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Impaired Insurer

Reviewed by Vineeth | Updated on Sep 30, 2020

Catalogue

Introduction

Impaired insurers are those insurance companies that are potentially not able to keep up to their obligations, and are kept under conservation or rehabilitation. Note that impaired insurers are not fighting insolvency but are in a risk of not fulfilling their obligations made to their policyholders.

The government and other concerned agencies perceive impaired insurers risky as there can be citizens filing a claim due to an emergency scenario. This is the reason why impaired insurers are put under rehabilitation.

Understanding Impaired Insurer

The concerned authorities of the state will decide if an insurer is impaired or if it is sailing in troubled waters due to some reasons and is not in a position to fulfil its obligation to the policyholders. Courts may put an insurance company under rehabilitation until the time it improves and is able to take on the risk or has come out the insolvency.

An insurance company that is deemed impaired and is not able to come out of the court’s order of conservation can be perceived as an insolvent insurer and can be liquidated forcibly.

When the authorities find an insurance company to be impaired, they are supposed to ascertain the level of impairment and how much funds are needed to come out of the impairment. Also, they will determine the timeframe over which the insurance company will be under rehabilitation. The concerned authorities will convey these details to the insurance company that is going to be kept under conservation.

When Will an Insurer be Impaired?

An insurance company is most likely to run the risk of being impaired if they go on to offer insurance policies to individuals that come from a similar background.

For instance, an insurance providing organisation which offers only housing insurance policies to individuals residing in a coastal area and has not included people from other safer areas will run the risk of having the need to pay out compensation to all of them when there is flooding in the coastal region. This will create a cash crunch and put immense pressure on the insurance company.

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