Nygren right to end Property Insurance Fund, wrong on Life Insurance

Apparently State Rep and Joint Finance Committee Co-Chair John Nygren is reading the same audits from the Legislative Audit Bureau that I am, as he came out with a statement today that touches on a topic I posted on earlier this week.

“Last session, an audit of the Local Government Property Insurance Fund (Property Fund) showed that the fund was in a deficit. Increasing premiums began to force local units of government to search for other, more affordable insurance options in the market. With so many available alternatives, it became clear that the state should not be in the insurance business. It is for this reason that I proposed a bill to subject the LGPIF to the same rate regulations as private insurers.”

“Now, the State Auditor has reported number of insured entities has dropped from 983 to 174 in just over two years, and premiums dropped from $23.1 million to $3.2 million. While I support the Office of the Commissioner of Insurance’s budget request to stop renewing and issuing new policies, we must go further. Continuing the Property Fund on life support will create an unnecessary risk to the State’s General Fund. For that reason it is time to end the program.”

This is a rarity, but I’m on the same side as Rep. Nygren here. As I mentioned earlier this week, the $15 million debt seems likely to grow in coming years, so it’s worthwhile for the state to pull the plug now, pay off the debts that are accumulated (assuming we have the money available to do so), and walk away before we end up on the hook for more.

But there was a second part of Nygren’s statement, relating to another state insurance fund

“This month, the Legislative Audit Bureau also released a report investigating the efficacy of the State Life Insurance Fund (SLIF). Similar to the LGPIF, the SLIF has been experiencing difficulties for years. It is my belief that we should find a prudent solution to this fund and encourage the fund’s financial stability. Just like with the LGPIF, the state should not be in the life insurance business. With so many viable options in the market, a state-run life insurance fund is simply duplicative and outdated.”

First of all, I didn’t even know there was a state-run life insurance fund until I read the LAB audit on it that came out this week. It’s basically a “public option” life insurance plan that has been around over 100 years, as the LAB tells us.

The Wisconsin State Life Insurance Fund (SLIF), which was created in 1911 to provide low-cost individual life insurance to Wisconsin residents, is administered by the Office of the Commissioner of Insurance (OCI). SLIF is subject to the same regulatory requirements as any life insurance company licensed to operate in Wisconsin. Wisconsin is the only state that offers life insurance to its citizens. SLIF receives no subsidies from the State of Wisconsin.

And my guess is that Nygren’s seizing on this part of the report, which shows there are fewer people choosing to be part of the SLIF system.

By statute, OCI is not allowed to advertise this life insurance program, and SLIF is not permitted to use commissioned agents. As shown in Figure 1, the number of policies has been declining since December 31, 1996, when there were 31,361 policies. There were 25,132 policies as of December 31, 2015. The amount of insurance in force has also declined and was $194.1 million as of December 31, 2015. The number of new policies issued each year has been less than the total number of death claims and the number of policies surrendered for other reasons, such as failure to pay the annual premium. The continued decline is likely due to a combination of OCI’s inability to advertise (as mandated by state law), the $10,000 limitation on coverage, and private sector competition.

And if Nygren thinks the state doesn’t need to be in the life insurance business because things are different than 1911, that’s a legitimate viewpoint that can be debated. But Nygren’s claim that that the SLIF needs “financial stability”? That is flat out bullshit, and a look inside the audit shows that the SLIF is in great fiscal shape, and would be a profitable enterprise….if state law allowed it.

A main part of the State Life Insurance Fund’s finances is something called the “surplus balance”, which the LAB described as this.

The surplus balance of SLIF represents the difference between its assets, which are primarily investment holdings, and its liabilities, which are primarily actuarially determined reserves to pay future insurance benefits. The surplus balance increases when SLIF’s revenues, including insurance premiums and investment earnings, are greater than its expenses, including benefit expenses and dividends paid to policyholders. It is important that SLIF have an adequate surplus balance in the event the actuarially determined reserves are not sufficient to pay benefits as they come due.

