NAIC Accounting Group Tentatively Adopts Interpretation for Treatment of Fla. Hurricane Fund Assessments

A proposal accepted unanimously by the NAIC’s Emerging Accounting Issues Working Group during its meeting recently in Atlanta reportedly modifies existing statutory accounting to preclude accumulation in insurers’ financial statements of assessments amounts that would cause large numbers of insurers to appear insolvent.

“This proposal is relevant for insurers writing virtually all property-casualty lines, except workers’ compensation, in the Florida market,” William Boyd, NAMIC’s financial regulation manager, remarked. “If a major hurricane hits a developed area in Florida, there is potential for
triggering the Florida Hurricane Catastrophe Fund (FHCF) and consequent large assessments over decades to insurers in the Florida market.

“Existing accounting guidance would have caused all future assessments of the Fund to appear now as liabilities on subject insurers’ balance sheets,” he added. “If you have an assessment of, for example, 4 per cent of an insurer’s premium applied over 30 years, that results in a liability of crippling magnitude for most insurers.”

The NAMIC proposal, which was joined in by the Florida Insurance Department, the FHCF, and the NAII, reduces the liability to three years’ accumulation of assessments and buffers that liability with an asset available for insurers that impose the surcharge legally available to them to recover FHCF assessments.

The FHCF acts as a reinsurer for insurers of residential property in Florida. When triggered, it can issue debt that is used to pay claims of residential policyholders. FHCF assessments are used for service and retirement of that debt. Actuarial data show that the FHCF will be triggered. The legislation that created the FHCF notes that the Fund is necessary for maintaining an insurance market in Florida, a populous market with huge development in hurricane-prone coastal areas.

“The existing accounting for this kind of assessment did not distinguish between those for guaranty funds and this species of catastrophe fund,” Boyd added. “This measure achieves interpretation of Statement of Statutory Accounting Principles No. 35, which, when it was created, contemplated only the operations of insurance guaranty funds. We targeted our efforts toward remedying that lack of guidance.”

Jack Nicholson, chief executive of the FHCF, testified with Boyd, noting the distortion to subject insurers’ financial statements that would occur without the interpretation. The Florida Department of Insurance (now the Office of Insurance Regulation of the Florida Department of Financial Services) had earlier tried for an interpretation to prevent the liability problem, but the measure was tabled by the NAIC.

Florida withdrew its languishing proposal and joined the NAMIC proposal for change.

Final decision on the NAMIC proposal will be made in June.