Annuity and life insurance companies are regulated by a multi-faceted system of disclosure and statutory accounting known as the "Legal Reserve System." This is the modern system used to price life insurance in which the premium for each policy is directly related to the amount of risk the insurer assumes for that policy.
Under this system, applicable state insurance codes calculate the minimum "statutory reserves" insurance companies must maintain on their life insurance policies and annuity contracts to meet future claims and obligations to their policyholders, and to maintain investment standards.
Almost every state requires insurers doing business in the state to become part of the state's legal reserve pool. Under this system, if a company goes out of business, the remaining companies in the pool must reserve the failed carrier's liabilities and obligations. This protects investors and insureds.
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