Who's insuring the insurers?

• Position: Mutual Security Life Insurance Co.'s guaranty-fund system - Company Profile

When an insurance company goes under, a little-known state guaranty-fund system comes into play.

As the sun set last month for Fort Wayne-based Mutual Security Life Insurance Co., a busy day dawned at the Indianapolis office of Phil Hammond's organization. Make that a busy year.

Hammond is executive director of Indiana's insurance guaranty funds. His office goes into action when an insurer serving Hoosiers is declared insolvent, as Mutual Security was in early December. Hammond's job is to pay claims to the company's policyholders as the insurer is eased into non-existence, with as little pain as possible on the part of the insureds.

The guaranty-fund system operates like bank-deposit insurance, but differs in several ways, including the way its funds are accumulated. "The banks have to pay premiums into the fund to support deposit insurance," Hammond notes. "We assess other insurance companies only as we need the money. We don't have a standing bank account with lots of money sitting there not doing anything."

Also unlike deposit insurance, which is administered by a single federal agency, the insurance guaranty-fund system is a network of state-based organizations, created by state statutes but funded and operated by the insurance industry. There are funds for property/casualty insurance and funds for life/health insurance.

"There are property/casualty guaranty funds in every state," says Dale Stephenson, president of the National Conference of Insurance Guaranty Funds, an Indianapolis-based organization serving the nation's property/casualty guaranty funds. He once served in Hammond's position, running the Indiana guaranty funds. "On the life/health side, there are guaranty funds in all of the states, though there is not a life/health guaranty fund in Washington, D.C., as of yet."

The guaranty funds in each state protect insurance consumers in that state, regardless of the location of their insurance carriers. Hoosiers, whether they are dealing with an Indiana company or one in New Jersey, are protected by the Indiana Insurance Guaranty Association and the Indiana Life and Health Guaranty Association. The two funds have separate boards of directors, but operate just one office and have the same executive director, Phil Hammond. They cover most standard types of insurance products, with only a few exceptions.

The guaranty fund's mission begins when a court declares an insurance company insolvent. "That is, in fact, controlled by the...