Last Updated: 7/26/2024
State insurance regulators are responsible for overseeing the financial health of the insurance market in their jurisdiction. They monitor the solvency of insurance companies, and should they determine that a company's financial solvency is impaired or insolvent, or  a corrective plan unfeasible, they may place the troubled company in receivership.

Common causes of insurer insolvency are  undercapitalization; uncollectible or inflated assets; insufficient loss reserves for assumed risks; misappropriation or mishandling of funds; problems involving reinsurance( e.g., reinsurer insolvency, disputes, collectability, etc.); unprofitable lines of business, poor underwriting or claims management; risky investments; fraud; lack of agent oversight; and mismanagement by directors and/or officers.

Insurer insolvencies are governed by state law rather than federal bankruptcy law. Typically, these statutes appoint the state’s insurance commissioner as the receiver. While the insolvency process is primarily governed by the law of the state in which the insurer is domesticated, the laws from the other states where an insurer operated may also apply. Consequently, during the takeover and administration of an insolvent insurer, it is important for the receiver to consider the laws of those states.

Receivership proceedings can be categorized into three distinct forms: conservation, rehabilitation, and liquidation. All states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands have enacted statutes that govern these processes, patterned after three NAIC model acts: the Uniform Insurers Liquidation Act and the Insurers Rehabilitation and Liquidation Model Act which are earlier iterations of the Insurer Receivership Model Act (#555).

Conservation allows the receiver to analyze the company’s financial condition and determine whether liquidation, rehabilitation, or returning the company to private management serves the best interests of policyholders and creditors. The transition between forms of receivership is not  systematic; instead, the regulator may petition for the form appropriate to the circumstances at any given time. 

When state insurance regulators deem rehabilitation appropriate, they must allege and prove a specific statutory ground to proceed. In rehabilitation, a plan is formulated to correct the issues that led to the insurer’s receivership and return it to the marketplace. The receiver is charged with implementing the restrictions, limitations, and requirements outlined in the order of rehabilitation. The order may prohibit or severely limit the insurer’s ability to write new business, or it might impose significant restrictions or prohibit the renewal of business when the renewal is at the option of the insurer. The order may also suspend claims payments and freeze cash or loan values on life insurance contracts. The order could provide that reinsurance agreements may not be canceled and that any new reinsurance requires the approval of the receiver. The receiver is authorized to immediately seize and inventory the insurer's physical and liquid assets. The order will likely also suspend dividend payments to shareholders, affiliates, and subsidiaries, restrict new investments, and may even liquidate certain investments. If previously negotiated, the order may require an infusion of capital from the insurer’s parent company or shareholders.

The regulator must determine whether a company’s rehabilitation is feasible or if the severity of its problems necessitates liquidation to avoid  increasing the risk of loss to policyholders. If liquidation is the appropriate course of action, the company can defend itself, which can result in a trial or an evidentiary hearing. Following the liquidation order, the receiver’s duty is to secure, marshal and distribute the assets of the estate as provided by the liquidation order and the state receivership statute. Courts have held the order of liquidation effectively cancels outstanding policies and sets the date for determining debts and claims against the insolvent insurer. However, life insurer insolvency is unique, as the NAIC Model Acts provide for the continuation of life, health, and annuity policies.

The receiver organizes the insurer’s assets, determines the liabilities to policyholders and other creditors, and distributes the assets in satisfaction of such claims following a state-mandated priority-of-distribution scheme. Most state insurance departments maintain a list of companies in receivership/liquidation on their website.

The NAIC’s Receiver and Insolvency (E) Task Force and its Working Groups are charged with monitoring and promoting efficient operations of insurance receiverships and guaranty associations as well as monitoring legislation, including NAIC models, related to insurance receiverships and guaranty associations.