September 16, 2005

A.G.'s suit marks "failure of insurance-regulatory scheme" : Mayerson

Mark Mayerson at Insurance Scrawl says what he really thinks about the Mississippi Attorney General's expropriation lawsuit. "[W]hat the state's argument highlights is the failure of its insurance-regulatory scheme. Mississippi should not have permitted insurance policies to be issued in the state with flood exclusions if such exclusions are so violative of public policy. Besides arguing on the merits that the exclusions are proper, insurers will argue that voiding them constitutes a taking of property (meaning that the taxpayers will then fund the losses)." Insurance Scrawl: Tragedy and Failure

Mayerson goes on to argue that the attempted expropriation of insurer capital will not fall onto overseas reinsurers, as plaintiffs bar attorneys have implied, because any ex gratia payments and expropriation losses are outside of the scope of reinsurance coverage.

If Mayerson is correct, many smaller, regional and local insurance companies focused on Mississippi are likely to fail if the Attorney General's suit succeeds. In which case, the claims liability may fall to the Mississippi Insurance Guaranty Association. The National Conference of Insurance Guaranty Funds (NCIGF) offers text and summary of that state's guaranty fund laws at Guaranty Fund State Laws & Summaries.

In 1992, following Hurricane Andrew, the resulting failure of ten insurers due to wind claims exhausted the cash reserves and near-term assessment capacity of the the Florida Insurance Guaranty Associaton (FIGA). $400 to $500 million was required to pay the insolvents' claims. The statutory maximum assessment would raise only $65 million per year.

To provide the necessary cash flow to pay the wind claims against insolvent insurers, special 1992 legislation authorized the ground-zero city of Homestead to issue municipal revenue bonds, loan the resulting $500 million to FIGA at interest, and then collect principal and interest from FIGA for years thereafter. FIGA was allowed an extra assessment against surviving insurer's premiums and had enough funds by 2000 to pay off the Homestead bonds. Senate Staff Analysis and Economic Impact Statement on Florida Bill CS/SB 2184, regarding changes to the law of insurance company insolvencies and obligations of the Florida Insurance Guaranty Association, April 22, 2005, page 4 (PDF)

If the A.G.'s suit succeeds, how many insurers will be thrown into insolvency? How long will the Mississippi Insurance Guaranty Association be in the red and loading the cost into the few remaining voluntary premium dollars? The Department of Insurance's website has some information about the MIGA suggesting that claims the size of the Katrina expropriation bill will be beyond extraordinary: "Founded in 1970, the Mississippi Insurance Guaranty Association has handled 75 insolvencies, paying out nearly $52 million in benefits to policyholders." Mississippi Department of Insurance: Who Insures the Insurance Company

How many of the surviving insurers will be willing to continue writing in Mississippi, knowing that they must provide flood insurance for free, if the "Robin Hood Attorney General" succeeds?

Posted by dougsimpson at September 16, 2005 07:55 PM