FIGA reforms should increase flexibility, not eliminate it
However, a property insurance bill that appears to be sailing through the Legislature is one that deals with FIGA, a little-known state insurance mechanism with no apparent problems or need for reforms.
When insurers are on the verge of insolvency, they must either be rehabilitated or liquidated by state government. When they are liquidated, the Florida Insurance Guaranty Association (FIGA) assumes and pays any outstanding claims belonging such insurers so that consumers who bought an insurance policy in good faith are not left with their claims unpaid. It’s like the FDIC for insurance companies.
FIGA obtains its funding to pay claims primarily in two ways: through the liquidation of assets of insolvent insurers and by levying assessments on insurance companies.
Like Citizens and the Cat Fund, FIGA can levy assessments onto essentially every property/casualty insurer in the state. Specifically, FIGA can levy up to a 2%-of-premium assessment for each of the two accounts it has for a maximum of 4% per year. When the FIGA board determines the need for an assessment, the Office of Insurance Regulation approves it and orders each insurance company to pay the assessment upfront to FIGA within thirty days.
If it is an “emergency” assessment (due to a hurricane), the board at its discretion can spread the assessment over 12 months or collect it upfront, depending on whether it needs the funds quickly. “Regular” (or non-hurricane) assessments must be paid upfront within 30 days. Regardless, insurance companies recover the assessment from their policyholders at renewal or issuance. This is how just about all other states pay for their insurance guarantee funds.
S.B. 324 and H.B. 211 change the manner in which the assessment is levied onto the insurance companies. Instead of an upfront payment, regular assessments would be gradually collected directly from policyholders at renewal or issuance. Emergency assessments would likewise be collected directly from policyholders at renewal or issuance, unless the FIGA board determines it needs the funds immediately and cannot “reasonably” obtain financing.
At first glance, this appears to be a decent proposal that would save insurers from having to tap into their surplus to pay a FIGA assessment. Insurance companies like this for accounting purposes, not to mention the interest they can continue accruing on that money.
However, the proposal appears to bind the FIGA board to the new “pass-through” levy rather than give it more flexibility. Indeed, in the case of an emergency assessment, FIGA may elect to levy it upfront (per current law), but according to language in the bill, to do so, the board must demonstrate that “financing is not reasonably available” in order to make that decision.
“Reasonably available” is inherently vague. If “reasonably available” pertains solely to availability without regard to cost, then this bill would in essence always force FIGA to finance regardless of the cost.
Remember when the Charlie Crist Administration paid $224 million to Warren Buffett’s Berkshire Hathaway for a mere pledge to buy $4 billion in Cat Fund bonds back in 2008 when the bond markets were frozen? The moral of this flashback: financing is always available even in hard times—at the right price.
If after a sufficiently bad hurricane season there are multiple insurance company insolvencies and Citizens, the Cat Fund, and neighboring states also impacted by hurricanes simultaneously go cap-in-hand into the bond market, FIGA may very well find itself in a situation where financing may not come cheap.
And what does this mean? The cost of financing—potentially expensive, high-interest financing—would be passed through directly onto policyholders (read: consumers) instead of insurance companies paying their FIGA assessment upfront as current law prescribes, which incurs no finance costs.
Paging Rep. Fasano!
However, a few tweaks can avoid such a scenario. Two possible changes that preserve the spirit of the current legislation are:
- Removing the requirement that “financing is not reasonably available” and giving the FIGA board the discretion to determine if circumstances merit an upfront assessment payment or a gradual pass-through assessment payment; or
- Allowing the insurance carriers to decide. They can be given, say, 30 days to decide whether to remit the full assessment amount as current law prescribes or to remit it gradually as a pass-through as the bill prescribes. Those electing the gradual pass-through option would subject their own policyholders to applicable financing costs, if any.
These are commonsense suggestions to fine-tune well-intentioned legislation that, if enacted without changes, may very well have the unintended consequence of raising insurance costs on consumers.