The Life and Health Insurance Guaranty Association is funded primarily through assessments made on admitted insurance companies. These assessments are required by law to create a safety net that protects policyholders in the event that an insurance company becomes insolvent. This ensures that individuals who have valid claims against a failed insurance company can still receive their benefits up to a certain limit.
The necessity of this funding model is rooted in the operational framework of the insurance industry, wherein each member company contributes to the pool based on its market share and the risks it undertakes. This collaborative funding approach helps maintain consumer confidence in the insurance industry, as it assures policyholders that there is financial backing in place should any member company experience severe financial difficulties.
In contrast, relying on government allocations, policyholders' premiums, or state budget grants as a funding source could lead to conflicts of interest, potential tax burdens on citizens, and instability in the funding available for payout to policyholders affected by insurance company failures. Therefore, the assessment approach not only aligns with the principles of mutual assistance among insurers but also promotes a competitive insurance market while safeguarding consumers.