PCI: New York’s Guaranty Funds Need Both Short and Long-Term Reform

Shifting funds from one New York guaranty fund to prop up the state’s floundering Workers’ Compensation Security Fund will reportedly only jeopardize the solvency of the Property/Casualty Security Fund and increase the price of auto and homeowners insurance policies for all consumers.

At a hearing Wednesday before the New York Assembly Standing Committees on Insurance and Labor, the Property Casualty Insurers Association of America (PCI) spoke out against an insurance department proposal to transfer $50 million from the Property/Casualty Security Fund to the Workers’ Compensation Security Fund, which last month was projected to be insolvent and unable to pay claims by the end of February.

“PCI opposes the transfer of money between the guaranty funds in New York because it can result in policyholders of one type of insurance subsidizing the insolvency of a company that writes an entirely different type of policy,” said Kristina Baldwin, regional manager and counsel for PCI. “That is simply not fair.”

New York has four guaranty funds: the Life Insurance Guaranty Fund, the Public Motor Vehicles Liability Security Fund, the Workers’ Compensation Security Fund, and the Property/Casualty Security Fund. These funds, which are fueled by insurer assessments, pay for covered claims of the policyholders of an insolvent insurer.

Baldwin pointed out that the Property/Casualty Security Fund already has a $40 million note as an “asset,” the repayment of which is highly doubtful. “In 2002, legislation was passed to provide a $40 million loan from the property/casualty fund to the Public Motor Vehicle Liability Security Fund. This ‘asset’ cannot be used to pay claims, and adding another $50 million note to the fund would only exacerbate the problem.”

Although the insurance department’s proposal to increase assessments on workers’ comp policies from 1 to 2 percent is reportedly not unreasonable, any further increase will result in increased premiums for employers and market instability.

A more feasible approach is reportedly to obtain a loan from liquidation estates. According to the National Conference of Insurance Guaranty Funds, there are significant assets in the liquidation estates. “Alaska recently pursued such a loan and was able to get the funds necessary to keep its guaranty fund liquid in under a month’s time,” Baldwin noted. The loan could be repaid through a 1 percent increase in assessments on workers’ comp policies.

Bonding is another viable alternative to borrowing between funds, as California recently did to keep its workers’ comp fund afloat, she said. “This proposal is noteworthy because it’s another way to ensure the payment of workers’ compensation claims without raising premiums on unrelated lines of insurance,” Baldwin said.

However, these stopgap solutions will reportedly not solve the underlying problem of New York’s outdated liquidation laws, which require significant reform.

For instance, most states cap guaranty fund coverage for property/casualty claims at $300,000; New York’s cap is currently $1 million. Additionally, at least 34 states have provisions to bar guaranty fund coverage for first-party claims by high net worth policyholders (usually defined as between $10 and $50 million). Net worth provisions reinforce the limited safety net nature of guaranty funds and protect those for whom an insurer insolvency would be a catastrophic financial loss.

“In the long term, it is critical that guaranty fund reforms be enacted which will make New York’s guaranty funds more sustainable and prevent the occurrence of another guaranty fund crisis in the future,” Baldwin concluded. “We look forward to working with the legislature in crafting such a solution.”