The default of an insurance company has been in the headlines for the last couple of weeks.Emotions are high. Thoughts of policies lost, and monies out of pocket — never to be recovered, are angrily listed again and again.This is a just such a sorry state of affairs.It is very understandable that individuals who invested are confused, angry, and disillusioned.One of their important safety nets, protection for their families — the one that financial planners the world over harp incessantly on putting in place — has been ground up in the bankruptcy propeller.In this insolvency action, policy holders have been disadvantaged several times over:1. One, their life insurance policies may not be able to be renewed under the original terms and conditions. The passage of time, since issuance of the original policy alone may have physically incapacitated some policy holders, who may now have pre-existing conditions (even in redundancy) rendering purchase of a new policy more difficult in qualification, more expensive, or even impossible to afford.2. Two, they will not receive the full balance of payments due to them under the terms of their insurance or annuity contracts.3. Three, policy holders may have incorrect expectations of the amount of premium/ cash value/ annuity payout that they are actually due.Why couldn’t something have been done to avert the policy losses?Well, it was not for lack of cooperation among our local insurance industry and regulators.According to the Report of the Official Receiver/Provisional Liquidator to Bermudaresident policyholders and creditors of British American Insurance Company Limited (BAICL) dated September 12, 2013, the Provisional liquidator, the agents, the Bermuda Monetary Authority, the Minister of Finance, (Bob) Richards, and the local insurance companies worked extremely hard to find a solution that would allow for a capital commitment and continuation of all life insurance policies.Two options were considered:a) Forming a new Bermuda company to assume the liabilities of the failed BAICL with new funding to cover the deficit supported by our remaining local insurance companies, orb) Seeking a foreign insurance company that would be willing to assume BAICL’s liabilities and provide the necessary funding to allow for the continuation of the life insurance policies, in exchange for a license to operate an insurance entity and compete for business in Bermuda.Ultimately, the BAICL funding gap (deficit) was considered (implied in the report) too extensive, and the support efforts failed.These Bermuda insurance, finance individuals and companies should be thanked for even considering taking on such an additional financial burden, not to mention the extensive project planning involved.Bermuda businesses across the spectrum are committed to the ongoing health of Bermuda’s economy.Insurance companies, on a global basis, file insolvency far more than most realise.The demise of an insurance company is always a shock — that’s because we tend to think of insurance companies as inviolate, floating in cash — even if that cash is other people’s money.Insurers are one of a rarefied few corporate entities in the world that collect cash upfront before a service is rendered — and that cash could be held for decades away.We give insurers a cash premium to protect us against our worst nightmares, and provide the best outcomes. Sometimes, we given them money very, very reluctantly because we can barely afford it, because we don’t perceive a current need — as in life insurance protection for our families — since that event is way too far from mind.Further, many of us certainly don’t see any immediate benefit — even though, God forbid a family tragedy could happen, at any bad luck of the draw.So, it sort of feels like we are just wasting money, almost throwing it away. Those are readers and client words over the years, by the way, not mine.There is also another very common feeling about insurance companies; they are rich, they take your money and then they do very little for it.That perception is completely inaccurate.Insurance companies never insure us, our property, our health, our lives, our disability without assessing the odds of providing protection for us and assuring that their management can run a cost-efficient company, manage client premiums and investments, maximising profits, while building absolutely vital adequate cash reserves for the eventual client insurance claims payout.They manage our risk; and sometimes, so wrongly, they completely mismanage their own risks of doing business.What did local individuals own in insurance terms, and what have they, or will they recoup on their insurance policy investments.They have been told their cash share of the percentage of the remaining assets, but how does that translate into what they have invested over the years, “thousands and thousands” according to news media?The answer depends upon the kind of insurance BAICL clients originally purchased. We will use some in General Hypothetical examples.Keep that in mind, this is, in general, and if you are one of the clients affected, you may receive additional information from the liquidator in explanation.Hypothetical example: The client has a face value term life insurance of $100,000 costing $1,200 per year. $100,000 is the amount his family will receive when he dies.One. Term life insurance generally covers only one year, and has to be renewed beginning of each year. No premium payment, no coverage. BAICL was ordered into windup on July 29, 2009.In general then, this policy holder was only covered for seven months, and is due a repayment of unused premium of $500.Due to the funding gap between the liabilities of BAICL, some 21 million and the remaining assets of around 7 million, he will receive only an estimated percentage (around 37 percent) of his unused annual premium after deducting for a share of BAICL expenses.Two. Whole life insurance for the same face value of $100,000 also covers only one year, but whole life premiums cost more because he is paying upfront to keep the policy premium the same over a much longer period of time, say twenty years. This upfront extra premium goes into a cash value build-up fund. Thus, the unused premium for the year to be returned to the client will still represent those same five months, plus the cash value accumulation, all discounted by the same percentages as above.Three. Clients with life annuities are structured differently. Annuities are purchased by the client from the insurance company, accompanied by a promise to pay out a portion of that principal, with interest, generally monthly for the rest of a natural life or a definite term. If a client has bought a $50,000 annuity, and only received five years worth of annuity payments, say out of a twenty-year annuity, he would be due the remaining amount. His shortfall in this settlement will be considerable.Please note that these are only examples, in general, of how payments may be computed. I encourage anyone affected to review their Settlement reports when they receive them and ask for clarification in explanations if not understood.Finally, I am terribly sorry for the clients of British American Company Limited, who are trying to understand and work through this devastating situation.It is a bitter irony that this very company, experienced in the risk management and protection of life and health business, not only failed to manage their own insurance company protection and those of their clients, but placed the cost legacy of the insolvency winding-up bill directly upon those same clients.Next in the Bermuda Insurance ePrimer on:1. How are insurance companies structured?2. Who protects them from themselves?3. A checklist to review your insurance company’s financial position.Martha Harris Myron JP CPA PFS CFP is a Bermudian journalist and a cross border financial planning specialist focused on offshore financial perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre.President of Pondstraddler? Life™ Consultancy.Publications, Presentations and Seminars. www.pondstraddler.com inquiries to info@pondstraddler.com