The 29,250 Maryland residents and businesses that have investments frozen in insurance companies seized by regulators should have access to their funds in a matter of months if everything goes as planned, says the head of the Maryland Health and Life Insurance Guaranty Corp.
But if the situation worsens and two or more of the companies are liquidated, some policy holders may have to wait years for their money, said Gary C. Harriger, chairman of the guaranty fund, speaking with state legislators yesterday.
"I'm optimistic because a lot of people are putting a lot of effort in on resolving this problem," he said after the hearing. "There are a lot of reasons that it should work. I'm also concerned that it will not."
Harriger appeared before the House of Delegates Economic Matters Committee to explain how the private guaranty fund plans to handle the problems stemming from the seizing of major insurance companies.
In the last few months, five major insurance companies have been put into conservatorship in different states. The companies are Executive Life of California, Executive Life of New York, First Capital Holding Corp., Fidelity Bankers Life Insurance Co. of Virginia and Mutual Benefit Life Insurance Co.
While the companies continue to pay death benefits and annuities, customers who have cash value in their policies are prevented from borrowing against them or redeeming them.
The guaranty corporation, a cooperative effort among Maryland insurance companies, backs the investments that Maryland residents have in insurance companies, even if they are headquartered in other states. Such investments include cash-value life insurance policies, annuities and health insurance plans.
The guaranty program is triggered when a company is put into receivership and liquidated. So far, none of those companies has reached that point.
Harriger said the corporation is working with other guaranty funds from other states to try to provide money to make Executive Life of California strong enough to be acquired by another company. If this is done, the guaranty fund can avoid a major payout.
Two of the other seized companies, Fidelity Bankers and Mutual Benefit, still are financially strong, but were the victims of anxious policy holders withdrawing their money en masse.
If the companies are liquidated, the guaranty operations would be stretched thin. The guaranty corporation raises the money to pay claims by assessing the premiums earned by insurance companies operating in Maryland. The fund can assess up to 2 percent of the premiums per line of insurance. This means the guaranty fund can raise a maximum of $25 million from life insurance operations, $13 million from the annuity business and $18 million from health insurance firms, for a total of $56 million.
While the amount that can be raised each year is restricted, there is no limit to the size of the claim covered by the guaranty corporation. The Maryland fund is the only such fund in the country with an unlimited liability.
In the case of Executive Life of California, the 2,200 Maryland customers hold investments with a cash value of $56 million. But after deducting the $18 million of investments not covered by the fund and accounting for recouping some of the outlay through the sale of assets, Harriger estimated, the guaranty fund would be liable for $12 million to $25 million, if Executive Life were liquidated.
While the corporation could raise up to $38 million, further payouts would have to wait for a new assessment next year.
To cover it, other policy holders would in other insurance companies that might be liquidated later would , the policy holders for those companies might have to wait until a further assessment the next year.
The distribution of the available funds would be strictly on a first-come, first-served basis and would depend on which companies are liquidated first and which policy holders file their claims earliest, Harriger said.
"The first thing you know is you got a big black hole there that you are filling in for years and years at 2 percent," said Del. Casper R. Taylor Jr., D-W.Md., chairman of the committee.