The Florida Insurance Guaranty Association (FIGA) is asking its member insurers to hold off assessing Florida homeowners a surcharge amount upon policy renewal to cover the costs of two 2021 insurance company insolvencies in the state. The assessment amount of .7 percent was voted by the FIGA Board of Directors in August 2021 and insurers are asked to wait approximately two weeks until state regulators decide whether or not to vote for a surcharge on the approximately $168 million in claims from two 2021 insolvencies. There is also concern over two other financially unstable insurers in the state which may lead to further FIGA obligations should they fail.
This is the first time since 2012 that FIGA has had to raise the surcharge. Much of this is attributed to hurricanes and Florida's recent history of fraudulent assignment of claims and litigation costs surrounding them. Two insurance companies: American Capital Assurance Corporation (AmCap), and Gulfstream Property and Casualty Insurance Company have been liquidated in 2021. These two insolvencies came on the heels of a couple of large 2020 insolvencies for the association.
The FIGA statute allows insurers to recover the cost of guaranty association assessments directly from Florida policyholders by increasing their policy premiums until the cost of the assessments have been fully recovered. While the surcharge per policy is spread amongst all policyholders in the state, it does increase premiums in a state with already high homeowners premiums. The ability of member insurers to add this FIGA surcharge is in contrast to state guaranty funds such as Ohio that allow member insurers to take a premium tax offset for guaranty fund assessment biannually under its statute.
FIGA's regular assessments are capped at 2 percent of total written premiums on covered lines of business. In addition, there is a second 2 percent of assessment cap for emergency assessments related to hurricanes. FIGA's assessments are then further broken down by the auto account, which is used to cover auto claims, and the other account which includes all other lines of covered business. Workers Compensation claims are covered by a separate workers compensation guaranty fund; both funds share executive management, but have separate Board of Directors which must be approved by the Chief Financial Officer for the State of Florida.
The surcharge for homeowners in Florida will be for the other account, as assessments and other forms of funding an insolvency are allocated to the proper guaranty fund account. In other words homeowners are not responsible for auto insurance premium surcharges and vice versa. Therefore since the insolvencies are related to homeowners claims, the assessments come out of the other account, not the auto account.
Assessments are based upon the reserves set on the number of claim files received at FIGA from the liquidator of the insolvent insurance company, plus any new and timely reported claims. Coverage under all policies cease thirty days after the liquidation date unless the policy terminated or was replaced prior to that date. The assessment base also includes unearned premium claims and loss adjustment expenses that are allocated to the appropriate claim file. After assessments are voted on by FIGA's Board, they are then called and collected. This process can take some time although most insurers pay assessments quickly.
Assessments are only one of four areas that FIGA can draw from to cover an insolvency. FIGA can also receive what is known as Early Access funds. This occurs when an insolvent insurer's estate contains some liquid assets that can be used to pay claims. Because FIGA steps into the policyholder's shoes under the liquidation statute, these funds when available can be used to more quickly fund the covered claims payments. Early Access Agreements require the liquidator's and the liquidation court's approval.
Payments received from other liquidation estate distributions can also be used to pay claims of current and future insolvencies. FIGA will invest these estate distributions, which in some cases can be quite substantial, and use the income produced along with the distributions to pay the claims of current and future insolvencies. In years with low insolvency activity these estate distributions are frequently more than enough to cover both the claims and the administrative expenses of the association. However, in years of high insolvency and claims activity additional sources of funding, such as assessments and policy surcharges, become necessary to cover and handle claims.
Finally FIGA receives reimbursements from the Florida Hurricane Catastrophe Fund for claims and insolvencies resulting from hurricanes. All of these funding sources allow FIGA to pay the covered claims of insolvent Florida licensed insurance companies.
The maximum amount of coverage that FIGA will pay is up to $300,000 per claim (or the policy limits, whichever is less). There are however, special limits on 1) damage to structures and contents on homeowners claims and 2) damage to structures and contents on condominium and homeowners' associations claims. For homeowners damages the additional limit is $200,000 on structures and contents. For condominium and homeowners' associations, the cap will be the lessor of policy limits or $200,000 multiplied by the number of units in the association. No claims will be paid in excess of this cap. In addition, insolvencies that occurred prior to July 1, 2021 are subject to a mandatory $100 statutory deductible, including on unearned premium claims, that is in addition to any policy deductibles. Insolvencies occurring after July 1, 2021 are no longer subject to the $100 statutory deductible, only policy deductibles as the guaranty fund act has been amended to do away with it. Further information about FIGA can be found here.