In the world of insurance, a guaranty fund is a fund that is set aside to pay outstanding claims when an insurance company becomes insolvent. In the United States, guaranty funds are normally established in each state where the insurance company is licensed to do business. Funding for a state guaranty fund comes directly from contributions made by the insurance companies operating in the state.
One of the main functions of an insurance guaranty fund is to protect the beneficiaries of any policies sold by insurance companies authorized to sell insurance coverage within the jurisdiction. In the event that the company fails, the fund can cover all or at least part of the total amount owed to the beneficiary. The existence of state guaranty funds gives a sense of security to people who take out a life insurance policy as a means of providing for their loved ones in the event of their demise.
In addition to the protection of beneficiaries, the establishment of a guaranty fund at state level also sometimes serves as a means of evaluating whether a given company will be allowed to do business in the state. Should an insurance company not be willing to participate in the fund, state officials may choose to deny the company the privilege of doing business anywhere within the jurisdictions of that state. The exact relationship of the willingness to contribute to the fund and being granted the right to offer insurance within the jurisdiction will vary, depending on the statutes and regulations currently in force in that state.
The actual process of funding insurance guaranty funds varies somewhat from one state to another. Generally, all insurance companies authorized to sell policies in the state are assessed a percentage of the net amount of sales generated within a specific time period. The percentage ranges from one to two percent of those sales, with the amount subject to verification by the state.
Most states periodically review the regulations that govern the management of the state guaranty fund, making sure they are relevant to any new laws regarding insurance in general. For the most part, states tend to keep the oversight of this type of fund as simplistic as possible, while also taking the necessary steps to keep the resources in the fund secure. As with any type of state operated funds, regular audits are conducted on the guaranty funds by independent accounting firms, helping to ensure that the management process is within the limits of current laws.