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Stretching the consumer safety net: Florida's guaranty funds fulfill the promise.

The manmade anti natural disasters of the past several years have brought new meaning to the catch phrase "safety net." The summer of 2006 gave us a significant education in Property and Casualty Guaranty Funds 101 with the insolvency of three related property and casualty insurers. Following the hurricane activity of 2004 and 2005, Florida homeowners naturally turned to their insurance carriers for help rebuilding their homes and their lives. Unfortunately, during dais time of intense activity one of the larger providers of those benefits became insolvent. With that, the Florida Insurance Guaranty Association suddenly became a major part of many residents' daily lives.

On the life and health side, the financial meltdown of last fall left consumers questioning the stability of companies once considered rock solid. Would annuities continue to pay out? Would policies be cancelled? What recourse was available?

With these heightened public concerns, agents now find themselves facing increased questions about insurer balance sheets, fiscal viability, and the protections offered by state guaranty funds.

The overall mission of guaranty funds is to preserve consumer confidence in the insurance system by providing a safety net for people least able to absorb a financial loss when their insurance company becomes insolvent.

The guaranty fund system was developed in the late 1960s in response to the number of insolvencies in the non-standard auto market. It was adopted by most states, including Florida, in the 1970s. It is a statebased system, which means that each state's system operates independently. However, as with most insurance regulatory systems, there is a uniform framework ar model law developed by the National Association of Insurance Commissioners, which is adopted by the individual state legislatures.

Oversight of Florida Funds

Florida's guaranty funds have several operational characteristics in common. They are individually established by law and operate as private not-for-profit organizations. There is a governing boar( of directors comprised mostly of industry representatives with knowledge and expertise in the given industry. To acid perspective, several funds also include a consumer or business representative on their governing boards. The Chief Financial Officer makes the final appointment of directors to the boards.

Each organization has statutory guidelines with detailed duties and responsibilities established in the plan of operation. These plans are reviewed and approved by the Florida Department of Financial Services. Each organization has defined methods for establishing the recommendation of board members to the Chief Financial Officer. The Department of Financial Services and the Office of Insurance Regulation jointly provide regulatory oversight for the organizations, with periodic operational audits and regular consultation on industry matters. Audited financial statements are filed annually by specified dates to both regulatory bodies. As all of the organizations include a funding mechanism based on assessments, this oversight is critical in maintaining the integrity of the process and appropriate stewardship of the funds. Guaranty funds draw from many sources for funding, including distributions from the insolvent company's estate, member company assessments, and investment income.

The receiver's mission is to gather the assets of the insolvent company and close the company, which is why the guaranty fund partnership is important for consumers. The insolvency process is similar to a bankruptcy proceeding for non-insurance companies. Both involve identifying all parties that have a claim, money, or services owed by the insolvent entity; collecting and evaluating the assets; and making an equitable distribution to the claimants. This process can take many years, and the average insurance consumer with a claim cannot wait five or 10 years to receive payment.

Funding shortfalls are bridged by levying assessments that are paid by member insurance companies and, depending on the organization, may be recouped from individual policyholders as a surcharge on premiums, offset as a tax credit, or included in rates.

Claims settled by the guaranty funds follow the original policy terms with some limitations on the amount of coverage. There are important deadlines for filing claims during the insolvency process, after which the claim will not be allowed for inclusion in the guaranty fund These dates are established by the court order placing a company into liquidation.

Florida has four major guaranty funds, two on the property and casualty side and two on the life and health side.


The Florida Workers' Compensation Insurance Guaranty Association (FWCIGA) is the newest Florida guaranty fund It was formed in 1997 in response to significant insolvency activity in that market. Previously, the workers' compensation line of business was a part of the Florida Insurance Guaranty Association, but due to the domestic, state-based nature of the Florida market and the fact that this was a challenged market at that time, legislation was passed to form a separate fund that specialized in workers' compensation.

The fund was created by merging the Florida Self-Insurance Fund Guaranty Association with the workers' compensation insurance account of the Florida Insurance Guaranty Association. This new fund catered to the injured worker, providing a level of continuity during the insurance company insolvency process while drawing from the Florida industry expertise in establishing the board of directors to oversee the organization. This was a model used by other large states and was a well-timed initiative for Florida.

