Question

Which of the following statements about state insurance guaranty funds is (are) true?

I. They limit the amount that policyholders can collect if an insurer becomes insolvent.
II. They are usually funded by general revenues of the states.
a) I only
b) II only
c) Both I and II
d) Neither I nor II

Answer 1

State insurance guaranty funds limit the amount policyholders can collect if an insurer becomes insolvent, and the funds are supported by assessments on insurers, not state general revenues.

Step-by-step explanation:

The correct answer to the question about which statements regarding state insurance guaranty funds are true is 'a) I only'. State insurance guaranty funds do indeed limit the amount policyholders can collect if an insurer becomes insolvent. This is to ensure that even in the event of a company failing, policyholders can receive some compensation. However, the assertion that guaranty funds are usually funded by the general revenues of the states is incorrect. Instead, they are typically funded through assessments on insurance companies that operate within the state.

This mechanism helps to protect the consumer from the full risk of insurer insolvency, but there are caps to the amount of coverage that the guaranty funds will provide. The workings of guaranty funds are a part of the broader regulatory framework designed to maintain stability in the insurance markets, discourage hazardous practices by insurers, and ensure that they maintain sufficient reserves to cover potential claims.