Central Loss Fund

Central Loss fund is set aside by some states in order to cover policyholder claims if an insurance company is declared insolvent. A central loss fund is created by state insurance regulators through the collection of assessments on insurance companies operating in the state. Most states have a central loss fund of some type, however the details of their operations differ according to their respective state laws.

A central loss fund is important to protect the interests of policyholders in the event an insurance company is unable to pay claims. The states' respective insurance commissioners are responsible for overseeing insurance companies and ensuring that they maintain adequate collateral to cover expected losses. However, unanticipated catastrophes or mismanagement may arise which result in claims exceeded an insurance company's ability to pay.

Financial trouble is relatively rare for insurance companies. Even in the challenging years following the financial crisis of 2008-09, insurance failures spiked at over 100 year then fell. For the states that oversee insurers, central loss funds make sure that policyholders are made whole. But there are other mechanisms for handling insurer failures.

One is a troubled company run-off. This is usually a voluntary course of action where the insurer ceases writing new business on all lines of business, but continues collecting premiums and paying claims as they come due
on existing business. The goal is to completely close operations while remaining solvent, according to the National Association of Insurance Commissioners.

Another method when the state's insurance commissioner allows a troubled insurer  to permit an impaired or insolvent state domestic insurer (or an impaired or insolvent United States branch of an alien insurer entered through that state to commute reinsurance agreements to eliminate the company’s impairment or insolvency.

Other states provide for voluntary restructuring of insolvent insurers. Rhode Island's "statute was intended to provide an alternative to a traditional run-off by bringing “solvent schemes of arrangement” (which are discussed further in the next section) to the United States. It allows solvent companies that are in run-off to reach a court-ordered (and department of insurance supervised) agreement with all of its creditors in order to accelerate completion of the run-off, bringing certainty of payment to creditors and reducing administrative costs often associated with lengthy run-offs," according to NAIC.

Alternative mechanisms, the NAIC reported, "should not be a way for an insurance company to sidestep its contractual obligations to policyholders. There should be no involuntary restructuring of policies or impairment of policy benefits or claims permitted outside of receivership. This would preclude any changes to policies, or reductions to policy claims or benefits, without the express, informed, voluntary consent of individual policyholders."