The membership is comprised of all authorized property and casualty insurers writing workers' compensation, group self-insurance funds, commercial self-insurance funds, and assessable mutual insurers. While a number of self-insurance funds are included, there are several types that are excluded: qualified local government self-insurance funds, independent educational institution self-insurance funds, electric cooperative self-insurance funds, and individual self-insurers. Since the overall goal of the guaranty funds is to provide a safety net for consumers, entities with another safety net mechanism are generally not included in membership.

Assessments are capped for insurance companies at two percent of net written premium and 1.5 percent for self-insurance funds per calendar year. If regular assessments are insufficient, an additional 1.5 percent may be levied. Claims are validated by the receiver and reported to the guaranty fund for processing. This guaranty fund partners with third-party administrators that specialize in workers' compensation to provide claim adjusting services.


The other property and casualty guaranty fund is the Florida Insurance Guaranty Association (FIGA). This fund was established in 1970. It is divided into three administrative accounts: auto liability, auto physical damage, and all other. The all-other account is where most of the recent activity has occurred, as this encompasses the homeowners' line of business. All authorized insurers writing direct property and casualty business are members of FIGA. Regular assessments are capped at two percent of net direct written premium per year. In the event a homeowners' writer becomes insolvent following a hurricane, an additional emergency assessment of two percent may be levied to either pay the claims or to defense bond indebtedness.

A unique funding mechanism available to FIGA is the authority to issue tax-exempt bonds to pay hurricane claims. As a safety net, there are limits on the amount of coverage available to policy-holders. The general limit of coverage is 5300,000 per covered claim. For residential homeowners' claims, there is an additional $200,000, for a total of $500,000. Condominium associations are capped at the lesser of $100,000 multiplied by the number of units for an aggregate limit or the original policy limits. Historically, residential homeowners' claims rarely reach or exceed the limits of coverage.


There are two organizations that provide coverage on the life and health side. The Florida Life and Health Insurance Guaranty of Payments (FLAHIGA) covers authorized life and health insurers, and the Florida Health Maintenance Organization Consumer Assistance Plan (FLHMOCAP) covers health maintenance organization contracts. While the goal for property and casualty companies is to settle the claims of insolvent insurers, the goal of the life and health entities is to ensure continuity of coverage by moving in-force policies and subscribers to another carrier. Life and health insurance policies and certain annuity products are covered by FLAHIGA. In addition to providing services when an insurer becomes insolvent, FLAHIGA may step in when a life and health insurer becomes impaired.

FLAHIGA is divided into three operating accounts: health insurance, life insurance, and annuity. There are two types of assessments. Bass A assessments cover administrative costs and cannot exceed 5250 per year per member insurer. Bass B assessments are capped at one percent of premiums written for the past three years, divided by three. The limits of coverage are 5300,000 for all benefits on one life and 5100,000 for cash value. FLAHIGA assessments may be offset against Florida premium or corporate income taxes.

In 1988, the FLHMOCAP was established as the safety net for HMO subscribers to allow for temporary coverage and to facilitate the transfer of coverage to a new carrier when an HMO becomes insolvent. Temporary coverage ceases when payment of $300,000 of covered benefits is reached or six months after the insolvency. Each HMO that becomes licensed pays an initial assessment of $25,000 and may be assessed up to 0.5 percent of annual earned premium revenue per year. Assessment costs may be estimated and reflected in the rates charged to subscribers.

Advising the Consumer

Each of the laws establishing the Florida guaranty funds contain an advertising prohibition clause that states that the existence of the guaranty fund may not be used as an enticement to purchase or to discourage the purchase of a particular product. This has become a major concern for agents in recent months.

When purchasing coverage today, most consumers have some understanding of the guaranty fund system and are seeking information and explanations from their agents. It is appropriate for agents to provide information and education about the various funds, but they cannot use the organizations' existence as an advertising tool Agents who are familiar with the various coverage limitations, deadlines, and fees can respond appropriately to client questions and provide critical consumer education.

Michelle Newell Lovern is president and CEO of Innovative Edge Consulting, Inc., an insurance regulatory and consulting from based in Tallahassee. She may be contacted at 850-421-3343 or
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Title Annotation:FEATURE STORY
Author:Lovern, Michelle Newell
Publication:Florida Underwriter
Date:Oct 1, 2009
Previous Article:Q&A with Bill Gunter.
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