So it’s an extra cushion in case a lot of people die that have SLIF policies on them, to make sure the fund doesn’t go broke or elsewise gets endangered by a large number of policies that have to be paid out.

Two other sidelights to this is that SLIF policy holders get dividends paid back to them, and that a guiding factor in how much those dividends are involves Wisconsin laws that spell out what is an adequate surplus balance. As a result, the dividends were lowered a decade ago when finances were tighter, but were raised 2 years ago, because the SLIF became more financially healthy than the state would allow.

Section 607.15, Wis. Stats., provides that SLIF’s net profits be distributed annually to policyholders in the form of dividends. However, statutes also specify that, to the extent practicable, the ratio of SLIF’s surplus to its assets is to be between 7.0 percent and 10.0 percent. Some factors affecting the surplus-to-assets ratio, such as actuarially determined reserve balances, are not controllable by SLIF staff. However, staff can adjust the level of dividends paid to policyholders. Periodically, staff will assess whether the dividend scale, which determines the dividends to pay to the various types of policyholders, needs to be adjusted to maintain a surplus-to-assets ratio within the statutorily specified range of 7.0 percent to 10.0 percent. If a dividend adjustment is necessary, staff work with SLIF’s actuary to review and adjust certain assumptions, such as anticipated investment earnings and mortality rates, which are used in the calculation of the dividend scale.

The dividend scale was adjusted in 2005 and 2006 in an effort to increase the surplus-to-assets ratio, which had declined below the statutorily specified minimum of 7.0 percent. As a result of these adjustments, which we described in report 09-14, the ratio was within the statutorily specified range as of December 31, 2007. However, as we described in report 13-16, the surplus-to-assets ratio continued to increase. As of December 31, 2011, the ratio exceeded the statutorily specified maximum of 10.0 percent and, as anticipated in report 13-16, OCI implemented plans to adjust the dividend scale to reduce the surplus-to-assets ratio by the end of 2014. As shown in Figure 2, the surplus-to-assets ratio was within the statutorily specified range at 9.9 percent and 9.2 percent as of December 31, 2014, and December 31, 2015, respectively.

To get the surplus ratio under 10%, the dividends paid out to SLIF policy-holders went up from $2.1 million in 2013 to $4.7 million 2014, and then remained elevated at $3.6 million last year. Not a bad deal if you’re a policy holder, almost makes me want to consider getting in (my policy doesn’t give me dividends).

And even though there’s a reduced amount of people holding policies, the SLIF is still took in $6.9 million last year, and only paid out $3.8 million in expenses, so its financial solvency is fine for the near and likely long-term future. This is especially true given the rising interest rate environment we are heading into, since 93% of SLIF fund assets were invested in bonds at the end of 2015, and were earning more than enough to pay off a given year of expenses before the current rate-raising cycle began ($5.4 million in 2015).

In addition to there being no fiscal reason for ending or modifying the SLIF, I also have questions as to what would happen to all of these 25,000+ policies if the SLIF is ended. Do they get grandfathered and eventually just fade away over time? Do they get sent over to some other insurance company to oversee (which may or may not be a favored campaign contributor :P)? Or do they all get paid off to make a clean break?

That last point is the one that would set off major warning flags, because the total amount of insurance out there to be claimed totals a little over $194 million, which would mean a massive payment would have to come from state taxpayers to take care of that. Why the hell you’d do that when the SLIF doesn’t take a dime of tax dollars to operate these days is beyond me, unless you were a destructive ALEC whore and wanted to cause a fiscal crisis (wait a second….)

Regardless of the underlying motivation, it looks like “reform” and changes to both the Property Insurance Fund and the State Life Insurance Fund are on the table for Nygren and the WisGOPs that run the Legislature. And while the Property Fund probably should get dumped before the losses get bigger, I’m going to be quite curious to see what they want to do with the SLIF, because on the surface, there doesn’t appear to be any reason to mess with it.