Central Loss Fund

In a perfect world, there would be a central loss fund for anyone to tap into whenever we couldn’t pay our bills. Insurance companies do have a central loss fund run by states, on the off chance they go out of business and will not be able to pay their claims.

All insurance companies in each state pay into the fund, so there will always be money available to pay the claims of policy holders. Meanwhile, state insurance regulators are frequently auditing insurance companies to make sure they have enough in reserves in case there's a catastrophic year with lots of claims.

If the catastrophes exceed the reserves or there is incredible mismanagement resulting in poor investments, the insurance company can tap into the central loss fund. But before they reach that point, they can do a voluntary course of action called a troubled company run-off. The insurance company agrees to stop writing new business, but continues to collect premiums from current customers and pay claims while they are in the process of closing the business. They also can’t decide to change the terms of current policies just because they're in financial trouble.

Even after the Great Recession of 2008, when 100 insurance companies went out of business, the number has never been that high since. Now if there was only a central loss fund for the average Joe…