NY Comp Guaranty Fund Eyes Bankruptcy

At the hearing, it was revealed that some short-term funding had been secured to keep the operation going until April. Officials had originally feared it would run out of cash at the end of this month.

During the proceedings, the State Insurance Department came under fire from the Property Casualty Insurers Association of America (PCI) for a proposal transfer $50 million from the Property/Casualty Security Fund to the Workers' Compensation Security Fund,

The Property/Casualty Security Fund protects against failed p-c insurers. PCI said the proposed shift would only jeopardize the solvency of the Property/Casualty Security Fund and increase the price of auto and homeowners insurance policies for all consumers.

"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.

Ms. 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," she said.

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

A more feasible approach, PCI suggested, is to obtain a loan from liquidation of failed insurers' 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," Ms. Baldwin noted. The loan could be repaid, she said, through a 1 percent increase in assessments on workers' compensation policies.

Bond issuance is another alternative to borrowing between funds, she suggested. California recently did this to keep its workers' comp fund afloat, Ms. Baldwin 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," she added.

But her organization said that such "stopgap solutions" will not solve the underlying problem of New York's outdated liquidation laws, which require significant reform.

PCI noted that 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, PCI stated.

"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," Ms. Baldwin concluded. "We look forward to working with the legislature in crafting such a solution."