The US Legal Reserve System (USLR) was created to ensure that no legitimate death claim could fail to be paid due to insolvency. The USLR has withstood the test of time, recessions, depressions, world wars, and financial crises to prove itself as a stable charter supporting the American life insurance industry.
Various checks, balances, and safeguards make up the anatomy of the USLR and it has proven to be effective in maintaining a perfect record for paying claims.
The State Insurance Department
The State Insurance Department is vital in each of our fifty states and Puerto Rico to maintain a regular and orderly insurance market. The Departments perform regular audits, review complaints from consumers, and oversee mergers of companies that do business within its boundaries.
Required Reserves Ensure Payment of Policyholder Benefits
A prescribed percentage of each premium dollar goes into the policy owner's reserve fund. The reserve liabilities are established as financial safeguards to ensure the company will have sufficient assets to pay its claims and other commitments when they fall due. Life companies that comply with the legal reserve requirements established by the state insurance laws are known as legal reserve life insurance companies.
Risk-Based Capital (RBC)
The RBC measures the amount of capital required to meet different elements of risk, including asset, interest rate, insurance, and business risk. A company reporting total adjusted capital of 200% or more is considered within acceptable levels. RBC ratios of 300-350% are common in the industry. Companies whose RBC ratios fall below 200% fall under regulatory controls by the state insurance departments.
Periodic Company Examinations
Every year, all legal reserve life insurance companies submit annual statements to the insurance departments of the state in which they are licensed to do business. The format and contents of the forms used are prescribed by the State Insurance Commissioners and they are a detailed report of an insurance company's financial status that is important in evaluating the company's solvency and compliance with the insurance laws.
Additional Security Safeguards
A prescribed percentage of each premium dollar goes into the policy owner's reserve fund. The reserve liabilities are established as financial safeguards to ensure the company will have sufficient assets to pay its claims and other commitments when they fall due. Life companies that comply with the legal reserve requirements established by the state insurance laws are known as legal reserve life insurance companies.
- Reinsurance – Nearly every legal reserve life insurance company further protects its policyholders by reinsuring part of the coverage with a life reinsurance company. Reinsurance prevents relatively sizable claims from depleting a company's policyholder reserves.
- Surplus – The surplus is the amount by which a company's assets exceed its liabilities. The surplus protects the policyholders and third parties against any deficiency in the insurer's provisions for meeting its obligations.
- Mergers – In the unlikely event that a company's annual statement or its own examination reveals the possible financial weakness, one of several avenues is open to the company:
- Produce additional operating capital
- Sell its business to another life company
- Merge into another financially stable life company
A legal reserve life insurance company simply does not close its doors and go out of business declaring that all policies are null and void. Legal reserve life insurance policyholders enjoy personal security safeguards unknown by other types of businesses.
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