Some businesses do well and last for years, while others do not. Retail stores that continue to fail will close shops, leaving thousands of employees without jobs. Closed operations will have enormous sales to get rid of inventory. Bon-Ton, Toys R Us, and Teavana are just a few of the businesses that have closed or are closing all shops, and many other retailers are closing specific numbers of underperforming stores. This is easy enough to do because tangible goods can readily be sold, and there are no obligations for previously sold goods. Insurance, however, is a different matter entirely.

When an insurance policy is sold, the insured receives a copy of the policy. However, what the insured is actually buying is a promise – a promise to make the insured whole in event of a loss. A loss may never happen, in which case the insured is spending money for something he will never receive. However, if a loss does occur, then the insured will be made whole for the loss. If the insured's house burns down, the insured has paid far less in premium than the value of the home, and it is likely that the insured did not have the cash on hand to replace the home and all its contents. This is a great relief to an insured who has sustained a loss, and why insurance works. Insurance provides coverage for financial losses an insured cannot readily absorb on her own. Even if the home is paid off and there is no longer a mortgage, the chances that an insured could pay to replace that home out of pocket are slim. This is fine as long as the insurance company has the funds to pay the losses. States regulate insurance to make sure that the company does have such funds and can pay its insureds if a loss occurs; certain levels of capital are required before a carrier can even operate in a state, and some states require an additional amount of surplus funds as well. So what happens if a carrier does become insolvent and is no longer able to pay claims?

The carrier may be declared insolvent and put into receivership, where the carrier's assets and operations are put under the control of a custodian. An insolvent company is one unable to pay its debts as they come due. A liquidation order will be put in force, and this requires the assets of the company to be distributed to claimants. Claimants may be creditors, insureds and others. With an insurer insolvency, insureds are not only left without a policy, but there can be insureds who have suffered losses who now have no way to make themselves whole from a loss. States do not want insureds to be left in this vulnerable position. Insurance runs a thin line between being for profit organizations and being social organizations for the good of the whole.