A rash of commercial insolvencies that has cost the insurance industry substantial amounts of money should be the impetus for state legislatures to consider proposals for guaranty fund reforms, according to the Property Casualty Insurers Association of America (PCI).
“Existing insolvency laws and administrative mechanisms were not designed to address the current overload of commercial insolvencies,” said Michael G. Koziol, PCI assistant vice president and counsel at a recent insolvency update meeting before regulators, guaranty fund and company representatives. “These insolvencies have resulted in a dramatic increase in recent property/casualty guaranty fund assessments for companies that ultimately could affect policyholders and what they pay for insurance. The assessments levels are at long term highs, and in a number of states the assessment level has already reached the statutory caps adopted in those states.”
Koziol explained that PCI is a participant on the special National Conference of Insurance Guaranty Fund (NCIGF) Board Task Force that was created to address the specific financial and operational problems that have arisen because of the large number of commercial insolvencies. The task force concluded that many of the major problems are clustered around two specific types of difficulties:
— Complex, loss-sensitive commercial insurance products threaten to burden the guaranty associations with a greater financial burden than the exposure the insolvent insurer itself faced; and
— Complex modern commercial insurance programs, especially with the unbundling of various services and extensive involvement of third-party administrators (TPA), imposed extraordinary administrative burdens on guaranty associations in carrying out their primary duty of adjusting and paying claims.
According to PCI, the most critical problem is the large deductible issue. In a personal lines scenario, the insurance company pays the claim and is reimbursed by the insured for the deductible. This means that the insurance company is reimbursed in part with the deductible funds and then pays only the remaining portion of the claim. This is not the case with commercial insolvencies. The guaranty fund pays it all and the deductible reimbursement does not go back to the guaranty fund, but to the estate of the insolvent insurer.
“PCI strongly supports legislation that would require deductible monies to go back into state guaranty funds–where the monies appropriately belong,” Koziol said. “These deductible dollars would relieve the stress recent insolvencies have placed on the guaranty funds and also on the insurers who pay the assessments underlying those funds.”
Currently Pennsylvania is considering Senate Bill 815, which addresses the large deductible issue. Insolvent insurance companies, Reliance and Legion, were both domiciled in Pennsylvania. The deductible amount at stake is estimated at $600 million dollars, Koziol said.
Another area addressed at the meeting as a consideration for inclusion in legislative proposals was that of net worth exclusions from guaranty fund coverage. Guaranty funds are intended to be a safety net designed to protect the average policyholder, not the high, net-worth, sophisticated buyer.
“Society should expect a large corporation to examine its insurance carefully and bear some the burden should its insurer become insolvent,” Koziol explained. “Currently approximately 34 guaranty associations have provisions that shift financial risk of insurance insolvency from the guaranty funds back to high-net-worth insureds, primarily through exclusion of first party claims and subrogation reimbursement from such insureds on third party claims.
“Overall system costs could be reduced if net worth provisions were enacted everywhere with relative uniformity,” Koziol said. The NCIGF Task Force agreed that new worth provisions should be added to the remaining guaranty associations’ proposed legislative reform proposals as an appropriate solution.
Two other remaining proposals relate to the logistical aspects of guaranty fund management, according to PCI. The first proposal would require access to the books and records of TPAs and the second would address the timing of access to files. Often the fund administrator cannot pay claims simply because they don’t have the files, Koziol explained.
PCI, the new group formed by the merger of the National Association of Independent Insurers and the Alliance of American Insurers, will be seeking these legislative changes in states during the 2004 sessions.
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