This paper explores how Property Casualty Insurance Companies assist the government by providing financial safety nets for consumers and the country’s modern economy. How insurance companies are mandated and regulated by State Governments is explained in great detail. How insurance companies, especially property and casualty carriers, contribute a piece of the necessary bond that helps hold the modern economy together, too is outlined. In addition, this paper explores the belief that the conferences and organizations of guaranty funds that both the federal government and all state governments require to exist, have provided successful methods of positively contributing to the economy as well as continuing to play a role in its prevalence.
Property and Casualty Insurance Companies, the Modern Government and the Economy
Property and liability insurance play an important role in our modern government and economy. According to the NCIGF (2007), without insurance, individuals and businesses would be unable to obtain loans or have financial security. Assets, such as homes, cars, businesses and savings would be at risk from loss due to such things as acts of nature, theft, lawsuits, and many other causes well beyond one’s control. Insuring against these losses and the financial security that insurance companies provide, is the glue that holds the modern economy together.
The government does require reassurance from insurance companies that extends well beyond their own reinsurance markets. This is known as the National Conference of Insurance Guaranty Funds. This National Conference of Insurance is made up of privately funded, non-profit systems that exist in each and every state, the District of Columbia, Puerto Rico and the Virgin Islands. This conference in particular, is focused on property and casualty lines of insurance. The laws of state governments require “that all licensed property and casualty insurance companies be members of and protected by the guaranty funds in every state where they are licensed to do business” (Schmelzer & Steckbeck, NCIGF, 2007). A state life, health and annuity insurance guaranty fund system also exists. It is known as the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA). It is independently operated from the property and casualty system.
The reassurance that the government requires, is that known as the guaranty fund. This fund is necessary in the event that an insurance company is unable to meet its obligation to pay insureds and their claims. In other words, if an insurance company does in fact become insolvent, the state guaranty fund, where the policy is established, will step in and promptly pay the policy benefits that are outlined in the policy.
As explained by the NCIGF, the origin and roots of the modern property and casualty guaranty fund system can be traced back to the Uniform Insurers Liquidation Act (UILA). In 1939, this act was advocated by legislation and by the insurance industry to address and manage problems associated with insolvencies that occurred during the Great Depression. The National Association of Insurance Commissioners broadened the concept in 1969 by supporting the Model Liquidation Act. This legislation provided an administrative arrangement and outline for performing insolvency proceedings, commonly known as liquidation or bankruptcy. That same year, the first state property and casualty guaranty fund associations were formed and established.
There are two types of insurance companies, admitted carriers and non-admitted carriers. Carriers that are “admitted”, are authorized to sell insurance in that state by the department of insurance (DOI) of that state’s government. This means that the companies are subject to the state’s rules, regulations, overviews, and most importantly, are those insurance companies that participate and contribute into a state’s guaranty/insolvency fund. In addition, admitted carriers are required to file their rates with each state’s DOI that they write insurance in. They are in turn charged a fee for the status of being admitted and these funds are deposited into the state’s guaranty/insolvency fund. The fee is percentage based and is calculated according to each admitted carriers’ total annual volume of written insurance premium. With an admitted carrier, you can submit a complaint to your state’s department of insurance and have them review it, and is required to remedy the problem. A non-admitted insurance carrier on the other hand, is NOT subject to your state’s regulations, and does not participate in that state’s guaranty/insolvency fund. Non-admitted companies are considered surplus lines carriers and require their insured to pay certain fees upfront in the down payment of their policies, such as surplus lines tax, state sales tax, and a stamping fee. These fees vary from state to state. And most non-admitted carriers opt to operate and participate with domiciles of states that are not as expensive and do not require as many extensive requirements. Being admitted in states such as California or New York is more expensive than within states such as Arizona or Kansas. Non-admitted carriers have more flexibility with underwriting procedures, policies and pricing. So there are types of risks that can be insured through a non-admitted company that cannot be insured through one that is an admitted company. However, non-admitted carriers can charge premiums at their own discretion. While admitted carriers are known to be on the conservative side when it comes to underwriting procedures and tend to be more affordable with coverages and pricing.
Each state’s department of insurance acts as judge for its state’s guaranty fund as well as for each and every insurance company that is admitted and authorized in their state. “As a state mandated regulatory agency, the department of insurance has authority over how the insurance industry conducts business in their state” (CA, Dept. of Insurance, 2004). There are eight purposes that are exercised and/or implemented on a daily basis by each state’s department of insurance that demonstrate their regulatory authority. These eight purposes are enforcement, consumer protection, licensing, criminal investigations, certificates of authority, conservation and liquidation, rate regulation and financial surveillance. In addition, many state departments of insurance are the largest consumer protection agencies in their state. This is in fact the case in our very own state of California. “The California Department of Insurance (CDI), has more than 1,200 positions, a $200 million dollar budget and regulates almost one-tenth of the California economy” (CA, Dept. of Insurance, 2004).
