolution authority for large, troubled financial institutions.
Officials of the National Organization of Life and Health Insurance Guaranty Associations, Herndon, Va., and the National Conference of Insurance Guaranty Funds, Indianapolis, have sent a letter arguging that insurance companies are fundamentally different than banks, that the existing guaranty fund system is designed to put consumers above commercial interests in any liquidation, and that creating a new system would undermine the existing guaranty system used to resolve troubled insurance companies.
“A proposal to resolve insurer failures directly, in a new resolution regime that would not protect or effectively replicate the priority status of policyholders (and of the ‘safety net’ protecting policyholders), perversely could leave policyholders at greater risk of incurring financial harm in connection with insurance company receiverships than they are today,” the groups write.
“Any proposal to resolve insurer failures directly in a new federal resolution regime would undermine the current system, which has been effective in protecting policyholders and other claimants,” the groups write.
Liquidations of insurance companies “are fundamentally different than for financial services institutions that are primarily engaged in banking or banklike activities,” the groups add.
Because insurance claims evolve over time, a “run on the bank” scenario for other financial institutions “is not a significant risk in insurer insolvencies,” the groups write.
“The insurance receivership statutes of all U.S. jurisdictions give an “absolute priority,” in distributing the assets of insolvent insurers’ estates, to claims of consumers (and of guaranty associations, for costs they incur to protect consumers), over the lower-ranking claims of general and subordinated creditors,” the guaranty groups write. “This absolute priority dramatically lessens the insolvency’s impact on policyholders, and it provides the guaranty associations with funding that helps them fulfill the failed insurer’s obligations to consumers.”