The woman calling the state Insurance Division was worried about her life insurance annuity. Her insurance company had shown no sign of financial troubles, but the daily barrage of bad news about troubled insurers had troubled her.
What happens if my company has trouble, she asked.
Don't worry, said Charles Siegel, an associate insurance commissioner. The policy, he said, will be protected by the state's Life and Health Insurance Guaranty Corp., the private fund set up to protect insurance policies in Maryland.
"She seemed greatly relieved," Siegel recalled.
The relief is well-founded -- probably -- experts say.
But, with several major insurers now in bankruptcy, some critics say Maryland's insurance protection fund -- and similar funds in other states -- are inadequate to cover a major collapse in the insurance industry.
"We think the system is seriously flawed," said Marty Leary, research director with the Southern Finance Project, a non-profit North Carolina group that has studied guaranty funds across the country. "And ultimately they will not be able to stand the test of a big insolvency like Executive Life."
"Certainly we're better off with them than without them," said John A. Donaho, the Maryland insurance commissioner. "The guaranty funds have been extraordinarily helpful. Fortunately, we've never had to really put them to a substantial test."
The two biggest bankruptcies in the history of American insurance -- involving subsidiaries of First Executive Corp. and First Capital Holdings, both of which invested heavily in junk bonds -- have caused a debate in Washington and around the country about the safety of the nation's insurance system.
In Maryland, the focus is on the life and health insurance fund, which the General Assembly established in 1971. The legislature later created a second fund to protect property and casualty insurance policies.
Although created by the legislature, the guaranty funds are private entities, financed and controlled by the insurance industry. Unlike the Federal Deposit Insurance Corp., which is designed to protect bank accounts and is backed by the U.S. government, the guaranty funds are not backed by the state treasury.
If, for example, a life insurance operation that does business in Maryland fails, the guaranty fund can collect an assessment on all Maryland companies that sell life or health insurance or annuities.
