This seems like a particularly good time to discuss insurance security funds as part of the review of the insurance insolvency process in New York. While every state has some form of security or guaranty fund coverage for both property/casualty and life insurance products, New York does it differently – not necessarily better, but definitely differently.
Guaranty Fund Overview
The various state insurance guaranty funds generally provide coverage to resident policyholders against the failure of any carrier admitted to do business in the state. There are limitations and caps on coverage that vary from state to state. For information on any particular states coverage, go to the web sites of the National Conference of Insurance Guaranty Funds (www.ncigf.org) for information on property/casualty funds, and the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com) for information on life and health funds. Both of these organizations make available detailed information on the coverages, caps and limitations on a state-by-state basis. The NCIGF site also has some excellent publicly available summary charts comparing coverages and limitations by state.
Even though these associations make information publicly available about the funds, the insurance guaranty funds are little known to or understood by the insurance consumer. There are many factors contributing to this lack of understanding including:
- Insurance claims are not as readily determined, for instance, as the balance in a bank account covered by Federal Deposit Insurance;
- The caps, coverages and exclusions are not uniform but vary greatly from state to state; and
- Most insidiously in this age of instant communication and “openness,” the laws of most states specifically prohibit the advertising of the existence or coverage of the insurance security and guaranty funds, particularly the life insurance funds (see my June 18, 2008 post, “Outing Life Guaranty/Security Funds”).
This series of articles, however, is about the insolvency process in New York and, of course, the insurance security funds in New York have their own quirks and distinctions from the rest of the universe.
New York has five, count ‘em, five insurance security funds — three property/casualty funds and two life funds. The three New York p/c funds are the Property/Casualty Insurance Security Fund, the Workers’ Compensation Security Fund and the Public Motor Vehicle Liability Security Fund. The two life funds are the Life Insurance Guaranty Corporation, which was replaced (but not eliminated) by the Life Insurance Company Guaranty Corporation of New York in 1985.
The New York P/C Funds
There are two main differences between New York’s three p/c funds and the p/c funds in all other states:
- The New York funds are pre-assessed rather than post-assessed; and
- The New York funds are controlled directly by the superintendent of insurance as receiver rather than by separate guaranty associations.
By statute, the New York p/c funds are funded by annual assessments of all licensed carriers writing the kinds of business covered by each fund. For the largest of these funds, the Property Casualty Insurance Security Fund, all licensed p/c insurers are assessed 0.5% of “net direct written premiums” in any year where the balance in the fund falls below $150 million. According to the 2007 Annual Report of the Superintendent to the Legislature, the balance in this fund at March 31, 2007 (the latest published report) was $180,903,187. Although this balance is in excess of $150 million, it is likely that the annual calls will continue without break for the foreseeable future because of the extensive demands against the fund in recent history, including the solvency concerns with the other two p/c funds.
The other two funds are not only smaller, but they are financially stressed to the point of having required legislative intervention to support them – particularly the Public Motor Vehicle Liability Security Fund, which at March 31, 2007 had a balance of $92,760. The Workers’ Compensation Security Fund had a March 31, 2007 balance of $52,748,854, but this balance was supported by loans in excess of $17 million from assets of estates in liquidation. These loans were authorized by legislation adopted in 2005 as part of emergency measures taken by the New York Legislature to shore up the stressed funds — measures that raise a number of unanswered questions about the long term viability of the funds and the proper or improper use of estate funds.
The 2005 legislation required the superintendent of insurance to evaluate the funds and make recommendations to the Legislature for “long term” solutions to the fund issues. This resulted in a May 2006 report by then Superintendent Howard Mills supported by an extensive evaluation by the consulting firm of RSM McGladrey, recommending a number of statutory and administrative reforms. Among the more significant recommendations were proposals to eliminate the cap on assessments; reduce the $1 million cap on claims to either $500,000 or $300,000 consistent with other state funds (NY is the only state with a cap in excess of $500,000, and most states cap claims at $300,000); excluding claims of large commercial insureds (again, consistent with the restrictions in many other states); and the merger of the Public Motor Vehicle Liability Security Fund with the more broadly funded Property/Casualty Insurance Security Fund. To date, however, I am not aware that the current administration has actively pursued these or other reform changes with the Legislature.
