Final answer:
State guarantee funds are responsible for paying benefits to policyholders if an insurer becomes insolvent. Reinsurance companies, FEMA, and the insured's personal assets are not responsible for covering these claims. Insurance protects against financial loss, with entities like the FDIC insuring depositor funds.
Step-by-step explanation:
If an insurer becomes insolvent, the entity that would pay benefits to policyholders is a) State guarantee funds. These guarantee funds are designed to protect policyholders in the event of an insurance company's failure by stepping in and covering outstanding claims. While reinsurance companies do provide financial protection to insurers, they do not deal directly with the insured's claims in case of the insurer's insolvency. FEMA is not responsible for the obligations of private insurance companies, and the insured's personal assets are not typically involved in covering the claims of an insolvent insurer.
Insurance operates on the principle of protecting individuals or entities against financial loss. Policyholders make regular payments to an insurance entity, which then compensates members who suffer covered financial damages. Government-run programs like the Federal Deposit Insurance Corporation (FDIC) provide similar protection, such as insuring bank deposits up to a certain amount to prevent the loss of depositor funds in the event of bank failure.