Insolvency

An insurer is insolvent when it can no longer meet its obligations to policyholders, claimants and creditors. In practice that means liabilities exceed assets, claims cannot be paid on time, or capital and surplus have dropped below what state law requires. Insolvency, or the clear threat of it, is what lets a regulator take over the company.

State regulators watch for it. Insurers file detailed annual statements, and the NAIC's risk-based capital formula compares each company's capital with the risks it carries. Falling below set thresholds lets the commissioner require a corrective plan and, at the lowest level, take control. Insurers generally do not use federal bankruptcy court. A state court supervises the case through receivership, which can lead to rehabilitation or to liquidation. Once a court orders liquidation, the guaranty fund pays covered claims up to its cap.

Insolvencies in homeowners insurance cluster after large catastrophes, when a thinly capitalized or heavily concentrated carrier takes losses beyond what its reinsurance covers. For a policyholder, a financial strength rating is the early warning, though a rating is not a guarantee. If your insurer is placed in receivership, keep your policy in force until replacement coverage starts, follow the receiver's instructions on premiums and claims, and begin collecting quotes. The insolvency guide covers the steps.