Q: Guaranty Fund - Who Pays?
Ultimately the public pays for everything.
-- Eden Safarty (President / NOLHGA - National Organization of Life and Health Insurance Guaranty Associations):
1991 0227, 0507, 0509, 0523 - GOV (Senate) - Insurance Company Solvency, aka Insurance Company Insolvencies - [PDF-369p-GooglePlay] ->Not on govinfo.gov - 0509-VIDEO-CSPAN]
- (p186) - Senator Howard Metzenbaum (D-OH).
- Professor Nelson, I understand that your testimony is based on two papers which you and your colleague, Prof. James Barrese, have written.
- I am impressed by your research which shows that taxpayers have to pay 86 percent of guaranty fund costs.
- Federal taxpayers pay 7 percent and State taxpayers pay 79 percent. Insurance companies, their policyholders and stockholders pay only 14 percent.
- Now, as I understand it, you believe it is appropriate for taxpayers to cover the cost of insurance company failures. You cite several reasons.
- First, you say that it is fair to pass the cost to taxpayers because the public benefits from having policyholders pay.
- Second, you say it is inappropriate to ask the policyholders of solvent companies to pay because they chose a company that hasn't failed.
- Third, you say passing the cost to taxpayers rather than to insurance companies encourages more effective insurance regulation.
- I think you know I disagree with you on each point.
- Professor Nelson, I understand that your testimony is based on two papers which you and your colleague, Prof. James Barrese, have written.
- Jack M. Nelson (The College of Insurance, New York, NY): Yes, sir.
[Both Dates PDF-629p-GooglePlay, 0428-No Video / 0505-VIDEO-CSPAN- Insurance Policy Transfers]-
- (p1-2) - Senator Bryan (D-NV) - Unlike thrifts and commercial banks there are no Federal depository insurance funds to protect policyholders and claimants in the event an insurer fails.
- Most States, however - nearly all — have established special guaranty funds to provide coverage to policyholders of failed companies.
- The funds are collected from assessments of all companies doing business in the respective States.
- Reports show that as a result of the substantial increase in company insolvency, guaranty fund assessments increased from $82 million in 1984 to close to $1 billion in 1988.
- This burden is not borne by insurance companies alone, because in most States such assessments are recouped by companies either through direct surcharges on policyholders or tax credits and deductions, ultimately leaving much of the bill to be paid by policyholders and taxpayers.
1991 0227, 0507, 0509, 0523 - GOV (Senate) - Insurance Company Solvency, aka Insurance Company Insolvencies - [PDF-369p-GooglePlay] - 0509-VIDEO-CSPAN]
- Senator Bryan (D-NV): How are the costs passed on?
- You talked about the enormous costs that are involved, and very clearly there are substantial costs when you have a big failure like this.
- How are those passed on?
- Eden Safarty (President / NOLHGA - National Organization of Life and Health Insurance Guaranty Associations): Well, it does depend on a number of things.
- It depends on the line of insurance, the type of policy.
- It depends on whether there is a tax offset provision in the statute for that particular State, and what the characteristics of that statute are, et cetera.
- In other words, some of the cost is in effect reflected in increased premiums.
- There are obviously many types of contracts, like life insurance contracts where you cannot raise the premium, the premium is fixed.
- So that would then be passed on to new policyholders in higher premiums, offset against the tax over an extended period, along the lines of the deductibility of a bank's FDIC premium.
- That same general idea, if that is available in that State.
- Lower interest rates on interest-sensitive products is another way it gets passed on.
- Lower dividends.
- So, naturally it spreads through the entire system.
- There is simply no free money.
- Senator BRYAN. So, ultimately the public does—
- Eden Safarty: Ultimately the public pays for everything.
- Senator BRYAN [ continuing]. Either in the form of lower dividends , lower interest rates, perhaps higher premium, depending upon the product.
- Eden Safarty: That is correct. That is absolutely right.
- Senator Bryan. And ultimately the general fund of those States that permit offsets would have an affect.
- Eden Safarty: That is absolutely right
1991 0227, 0507, 0509, 0523 - GOV (Senate) - Insurance Company Solvency, aka Insurance Company Insolvencies - [PDF-369p-GooglePlay] - 0509-VIDEO-CSPAN]