OFF THE RADAR:
THE TROUBLED PMV GUARANTY FUND

New Year Brings New Opportunity to Address Chronic Underfunding

By ERIKA ROSENFELD

We’ve all seen the movie. It might have been a World War II film, or a disaster picture, or even a sci-fi flick. The scanner sweeps clockwise around the glowing green radar screen, as airtraffic controllers intently track tiny blips of light. A new blip appears, large and traveling fast right on collision course with several other blips. Alarms go off, controllers scramble to bark out instructions. But there’s a hurricane in Florida, and a blizzard in Denver, and JFK is fogged in. And while the controllers are rerouting various flights, the new blip fades from notice.

“Where’d it go? Oh well – I guess it wasn’t that important.”

That particular blip is New York State’s Public Motor Vehicle Guaranty Fund (the PMV), which – everyone agrees – has been “chronically underfunded for years,” to quote the New York State Insurance Department. The fund and its woes never went away; they just kept falling off the edge of the legislative radar, year after year. The blip labeled “The PMV Fund is About to Crash” tends to reappear every January, but loses its ability to alarm soon thereafter.

Now we come to January 2007, and, as Yogi Berra famously said, “It’s déjàvu all over again.”


Background

In New York, the three state guaranty funds (P/C, workers’ compensation, and PMV) exist as separate entities, collecting assessments only from those insurers who write the particular line to which that fund is dedicated. And therein lies at least one problem besetting the PMV Fund.

The law defines “public motor vehicle” as any vehicle for hire, excluding those owned and operated by municipalities. Thus insurers of taxis, limousines, black cars, vans, and the like are required to pay into the fund. And at present there are only some 16 carriers, according to the Insurance Department website, “with approved livery [insurance] programs.”

“The universe of companies that write public vehicles is small,” said Ellen D. Kiehl, PIANY assistant executive director for
government and industry, “and it’s even smaller [today] than it was historically.”

And so, as Insurance Advocate reported in the third of a series of articles from the fall of 2005, “For the last several years, the PMV Fund has been unable to defend or pay for claims that it has assumed from insolvent companies.”

Indeed, according to Tim Dodge, director of research and external communications for IIABNY, the Insurance Department’s balance sheet shows that, as of April 31, 2005, the fund had just $375,229.76, a loss of about $2.3 million from March 1, 2004.


Political Punch

If everyone knows the PMV fund is in deep trouble, and if everyone agrees it has been this way for some time, why hasn’t it been resolved?

Asked why there seems to be less concern about the PMV fund, in comparison to the other two guaranty funds, State Senator James L. Seward (R-Oneonta), who chairs the Senate Insurance Committee, compared it with the workers’ compensation fund, saying, “There seems to be something more politically sensitive about an injured worker going without benefits. Those who have claims that should be paid by the PMV fund are also victims, but the injured worker angle seems to politically cry out for an immediate answer.”

Indeed, the near collapse of the workers’ compensation fund in 2005 did set off alarms, leading to an emergency bill permitting borrowing from the estates of liquidated carriers.

That bill also included two other provisions that address the evident shortcomings of guaranty funds in general. It required that the superintendent of insurance report to the Legislature on actual and anticipated receipts and disbursements of all three funds – a reaction, according to Kiehl, to a hearing earlier in the year that highlighted how little information is publicly available on the funds. And it mandated that the department retain an independent auditor to evaluate the funds, report on their condition, and make recommendations for reform.


Observations and Reforms

The department issued a report covering all three funds on May 1 called “On Reforms to New York’s Security Funds” – based on and, presumably, summarizing the report by the independent auditor, RSM McGladrey (RSM) (For clarity’s sake, the former will be referred to as the May 1 report, to distinguish it from the RSM report).

In describing the problems besetting the PMV fund in particular, as well as those it shares with the workers’ compensation fund, the RSM report notes three significant shortcomings:

  • The PMV fund, like workers’ compensation, has a statutory pre-assessment rate that appears “inadequate based on lack of linkage to expected payments,” and the “matching of assessments to current cash flows and/or future liquidations is critical”;

  • While the P/C fund can be replenished with increased
    assessments on a year-to-year basis, the other two funds lack that flexibility;

  • With respect to the PMV fund specifically, “[N]o state guaranty fund in the nation has an assessment base as narrowly refined as this fund.”

  • These observations and conclusions led RSM to the following recommendations:

  • Administrative reforms, including systems enhancements to address concerns about data transmission and integrity, procedural changes to ensure more accurate third party administrator reporting, and maintaining separate books and records for each fund. The department said that these reforms are either in place or underway;

  • The establishment of a more flexible assessment rate, combined with special temporary increases in assessments when necessary. According to the May 1 report, however, the department does not support that measure, out of concern that “levying additional increases on PMV insurers could lead to more insolvencies, and, thus, put more pressure on the fund”;

  • Make borrowing ability more flexible to enable funds to borrow from one another rather than from liquidation estates;

  • Reform the security fund process “for long-term stability.”


