May 26, 2017

State budget proposal may raid Surplus Lines Insurance Guaranty Fund

Gov. Chris Christie released his proposed state budget for the 2017-18 fiscal year at the end of February. Included in the proposed budget is a plan to transfer $8 million from the Surplus Lines Insurance Guaranty Fund to the state’s General Fund. The Department of Banking and Insurance released an analysis and a response to the 2017-18 budget, including the proposal to transfer the funds. DOBI Commissioner Richard J. Badolato also provided testimony before the Senate Budget and Appropriations Committee in April.

PIANJ opposes any proposal that could hurt policyholders and negatively affect the surplus-line market.

The SLIGF was established to provide a safety net for policyholders and claimants of insolvent surplus-lines insurance companies by ensuring the payment of claims. All surplus-lines companies in the state are required to be members of the fund and to contribute funds for its operation. Each member insurer is responsible for making an initial one-time payment of $25,000 into the fund. Additionally, a surcharge, in an amount determined by the DOBI, is collected on any surplus-lines coverage policy issued in New Jersey.

However, the surcharge has not been collected since 1993 and the DOBI ceased to collect the initial $25,000 payment as of July 21, 2011, due to limits imposed by the federal Dodd-Frank Wall Street Reform and Consumer Protection Act. The DOBI has not deemed it necessary to reinstate the fees to meet the current and projected obligations and expenses of the fund. Instead, the fund has generated revenue from net investment and interest income and distributions collected in connection with insolvency proceedings.

Since its inception, the SLIGF has paid benefits due to the insolvency of 14 surplus-lines insurers. However, only three of those insolvencies have occurred in this millennium. Due to the lack of claims, $100 million in resources has been diverted from the fund since 2000.

At the end of 2015, the fund carried a balance of $12.2 million with a combined indemnity and loss-adjustment expenses reserves of $1.3 million. The governor’s proposed $8 million transfer from the SLIGF to the General Fund would leave the SLIGF with a balance of approximately $4.2 million.