Insurers Split Over Proposed Changes to Florida Guaranty Fund

By | February 28, 2013

Florida lawmakers have kept alive a bill that would alter the method of funding the state fund that pays the claims of insolvent property insurers even though the change could increase costs and does not have the uniform support of the insurance industry.

The Florida Insurance Guaranty Association (FIGA) pays the claims of individuals when their insurer fails and no longer has the resources to meet its obligations. Founded in the 1970s, FIGA can levy an assessment on all participating insurers when it faces a shortfall in funding.

Rep. Jake Raburn (R-Valrico) has stepped forward with a bill that would change that funding mechanism. For the first time, FIGA would have the option of collecting assessments from policyholders as opposed to collecting them from insurers.

“By giving flexibility to the FIGA board, we can make the system better and create fairness for all policyholders in Florida,” Raburn said at a recent meeting of the House Insurance and Banking Subcommittee.

Under current law, FIGA can levy a regular assessment of up to two percent against insurers that they must pay within 30 days. Insurers then can recoup the assessment by collecting the money from policyholders as they renew policies over a 12-month period. Also, another two percent emergency assessment can be levied to pay claims from insurers that become insolvent specifically due to a hurricane. FIGA can require insurers to pay that assessment in one month or in 12-monthly payments.

Raburn’s bill would allow insurers to collect regular assessments directly from policyholders over a 12-month period using a separate line item on policy bills. Insurers would collect the money from policyholders and forward it to FIGA, rather than first having to pay FIGA and then getting policyholders to reimburse them as is currently the case.

Regarding emergency assessments due to a hurricane-related insolvency, FIGA could still use the old method of collecting emergency assessments straight from insurers, but only if it cannot find other sources of funding such as bank loans or bonds. That decision could not be made for 90 days as opposed to current law that calls for assessments to be collected within 30 days.

According to supporters, the impetus for the bill is the impact of the assessments on insurers’ surplus. Currently, an assessment is charged against an insurer’s surplus immediately, lowering it by the amount of the assessment. If FIGA can collect from policyholders, then the assessments would have no effect on insurers’ balance sheets.

The state-backed property insurer Citizens Property Insurance Corp. and reinsurer Florida Hurricane Catastrophe Fund already have a similar mechanism to assess for more money.

Raburn said the new funding mechanism could help some carriers that otherwise could face insolvency just because they owed the assessments up front.

“It preserves solvent insurance companies’ ability to pay claims and does not jeopardize FIGA’s paying ability for customers of insolvent companies,” said Raburn.

The trade-off, however, would be that it would take longer for FIGA to collect money, which means it would incur borrowing cost on loans and bonds that would in turn push the overall assessment amounts higher.

That is why the industry is split on the bill, a division that extends to the membership of the FIGA board, which is made up of domestic insurers and national carriers.

FIGA General Counsel Tim Meenan said that some FIGA members believe that the current funding mechanism has worked since the 1970s and they see no need to change it. On the other hand, he said, other members said the association should take into effect the impact of assessments on insurers’ balance sheets.

“There are differing views on the board which is why we are neutral and leaving it to the legislature,” said Meenan.

Some major insurers are opposed to the bill.

Michael Carlson, executive director of the Personal Insurance Federation, said that State Farm Insurance Co. and Allstate Insurance Co. have deep reservations about the bill.

Carlson said that the bill would make borrowing the default method for collecting emergency assessments. And shifting the burden directly to policyholders, he said, would not only require more time to collect the assessments, but also make the levies greater since they would include the cost of borrowing capital.

“According to FIGA’s own analysis of the bill, when Poe Insurance Co. went insolvent in 2006, there would have been a borrowing cost of $24 million on top of the assessment,” said Carlson.

How strong is the major insurers’ opposition to the bill?

“Raburn expressed disappointment why we didn’t respond in writing to his proposal,” said Carlson. “Our initial response is why don’t you fold up your public policy notebook and not pursue the bill.”

Several lawmakers agreed to support the bill. However, they reserved the right to oppose the bill in the future if the concerns of the major insurers and others were not resolved.

“I vote yes today, but if these concerns are not addressed I won’t vote yes again,” said Rep. Dwayne Taylor (D-Daytona).

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