If Insurance Company goes Bankrupt, What can We Do?

Investment in terms of premium in an insurance product is made with the intent to safeguard any future financial risks owing to the sudden death of the insured or for help during any medical crisis. It is the hard-earned money of the person that is paid to the insurance company to stay secure. Therefore the very thought of a life insurance plan going into loss due to the insurer’s bankruptcy or insurance company going bankrupt is scary enough to make anyone nervous.

Q. But is it even possible for an insurance company to go bankrupt?

Ans. To answer this question, let’s first understand how an insurance company comes into being and the basic guidelines, it has to adhere to as per the Indian insurance regulator, to function in the market.

As per the Insurance Regulatory and Development Authority of India, IRDAI, a company has to be registered and needs the approval to initiate its operations in India. It cannot be any company owing to start an insurance business. The basic capital required to enter the insurance sector to sell insurance policies in India is Rs. 100 crores and IRDA has complete authority to cancel the license of the insurer in case the insurer is not abiding by the prescribed guidelines.

The license of the company is also renewed by the regulator and the financial accounts of your insurance company are also audited by the regulator.
Now that the company is in existence and operating in the market, one of the crucial parameters to check its financial standing is the Solvency Margin. This can be explained in simple words as the amount of cash reserve to be kept by the company to pay claims in times of an emergency. As per IRDAI guidelines, a company needs to maintain an average solvency margin of 150%. This means that if a company has ensured its customers with a life insurance plan worth Rs. 100/-, then it has to keep Rs. 150/- with IRDAI as solvency margin. The higher the solvency margin, the safer is the company. The various companies providing insurance policies in India have different solvency margins and are not allowed to go below the benchmark.

The best part about these guidelines is that they are equal for both, government-run as well as private insurers. Nobody can close their business and run away just like that. If any private company wants to close the business or move to another business, then it has to merge the existing business with another company that takes over the control along with assets and liabilities of the company. The onus to provide the best life insurance to new customers and take care of the interests of existing customers then lies with the new operator that also has to adhere to all the guidelines set by IRDAI as well.

IRDAI is in existence with the prime motive to protect the interest of the policyholders. It is responsible for bringing an insurance company into being by defining the rules and regulations, ensuring these are met and it also takes care to ensure the company functions as per the given guidelines. IRDAI makes policies to primarily safeguard insurance holders’ interests and also audits the activities and books of insurance companies and any intermediaries involved. It also has a right to cancel the license of an insurance company not meeting the guidelines or flouting any rules causing losses to the policyholders. If any customer has any complaint against an insurer, it can approach the grievance cell of IRDAI and be assured that a resolution will be provided.

Given the kind of capital that is required to start the business, stay in the business and run operations along with strict regulations that are effectively implemented too, it is nearly impossible for an insurance company to go bankrupt or let the insured customer’s future hang in thin air. Therefore, go ahead and gift yourself and your family the best life insurance plans without worrying about the company’s solvency.

What to Expect if Your Insurance Company Fails

If any insurance company is declared bankrupt then the role of IRDA becomes significant and the authority will decide whether they should transfer the policies of the insurer to another insurance company or will continue to provide coverage for the policyholders themselves. So, this is why it’s very important for policyholders to keep continuing paying premiums if their insurer is taken over by IRDA.

Most probably, because it is said that there should never be any gap in the matter of premium payment or else you may face a problem, if you gaped in paying premium then policy transfer would be many problems for you. If an insurance company does not have a sufficient amount of money to pay the claim of the policyholder, then IRDA may use the Company’s assets and guarantee funds to pay all claims.

However, IRDA has a cap on the number of claims that can be paid by insurers. In many cases, this fixed amount is not enough for one person because there are insurance policies with benefits in excess of those limits, so it is disappointing.

How to Avoid Insurers That Might Go Out of Business

Usually, the answer to this is also known to us from the year-on-year decline of any company. But not everyone is interested in these things; in ace, you can trust IRDA because everything from license to insurance in India to rules of insurance is under its supervision. To avoid relying on IRDA for your protection as a policyholder, you can check with different insurance companies before doing business to ensure that they are financially sound. See, it is a basic rule that when you want to buy something new, you have to collect information about it before buying and this process is called research.

Apart from IRDA, you can rely on private sources that give ratings to insurance companies on the basis of their performance; the highest ratings are given to those companies which the rating agencies trust to meet their financial obligations, is the right choice for you and that company is in the best position. Low ratings are given to companies that agencies feel have poor ability to meet financial commitments.