Just as with other industries, insurance companies are not fail proof and will crash or fail from time to time. Without some kind of system with procedures to pay the claims of failed insurance companies, consumers would not have any means of financial security and the modern economy would be worse off than its current situation. The National Conference of Insurance Guaranty Funds provides an essential safety net for policyholders and their assets. Additionally, these safety nets create means to bailout insolvent companies before the federal government even has to get involved.
Certain types of bills created and proposed by Congress, such as H.R. 164 and S.926, also known as the Policyholder Disaster Protection Act of 2007 aim to “amend the Internal Revenue Code of 1986 to provide for the creation of disaster protection funds by property and casualty insurance companies for the payment of policyholders’ claims arising from future catastrophic events” (US House of Representatives, 2010). Thus attempting to amend laws of federal code to obligate property and casualty insurance companies to make contributions to an additional fund system referenced above. Although these contributions would be tax deductible, they would also be mandatory. The underlining idea of this Act appears contradictory by the fact that contributions are defined as charity or donations. These contributions should be renamed as fees which is what they truly are. Furthermore, these two bills have been established according to the findings of Congress that the increases in costs resulting from natural disasters have placed strain on property and casualty insurance companies and their abilities to assure adequate payment of homeowners’ claims.
These proposed bills are very interesting due to the fact that majority of your typical property and casualty insurance companies that provide homeowners coverage are admitted carriers and already deposit large amounts of money into state insolvency funds. Doubling the amount of fees in states such as California where it is already expensive as it is to write insurance in will only provoke many property and casualty insurances companies to withdrawal from state mandated regulatory agencies and declare themselves as non-admitted. Fortunately, these types of bills have not yet become law.
Additionally, most catastrophic events, such as earthquakes, hurricanes and floods are excluded from homeowners and fire insurance policies. They require a unique policy that is dedicated to each catastrophic event individually. And for the record, majority of the programs available for these unique catastrophic events are provided through federal or state programs.
Dramatic economic developments, especially some of the recent economic events, have fueled and encouraged widespread interest in how insolvencies in industries are handled. The nationwide guaranty fund system of our country is something that few people know much about. Besides, the fund systems websites and information, there are few documented references available defining these fund systems, explaining how they work, who they serve, and the abilities of these systems in the event of a new wave of insolvency-relate claims. “For a quarter century, certain free market doctrines have prevailed: Free and unfettered markets are efficient; if they make mistakes, they quickly correct them. The best government is a small government, and regulation only impedes innovation” (Stiglitz, Freefall, 2010).
The blueprints of insurance companies and the guaranty funds that have been established and that are in effect, have demonstrated their importance as well as their worth. During the present and recent fall of the economy, there have been insolvent insurance companies, such as AIG that have successfully been bailed out and liquidated effectively without having to place an expense on consumers. Of course exploitation by the news media is inevitable. However, this serves as proof that conferences and organizations of guaranty funds have succeeded and continue to produce the adhesive that hold the modern economy together. Even if the adhesive is glue and not necessarily cement.
Author Unknown, California Department of Insurance (February, 2004), About Us: An Introduction To CDI Operations. Retrieved from http://insurance.ca.gov/0500-about-us/0100-cdi-introduction/
Congress, United States House of Representatives (2007), H.R. 164 & S.926: The Policyholder Disaster Protection Act of 2007. Retrieved from www.house.gov
Epping, Randy Charles (2009), The 21st Century Economy: A Beginner’s Guide. New York: Vintage Books, A Division of Random House, Inc.
Lowenstein, Roger (2004), The Great Bubble and Its Undoing Origins of the Crash. New York, NY: The Penguin Press
Schmelzer, Roger H., & Steckbeck, Mark D., Primer-4: Insolvencies… An Overview. Retrieved from http://www.ncigf.org. Capital Market Investment Backgrounder. Retrieved from http://www.ncigf.org. Public_gf brochure. Retrieved from http://www.ncigf.org. After 40 years, PC Guaranty Fund System Thrives. Retrieved from http://www.ncigf.org.
Stiglitz, Joseph E. (2010), Freefall: America, Free Markets, and the Sinking of the World Economy. New York, NY: W. W. Norton & Company, Inc.
Stiglitz, Joseph E. (2003), The Roaring Nineties. New York, NY: W. W. Norton & Company, Inc.