Most of us have insurance policies to protect us against the unexpected. But what about when the unexpected happens to the insurance company itself
What happens if an insurance company goes bust? Believe it or not, it can happen. In the event that your insurance company is closed down, you need to know your rights and what you can do about it. Let’s take a closer look at what happens when insurers go belly up.
Why It Happens
The first lesson in how to avoid insurers that might go out of business is understanding why it happens in the first place. Not all insurance companies fall under the category of “too big to fail.” Like companies in all industries, there is competition among insurance carriers, and that sometimes leads to companies going out of business. If their prices are too high, insurance companies may not be able to attract enough customers. On the other hand, if their prices are too low and they receive too many claims, they can become insolvent. This is usually less likely with larger carriers, but it can happen.
What’s Going to Happen
The tricky part about what happens if an insurance company goes bust is that every state has different laws on how to handle it. The exact process will differ based on your state.
The good news is that all 50 states have insurance guaranty associations that help protect people if their insurance company is closed down. All registered insurers pay money into a state’s guaranty association to help protect policyholders if that company is no longer able to do so.
When an insurance company is insolvent, the insurance commissioner in that state will take control of the company. They will first try to save the company from going out of business. If that fails, they will sell off assets and transfer the policies of the failed company to another insurer.
Of course, this means that customers need to keep paying their premiums if their insurer becomes insolvent and is controlled by the state. Another option is to find a new policyholder as soon as possible so that you don’t go without coverage. Of course, this is easier to do with some forms of insurance like auto insurance whereas life insurance policies can be more complicated.
How to Get Out Before it Happens
Whenever possible, it’s best to avoid getting into a situation in which your state’s guaranty association takes over control of your policy. This means picking up a few tricks on how to avoid insurers that might go out of business. The first step is checking up on the financial situation of a company. There are independent agencies that do that kind of work by ranking insurers based on the financial strength of the company. Entities like Moody’s and Fitch, among others, have different scales. But it’s typically on an A-D scale with companies having more than one A or a + next to an A being in a far better position to pay off any financial obligations.
Insurer With A High Rating
Obviously, you’ll want to find an insurer that has a high rating. You should also check on it regularly to see if it changes. Most insurance companies make a point to publish their ratings on their company website. If you notice that a company doesn’t do this or hasn’t updated its rating recently, it might be time to become skeptical and look into why that’s the case.
Of course, your personal situation could also dictate whether it’s wise to leave an insurer because of a low rating. Even if you have concerns with your insurance company, it’s best to shop around and find a new insurance carrier before leaving your old one. If you have trouble getting a comparable policy with another company, it may be worth staying with your current company unless they are in dire trouble financially. In most cases, it won’t hurt to speak with a financial advisor who can help you assess your situation and guide your decision to leave your insurance company if it’s at risk of going out of business.