U.S. Leads Insurance Policyholder Protection Around the World

(Originally published in the Spring 2019 issue of The Insurance Receiver and is reprinted with the permission of IAIR)

On January 1, I began a one-year term as Chairman of the International Forum of Insurance Guarantee Schemes (IFIGS). My colleague at NOLHGA, Peter Gallanis has been involved since the earliest days of IFIGS and I joined him a few years ago.

The objectives of the Forum are to facilitate and to promote international cooperation between Insurance Guarantee Schemes and other stakeholders in the development of policyholders’ protection. From time to time it may communicate views, ideas and experiences to interested parties. IFIGS is a voluntary not for profit membership network. It is independent of any government authority.  Currently there are twenty-five members and the membership is growing.

I took on this responsibility because of my very strong sentiment that the insurance industry is absolutely essential to the world economy.  The insurance promise makes opportunity a possibility. Our support of it keeps the industry strong and gives comfort and peace of mind to policyholders. Guaranty mechanisms ready to protect insurance consumers undergird the sanctity of the insurance promise by assuring the viability, commitment and reputation of the insurance industry.

IFIGS is well-positioned to be the global definitive expert on supporting the insurance promise. All protections do not have to be structured the same way, but the important role of policyholder protection mechanisms must be articulated clearly and effectively to regulators as they work as overseers of the global insurance industry.

To build the value of the organization, IFIGS members have set three long-term strategic objectives:

  • Information Sharing. IFIGS will collect information and be the global expert regarding insurance guarantee schemes and will be an active resource for IFIGS members, supervisors and standard-setters.
  • Member Outreach. IFIGS will develop a plan for actively recruiting new members and encouraging more active participation and leadership by existing members.
  • Reputation Enhancement. IFIGS will work to heighten its profile with supervisors and standard setters, including those that may be involved in developing new insurance guarantee schemes.

Examples of IFIGS effectiveness are not hard to find:

1. The consultation paper published by the IAIS in mid-November, 2018 concerned a proposed holistic framework for the assessment and mitigation of systemic risk in the insurance sector. The initial IAIS consultation included the following statement:

“In addition to the direct economic effects of an insurer’s failure to pay claims on consumption, by a reduction of policyholders’ wealth, a number of correlated failures could have additional knock-on effects, such as through some insurance guarantee schemes.”

IFIGS, in partnership with NOLHGA and NCIGF, commented on the consultation paper and strongly objected to that statement. The offending comment was removed from the revised paper.

It would have been nothing short of a disaster for global regulators to continue their consideration of approaches to insurer oversight if they believed that policyholder protection schemes could spread contagion! It could take decades to change that thinking and no one country could do that alone. But by working together, IFIGS and its members played a strong advisory role that regulators took seriously. That is the value of being collaborative and building on that strategy.

2. A July 2017 paper published by EIOPA (European Insurance and Occupational Pensions Authority) stated that a minimum degree of harmonization of policyholder protection schemes in the European Union would benefit policyholders, the insurance market and the financial stability of the EU. IFIGS was invited to present on the role that insurance guarantee schemes can play in resolution during an EIOPA recovery and resolution seminar.

Thanks to our active participation in IFIGS, the U.S. made a joint presentation (with Greece) to an audience of European regulators and companies, and our presentation drew more interest from the audience than any other presentation over the day and half seminar. From this experience it was confirmed what we had already learned; that European regulators are very curious about our state-based system of policyholder protection. As EIOPA continues to deliberate on harmonization, the background we provided should prove useful.

3. Finally, on another occasion, Peter Gallanis and I, joined by a colleague from Canada, were asked to represent IFIGS before a working group of international regulators (including James Kennedy from the Texas DOI and Alex Hart from the Federal Insurance Office) who were drilling down on the relationship between regulators and policyholder protection mechanisms. My understanding is that we were helpful in providing background on ways to collaborate to provide a more effective safety net to consumers.

 

A primary goal is to spread the value of our engagement with IFIGS to IAIR and the NAIC. And to take that back to the IFIGS membership and international regulators. Our resolution mechanism—composed of receivers and guaranty funds– is by far the most experienced and effective system in the world. The broader the expertise we can bring to the table, the more impactful we can be on behalf of the individual policyholders and claimants we serve.

For more on particulars of other mechanisms around the world, a good, but not definitive, resource is a discussion paper published by EIOPA. https://eiopa.europa.eu/Publications/Consultations/EIOPA-CP-18-003_Discussion_paper_on_resolution_funding%20and.pdf)

I am happy to discuss this organization and the value of the United States’ participation.  Please feel free to contact me.

Further information may also be obtained from the IFIGS website at www.ifigs.org.

NCIGF Reps Meet with Members of Congress

Recently, a number of NCIGF members, board members and staff took Capitol Hill by storm to do some updating on the state guaranty fund system. Meetings like these are critical, especially after an election year that saw a shift in power in the House of Representatives and the election of 100 new members of Congress, many of whom are without a background in financial services. Here are a few quick takes from the day:

  • 16 total meetings; 15 of which were with members of the Senate Banking and House Financial Services Committees.
  • Cross-section of senior members and freshman members, including:
    • Senate Banking Committee Chairman, Mike Crapo
    • Housing, Community Development, and Insurance Subcommittee Chairman, Lacy Clay
    • Housing, Community Development, and Insurance Ranking Member, Sean Duffy
    • 4 House Financial Services Committee freshmen
  • Overarching theme in the meetings was support for the state system.
  • Members and staff expressed appreciation for NCIGF’s engagement.

