Certainly, there are checks, balances, rules and regulations in place to make sure that car insurance companies are as safe as they can be. Regardless of size, they are all subject to similar scrutiny. However, it may be easier to assume that some of the big names that operate in many states are safer purely because they go through more scrutiny, as it is up to each state to oversee vehicle insurance companies trading in their borders.
To start with every company has to be licensed to sell policies in each state. For example, nationwide providers have to pass through scrutiny of many states to conduct business. By doing so, they confirm that they will follow the rules and regulations set in place. In the same way, brokers and agents need to be licensed as well. There are certain barriers to enter into the market to protect citizens from rogue operators collecting premiums and disappearing.
They apply certain capital requirements and tests for each company, which has to provide accounts and may be inspected. The National Association of Insurance Commissioners (NAIC) is responsible for coming up with industry regulations and each state may consider them and enact their laws. Accordingly, they set the minimum capital requirements for each company based on riskiness of the lines they underwrite.
Every state set up Guaranty Funds to protect the policyholders in case of the insolvency of their insurers. Each company has to be a member of guaranty associations and contribute to it. Unfortunately, insolvencies happen and in such cases these funds first pay the outstanding claims of the bankrupt insurer and return unused premiums from these funds.
Although it is down to individual states to decide how much they will involve in rate setting, most states follow certain guidelines to ensure that rates are adequate to ensure companies are charging enough to remain in business, but not too high to allow them to make excessive profits and they cannot be discriminatory.
There may be room in between too high and too low but they are clear about rates applying to everyone equally. Companies cannot use factors that unfairly target a certain group of motorists based on their background. Yet, they can look at people’s credit score and charge much lower premiums to financially stable applicants while poorer drivers with money problems may have to pay higher prices.
Most states require the rates to be approved by the state insurance commissioner first while others may require that the rates have to be competitive. In other words, the commissioners who follow the latter doctrine believe that the market will sort itself out.
There is no guarantee for anything in life and financial stability of an insurer can only be checked up to a point. But there are checks and balances in place and in general auto insurance companies aren’t allowed to engage in risky investments and as a practice they are not known to be involved in such activities like banks.
Usually, the largest exposure a carrier has is facing unprecedented claims and they often reinsure against such risks. One of the main reasons why they could go down is catastrophic claims. This is unlikely to happen since policies exclude biblical losses. In other words, if something that could have happened in a thousand years has happened, they could not have predicted it. Therefore, they can refuse to pay the claims on the basis that it was beyond the scope of insurance.
Although, it may not be reassuring since you may suffer large losses in such cases, it is not hard to understand that this clause is there to protect them from total wipe out. Generally, the responsibility falls onto governments if such a scenario was to play out. And people would probably still get some proportionate compensation.
Naturally size may comfort people and therefore they may feel safer with the bigger automobile insurance brands rather than the smaller and less known names. Then again, some of those smaller insurers may actually be part of a much larger corporation. If you prefer to work with small and local ones there is no evidence that they are riskier.
Everyone has different preferences and takes comfort from various things. It could be the fact that you recognize the brand or they are local. These are all valid reasons for choosing one over the others. In terms of security, there is never a 100% guarantee but it is as close to it as humanly possible.
There are companies that check financial soundness of car insurance companies and publish reports but they usually only check the very large ones and therefore have a limited scope. Generally, people are not worried about purchasing coverage from them. Somehow, we are programmed to worry about the sources we know little.