The pre-assessment/post assessment dichotomy between New York and other states is probably not terribly significant today. While it might have been argued in the past that pre-assessments allow greater flexibility in addressing insolvencies on a timely basis, the mere volume of insolvencies and the resulting claims, and the financial stress on the funds, has de facto made even the New York funds close to being post-assessment funds.
The second significant difference between the p/c funds in New York and those of other states is that in the rest of the country, each state’s fund is managed by a separate entity – generally a guaranty association that is independent of the receiver and that include industry representation (the funds are, after all, the funds of the contributing insurers!). In New York, however, there is no separate entity managing or overseeing the funds. The New York p/c funds are nothing more than general accounts accessed by the sole authority of the superintendent of insurance. There is no industry representation, no separate claim handling function and no separate oversight.
The existence of guaranty associations provides an excellent check and balance in the insurance insolvency system. Receivers benefit from the expertise of the associations and their members in the management and payment of claims, and the associations provide an opportunity for the industry to have a better understanding of potential fund requirements and the unique issues facing particular insolvent estates.
In New York, however, the industry has limited if any involvement in the management or review of claims of an estate, and very little input to estate specific issues that may arise except in the context of costly and time consuming adversarial proceedings.
Finally, and of most significance, the absence of separate p/c guaranty associations in New York results in even more authority over the control and management of insolvent estates residing with the Liquidation Bureau as the superintendent’s agent – a Bureau that, as I have previously pointed out in earlier installments in this series, is not a state agency (it just acts like one), has no clear statutory foundation, is subject to no central regulatory or judicial oversight, and despite its claims of transparency, is not obligated to provide any significant information on its operations to any regulatory, judicial, consumer or industry body. In effect, the New York p/c funds are pools of funds collected from the industry with unfettered check writing authority granted to the superintendent’s agents – the Liquidation Bureau — who are accountable to no one!
The New York Life Funds
The principal life insurance guaranty fund in New York is the Life Insurance Company Guaranty Corporation of New York, which was created by special legislation in 1985. The creation of the Life Insurance Company Guaranty Corporation of New York in 1985, however, did not terminate the Life Insurance Company Guaranty Corporation, which continues to cover claims on policies issued before August 1985 that are not covered by the “new” fund.
The life fund in New York bears a much closer resemblance to the funds in other states. Assessments from the industry are made only on an “as needed” basis so there is no pre-funding involved. Also, unlike the New York p/c funds, the New York life fund is actually managed by a separate not-for-profit corporation whose members are all New York licensed life insurers. The members in turn select the directors of the corporation who are charged with its management.
The pre-1985 fund remains relevant because the “new” fund has limitations and coverage distinctions quite different from the pre-1985 fund. Most significantly, the “new” fund has a $500,000 cap on claims, and covers only New York resident policyholders of licensed companies, while the pre-1985 fund covers claims under any policy issued by a domestic life insurer. These distinctions are likely to play a significant role in addressing the Liquidation Bureau’s work-out plan for Executive Life Insurance Company of New York in Rehabilitation, whose remaining book of business consists primarily of single premium deferred annuities issued before and after August 1985.
Although the New York life funds are closer to the traditional separate entities found in most other states, they seem to fly under the radar to a greater extent than the New York p/c funds. For example, information on the p/c funds is included each year in the Superintendent’s annual report to the Legislature, but there is no information included regarding the life funds. This is the case even though Article 77 of the insurance law covering the new fund requires an annual report be filed with the Superintendent.
The New York insolvency process is fraught with inconsistent and ineffective reporting requirements. Explaining these requirements and how they affect the effectiveness of the process will be the topic of Part IV of this series.