Primary among this last recommendation is lowering New York State’s per-claim cap for both the PMV and the P/C funds from the current level of $1 million to either $500,000 or $300,000.

The department’s May 1 report notes that most states have a $300,000 cap; only two cap claims at $500,000.

RSM’s analysis of PMV claims from 1998 through 2004 shows that the lower cap could have reduced those claims by 14 percent, factoring in inflation. RSM also observes that the impact on claimants of a lower cap would be minimal: during that time, only 10 of approximately 600 PMV fund claims exceeded $300,000.

Finally, but significantly from the point of view of the insurance industry, the RSM report proposes that “consideration should be given to creating a role for the insurance industry in the administration of the security funds,” possibly by having the industry actually administer the funds “subject to appropriate oversight by the department….”


Whodunnit?

Our movie turns out to be neither shoot-’em-up nor sci-fi. Whether or not it’s a mystery depends on the viewer.

Alan Plafker, a PIANY director, whose agency, Member Brokerage Services LLC, deals primarily with medallion cabs, black cars, and other local car services, said the real questions remain, “How did [the PMV fund] become insolvent? Why did it stay that way?” His concerns relate essentially to what he and others perceive as a lack of transparency. “I don’t know of anybody who has gotten the financial information as to how [the fund’s problems] occurred,” he said. “I have no confirmation that companies are paying what they’re supposed to pay. If they were…, and if the fund [was] performing correctly, it doesn’t make sense that [it] should be in this position.”

After all, he added, “I don’t think there’s been [an insolvency] for six or seven years, so [the department has] had all these years to collect [assessments] and [for the fund to] become more solvent.” But, he said, “It’s possible that everything has been perfect for 20 years. These are just speculations that I would love somebody to answer.”

Some of his questions appear to have straightforward answers. Andrew Mais, associate public information specialist for the department, explained that the legal requirement that companies file quarterly reports includes the mandate that the payment of the assessment be enclosed with the filing. The due date for payment is 45 days from the end of the previous quarter, and late fees and penalties are imposed. Though Mais was unable to identify the rate of compliance, he pointed out that with so few companies involved, tracking compliance is a relatively simple matter.


Solutions

Certainly, the PMV fund could use louder voices to draw attention to its problems. “The question that’s always been a mystery to me,” Kiehl said, “is why there isn’t more outcry from attorneys and passengers?”

Plafker has tried to involve New York City’s Taxi and Limousine Commission, which has oversight over most of his customers. “We need to try in a positive way to get TLC support,” he said, “assuming that would help.”

The department, meanwhile, has long supported merging the PMV and P/C funds, which would greatly expand the number of assessed companies for PMV claims. This idea was proposed by the department in 2001 and 2004. The 2005 Insurance Advocate article notes that, in 2004, Assembly Insurance Committee Chairman Alexander “Pete” Grannis (D-New York) took up the proposal, introducing legislation to merge the funds, but the insolvency of the workers’ compensation fund pushed the issue off the radar once more.

Others have been more hesitant in suggesting legislative solutions. Kiehl, for instance, said that, with respect to merging the P/C and PMV funds, “PIANY can see arguments pro and con. We take the position that the situation needs to be fixed, but not on the specifics of how. We just think it’s untenable as it stands.”


The PMV Blip Looms Larger

It’s January again, and Plafker, for one, is worried. Never mind the past, he said, “What about the policies I’m selling to my clients today?” Imagine, he suggested, an individual who buys a taxicab, purchases a medallion – at a cost today of over $400,000 – and buys insurance, through a licensed broker or agent, from an insurance company licensed to do business in New York State.

“If that company becomes insolvent, the state does nothing to protect him,” Plafker said. “I’m worried about two or three years from now, when a claim comes in; I’m worried about the policies I sold last year.”

March 1 is the renewal date for most PMV policies, especially in New York City: “Every March 1, I’m selling a policy,” he concluded, “not knowing if the state will protect the policyholder as it does everyone else.”

Seward acknowledged that, for the general public and most legislators, the PMV fund “is not a front-burner issue,” but said that “it is one of those lingering problems I hope we can get resolved this year.” On the other hand, he has not yet come to a decision concerning the May 1 report’s recommendations. “I haven’t embraced yet the merger option,” he explained, “because I want to be sure that we do not drag down the P/C fund in an effort to salvage PMV. I have to make sure that whatever action is taken results in healthy, solvent funds.”

Without casting doubt on Seward’s sincerity, it should be noted that he told Insurance Advocate in 2005 that he expected the PMV fund to be an issue in the 2006 session. Still, he said now that “we have to figure out a way to cover these claims.” The current backlog of claims is some $5.3 million; the delay in payments is estimated at about one year. “There are victims there,” Seward said. “It is on our radar.”

One can only hope for something more than another short-term fix. “We need fundamental change,” Mais said. “And that can only happen through the Legislature.”

This article originally appeared in the January 15th, 2007 Edition of INSURANCE ADVOCATE. This article has been reprinted with the permission of Insurance Advocate, and may not be used, altered, or reprinted without permission.

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