Critical Issue Report

Guaranty fund raided for non-insurance use

Industry condemns "back-door tax" as New York legislators pursue deep pockets of insurers

By Phil Zinkewicz

Not too long ago, perhaps a decade or so, the New York Legislature’s politicos were in a borrowing mood. (When are they not?) The general coffers needed refilling, so they decided to address New York State’s insurance guaranty fund.

Now, it should be remembered that virtually every state has some sort of guaranty fund for the purpose of coming to the rescue of policyholders should an insurance company bite the dust. New York’s guaranty is different from every other state fund in that it is a pre-assessed fund. All other funds are post-assessed.

In other words, while other states wait until an insurance company goes insolvent to assess insurers in the state, New York assesses its member insurers before an insurer goes under. Just think of it—all that money lying around.

Well, the politicos couldn’t resist the temptation. They withdrew the guaranty fund’s funds to add to the general coffers and replaced them with an IOU. If an insurer in the state did go insolvent, they would ask the legislature to vote back the “borrowed” monies or, if that wasn’t possible, then they would just re-assess the insurers to replenish the fund. In short, the insurers would have to pay twice. Eventually, the politicos’ actions were made public and they were forced to vote back the money. Whether they actually did so, well, who knows?

Governor David A. Paterson’s recently announced bludgeoning budget contains a proposal requiring New York-based insurers to more than double their funding of “non-insurance-related state government services.” That would come to a tax increase of approximately $140 million on New York domestic insurers of autos, homes and businesses.

The New York Insurance Association (NYIA) called the proposed increase in assessments on New York state-based property/casualty insurers to fund service unrelated to the operations of the state insurance department a “back-door tax” on insurers and their policyholders.

“Everyone is talking about the importance of transparency and accountability in government and yet New York State wants to implement this back-door tax on insurers at a time when insurers, like all businesses in the state, are struggling with the economic downturn,” said Ellen Melchionni, president of NYIA, the state trade association that has represented the property/casualty insurance industry in New York for more than 125 years.

Currently, domestic insurers contribute more than $340 million in assessments to fund the expenses of the insurance department. That total already includes $111 million in so-called suballocations. The proposal would increase the amount to fund non-insurance department programs by $140 million for a total of $251 million in suballocations. More than one-half of the insurance department’s proposed budget will be used to fund programs that are not directly related to insurance.

The $140 million would be raised by having the insurance department increase substantially its assessment of New York-based insurers for the purpose of collecting monies that are currently funded through New York State’s general fund/Health Care Reform ACT (HCRA) budget line.

While not disputing the merit of the programs funded under the HCRA budget line, she stressed that funding should come from general revenues following open debate and approval by the state legislature, and not through suballocations hidden from the public’s view by burying it deep within the budget of a state agency.

“The funding of programs that are supposed to benefit all New Yorkers should be funded by all New Yorkers and not be hidden away in the budget of a state agency which has no direct responsibility for managing them, nor funded entirely by a single industry which does not wholly benefit from them,” Melchionni said.

“Raising taxes on any business in the middle of a deep recession is always a bad idea, but using a hidden tax, such as these suballocations, takes a bad idea and makes it even worse,” she said. Even New York State seems to recognize the impropriety of these suballocations, because language has been included in the proposed budget giving the state immunity from potential litigation, she added.

Most recent data shows that the insurance industry employs 149,000 New Yorkers and pays $16.4 billion in salaries and wages. In addition, property/casualty insurers have invested more that $22 billion in New York municipal bonds.

Melchionni noted that NYIA has for years been concerned about the insurance department’s use of suballocations, which has allowed it to collect and re-route insurance assessment money to other state agencies, such as the banking, health and state departments, as well as the attorney general’s office.

“This practice may be in violation of state law and must stop unless the insurance department’s suballocations can be definitively proven to be legitimate insurance department expenses,” said Melchionni.

When asked what the suballoca-tions meant, Melchionni replied that it means “deep pockets.” Actually, it’s a made-up word that means we will assess you for insurance-related expenses, but some of that money will go for non-insurance-related expenses. Why? Because.

“The legislature either doesn’t realize or doesn’t care that this kind of back-door tax hurts insurers and policyholders as well,” said Melchionni. “This kind of situation is occurring in other states around the country.”