Many thanks to those who participated, along with John Blatt, Amy Clark and me (from NCIGF staff): Chad Anderson (WGFS), Charlie Breitstadt (Nationwide), Allan Patek (WI), Barbara Law (GFMS), Barry Miller (DE), Brad Roeber (CA) and Frank Knighton (GA). I feel confident we are off to a good start with this Congress. We’ve invested large amounts of resources, especially since the financial crisis, to assure federal lawmakers that the state-based safety net is prepared to protect consumers. Now is not the time to let up.

Protect the Integrity Of State Guaranty Funds

From the National Underwriter, Final Say
By Roger H. Schmelzer

Property and casualty insurers and the mechanisms that support their consumers face quite a storm these days, and it’s not coming from the usual places. This one originates on Capitol Hill and from state capitals, with the prospect of fundamentally transforming every aspect of p-c insurance – including the state guaranty fund system.

Since the multiple hurricanes that ripped through Florida in 2004 and the 2005 Gulf Coast catastrophe, insurance has taken its shots from all quarters. As a result, a philosophical struggle seems to have developed that threatens to redirect the p-c industry away from its risk-sharing principles until it resembles something more like a mechanism for transferring income.

Even guaranty funds are not immune to these pressures, finding themselves on the defensive over nonlegislative attempts to stretch the legal definition of covered claims to mitigate the tragedy of company failure.

While representing different ends of the regulatory spectrum, these sorts of disputes invite potentially significant downsides to the very consumers policymakers are pledged to protect.

It’s easy to forget, but p-c insurance is based on a delicate public policy balance – one that allows property risk to be shared among millions of consumers under the supervision of state governments. A key to that balance is the state guaranty fund system, which has seamlessly paid out over $21 billion in statutorily covered claims to thousands of affected consumers since 1968.

Guaranty funds are the last line of defense for consumers. Critical to the array of protections is the solvency monitoring responsibilities of insurance regulators, who are intended to spot problems early on.

Underwriting restrictions, rate adequacy, loss mitigation and land-use regulations are also public-sector responses that affect an insurer’s ability to meet contractual obligations to its customers.

What has to be carefully watched for, however, are unintended consequences that may result from intervention into – rather than oversight of – the everyday business of insurance. Such acts could tip the balance intended to produce affordability, availability and dependability for consumers.

Consider the shot across the bow from U.S. Senator Trent Lott, R-Miss., and U.S. Rep. Gene Taylor, D-Miss., who propose to eliminate the insurance industry’s limited antitrust exemption under the McCarran-Ferguson Act – the decades-old foundation on which states have based their insurance regulatory structures. Sen. Lott is joined by Senators Patrick Leahy, D-Vt., and Arlen Specter, R-Pa., the chairman and ranking minority member of the Senate Judiciary Committee, respectively.

Assemblage of this formidable team of advocates suggests a serious attempt to at least get someone’s attention, if not to actually get something done.

State officials are also acting. Florida has enacted a variety of measures, including an “anti-cherry-picking” provision requiring carriers that write auto insurance in Florida – but homeowners elsewhere – to also write homeowners policies in Florida. (The attorney general of Mississippi later suggested the same idea for his state.)

In addition, Florida called for a rate rollback to reflect potential savings to a carrier created by cheaper reinsurance made available through the state’s subsidized hurricane fund. This latter initiative is characterized by The Wall Street Journal as “largely abandoning the insurance market in favor of a guarantee that, whatever happens, Florida taxpayers will cover the tab.”

With hundreds of millions of dollars at stake in a major company failure, guaranty funds are smack in the middle of the “risk-sharing versus income-transfer” conflict. If insureds can depend upon an ad hoc widening of the scope of guaranty fund coverages during administration of an insolvency, a purchaser’s motivation to buy coverage from the most financially sound companies will be reduced, thereby increasing the pool of potential guaranty fund payees.

Property and casualty guaranty funds are creatures of state law. They exist specifically to pay covered claims promptly.

However, the face of insolvency is changing. Reflective of this change is that state guaranty association policyholder claims and adjustment expenses stood at just half-a-billion dollars in 1997 but totaled $7.9 billion between 2001 and 2005.

This wave of insolvencies was so powerful because it didn’t come from the average personal- or small-business insurance consumer – for whom the system was designed to protect – but from carriers that wrote primarily commercial policies for sophisticated insureds, resulting in claims that were (and are) long-tailed, unpredictable and geographically broad.

But who actually pays these costs? Ideally, guaranty fund claims would be paid by distributions from remaining assets of the insolvent insurer company. Unfortunately, those assets are seldom sufficient, leaving a substantial amount of the cost to be footed by guaranty association assessments to insurers writing licensed business in the state where the fund operates.

Solvent carriers are then permitted to “recoup” these costs by various statutory mechanisms. This means that the more money guaranty funds pay out above their statutory obligation, the higher the burden on taxpayers and the insurance-buying public. This is why following statutory coverages matter.

As policymakers and the insurance industry engage on fundamental marketplace issues, a top priority should be assuring the integrity of the state-based p-c guaranty fund system. Legitimate public policy concerns ought to be addressed.

The National Conference of Insurance Guaranty Funds board of directors has outlined a series of policy recommendations that speak to the original mission of the guaranty fund system – including a net-worth ceiling, treatment of large deductibles and a reasonable cut-off period for claims against a guaranty fund.

To establish predictability for insureds, policyholders and claimants, it is imperative these and any other questions be resolved in the state legislatures responsible for public policies that allow the industry to compete in their states.

The era of mega-catastrophes and terrorism risk – not to mention political interest in the regulation of insurance markets – threatens to disturb the important policy balance that makes insurance work. It is critical to American consumers that it be preserved.