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Life Health > Life Insurance

The Mystery of the Hidden Guaranty Funds

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Insurance guaranty fund watchers say some states seem to be a little more open about guaranty funds than New York state has been.

The New York State Insurance Department drew attention to just how low-profile it wants its guaranty fund to be when department officials ruled that insurance producers in the state cannot legally post a general description of how guaranty funds work on the Web, even if the description includes disclaimers stating that the existence of guaranty funds is not a reason to buy insurance.

Producers in the state cannot even post a link to guaranty fund websites, officials warned.

All producers can do when they get questions about guaranty fund protection is to recommend that consumers contact the insurance department or a licensed insurer, officials said.

An insurer may, “upon a written request, provide information about the guaranty fund to policyholders by means of a form prepared by the guaranty fund and approved by the superintendent of insurance,” officials said.

John Darer, the editor of The Structured Settlement blog, reports that he triggered the New York opinion by sending the New York department a question about a website he saw.

The New York rules are so strict that, if a national trade group posts a general description of guaranty funds, a New York producer who simply refers a client to that part of the trade group website could be breaking the New York rules, Darer says.

Guaranty funds tend to take a low profile because of a fear that widespread awareness of the existence of guaranty funds may create “moral hazard,” by encouraging consumers to abandon natural caution and intentionally doing business with weak insurers.

Other concerns include the possibility that producers could describe the funds incorrectly; that publicity about guaranty funds could somehow start or accelerate a “run” on an insurer; and that a financial crisis could affect the ability of guaranty funds to back their guaranties.

But the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA), Herndon, Va., a group founded in 1983, operates a public website that describes how guaranty funds work. A “Welcome” statement on the home page directly answers the question, “What Happens When an Insurance Company Fails?”

The NOLHGA site provides links to the sites of member guaranty funds, including the Life Insurance Company Guaranty Corp. of New York.

The New York guaranty fund also operates a public website, and it answers the questions “What happens when my insurance company becomes insolvent?” and “How is policy coverage determined?” on its own site.

Jack Marrion of Advantage Compendium Ltd., St. Louis, has posted a link to sources of information about guaranty funds at


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