Insurance groups want tax offset

Pennsylvania's insurance companies want a tax credit to offset increased assessments they must pay into the state's guaranty fund after the insolvency of two major insurance companies.

If the law isn't passed, some insurers warn, homeowners and business owners may see their insurance bills go

At issue is House Bill 2206, which would permit insurers to take a premium tax offset, or credit, spread over five years. This would offset the 2 percent levy they now have to pay into a state-mandated guaranty fund to cover losses created by other insurers' insolvencies.

"It's a very slow period in terms of insolvency, except in Pennsylvania and Ohio," says Lenore S. Marema, vice president of legal and regulatory affairs for the Downers Grove, Ill.-based Alliance of American Insurers, an insurance industry lobbying group.

She says the failure of two major insurers that wrote roughly 25 percent of the malpractice coverage in Pennsylvania has caused the problem. PIE Mutual Insurance Co. of Cleveland, which wrote malpractice coverage for doctors and hospitals in a number of states, including Pennsylvania, went under in late 1998. It was followed in early 1999 by PIC Insurance Group of Fort Washington, Montgomery County, which insured hospitals in Pennsylvania.

As it stands, property-casualty insurers are being hit with both Pennsylvania's 2 percent premium tax and a guaranty fund assessment of 2 percent - the maximum allowed - of premiums written in the state.

There are several state-mandated guaranty funds in Pennsylvania: one for health and life insurers, one for workers comp insurers, and a third for propertycasualty insurers.

This third fund, the Pennsylvania Property and Casualty Insurance Guaranty Association, based in Philadelphia, actually has two separate sub-accounts: one for auto insurers, which isn't affected; and one for everything else, including property-casualty companies, says Homer Rhule, the fund's executive director.

"It's an impossibility to initially determine what the liability is," from the PIC and PIE insolvencies. Rhule says, but it could exceed $400 million.

Rhule says the assessment on property-casualty insurers normally runs about half a percent, but when PIC and PIE went under, the fund began imposing the full 2 percent surcharge, and he says he expects that level to continue for "three or four more years, at least, maybe longer."

One problem is that under the current formula the fund can collect only about $80 million a year, and malpractice cases typically have "long tails," meaning they take years to work their way through the system, Rhule says.

Theoretically, Marema says, propertycasualty companies can recoup the extra 2 percent through increased rates, but because of competition, "that's illusory," and most insurers are having to eat the losses, putting smaller companies that write exclusively in Pennsylvania at a particular disadvantage.

Under the proposed law, "The industry would get a 100 percent offset, but it would be over five years," Marema says, or 20 percent a year, a formula designed to reduce the impact of the lost premium tax on the state's revenues.

In other words, if a company were hit with a $1 million guaranty fund assessment, it could offset its taxes by 20 percent in the first year, 20 percent in the second year, keeping the process rolling forward as long as the assessment remains in effect.

State Rep. Steven Nickol, HB 2206's sponsor, concedes his bill may have some tough going, primarily because it would cost the state's general fund hundreds of millions of dollars. Estimates of how much range upward from $375 million.

Nickol, a Republican who represents parts of Adams and York counties, says his rural district is home to "a number of small mutual insurance companies, and these are the ones that are most adversely affected," by the double-tap of the premium surcharge and the premium tax.

For such companies, there are only two ways to come up with the money: raise rates - difficult in today's market - or dip into surplus, Nickol says, which could push some of them toward insolvency.

Nickol says he's optimistic the state will pass a premium tax credit, but "it may not be that they'll agree to the full offset," but perhaps a smaller proportion, like 50 percent.

Local insurance companies have been feeling the sting of the situation. David E. Hosler, Old Guard Insurance Group's chairman, president and CEO, says the Lancaster company writes about $110 worth of annual premiums in Pennsylvania, Maryland and Delaware, but more than $90 million of that comes from Pennsylvania, where the company writes auto, farm, home, workers' comp, and commercial insurance.

"It winds up adding almost a full (percentage) point to our expenses every year," Hosler says, and is causing companies to shift their marketing efforts to areas that aren't affected by this assessment, like auto and workers comp.

Penn National Insurance of Harrisburg writes insurance in nine states, so it isn't as badly affected as small insurers that write exclusively in Pennsylvania.

Penn National CFO Christine Sears says the double burden still is costing the company about $1 million a year.