FAQs
Positive rating factors are reflective of NYSIR’s conservative reserving and investment philosophies, commitment to proactive loss control and risk management programs, and its track record of providing quality products to its base of insureds. –– A. M. Best
Q. What is a reciprocal insurance company?
A. There are three types of insurance companies. A stock company is owned by stockholders. Mutual and reciprocal insurance companies are owned by policyholders. In New York State, all licensed carriers are subject to the same rate and form review, and to triennial audits by the New York State Insurance Department. Those audits include a review of claim payments and reserves, reinsurance structure, and a complete financial analysis. A municipal reciprocal insurer has the option of joining the Guaranty Fund or becoming assessable.
Q. What is the Guaranty Fund?
A. The Guaranty Fund, also known as the Property and Casualty Security Fund, is a pool of money amassed through contributions from mutual and stock insurance companies overseen by the State of New York. In the event that an insurance carrier becomes insolvent, the fund will provide for a maximum payment of $1 million per occurrence for a covered loss.
NYSIR, a public not-for-profit reciprocal insurer, is not obligated to pay into the Guaranty Fund. NYSIR member/owners are responsible only for their own results or losses. That has translated into substantial savings for subscribers in the form of lower premiums. Assessments by the Guaranty Fund to its members in recent years would have cost NYSIR and its member districts several million dollars. Additionally, by not participating in the Guaranty Fund, NYSIR is exempt from accepting assignments from risk pools such as the assigned-risk automobile plan. That protects NYSIR subscribers from having to share in the cost of high-risk entities.
Q. What would cause an assessment?
A. When the surplus of an insurance company reflective of NYSIR’s conservative model drops below $1.8 million, or the state superintendent of insurance deems the company impaired, an assessment may be ordered by the State Insurance Department.
Q. Why did NYSIR choose to be assessable?
A. NYSIR is a not-for-profit reciprocal insurer. After carefully weighing their options, the school districts that form NYSIR made a decision to become assessable. The Board of Governors determined that if the proper funding level was maintained and a strong reinsurance program was in place, an assessment would never occur. Remember, we only write one class of business ‒ New York State public schools ‒ so predictability of losses and a structured, focused reinsurance program was made easier. It made little sense for school districts to form an insurance company to control their own destiny and then pay for other insurance company failures.
Q. How can NYSIR ensure that members are protected against assessment?
A. NYSIR takes a multifaceted, conservative approach to protecting members against assessment. In addition to establishing a conservative reinsurance program using only superior reinsurers, NYSIR:
• Has Towers-Perrin/Tillinghast, an independent actuarial firm, conduct a funding level study every year that is adopted by the Board of Governors.
• Writes premiums to the highest possible actuarial confidence level, 95 percent, to insure that premiums adequately cover current and future predicted losses.
• Maintains adequate reserves for losses with annual actuarial reviews to ensure the sufficiency of reserves. Those reviews, in turn, are reviewed by the New York State Insurance Department, A. M. Best and the National Association of Insurance Commissioners.
• Adheres to a conservative approach with respect to investments and undergoes regular audits by the New York State Insurance Department, NYSIR’s reinsurers and outside auditors Ernst & Young LLP.
Q. Has NYSIR ever been required to impose an assessment?
A. There has never been an assessment by NYSIR.
Q. What is surplus?
A. Surplus is admitted assets less statutory liabilities, which include loss and loss adjustment expenses. In 2002, NYSIR’s surplus increased even while paying one of the largest suburban school district fire losses in New York State history. NYSIR’s surplus is one of the factors considered in NYSIR’s A.M. Best “A (Excellent)” rating. NYSIR’s current surplus is more than $80 million.
Q. How do insurance companies protect themselves from catastrophic loss?
A. Insurance companies purchase reinsurance to protect themselves by reducing their net exposure to loss. In the event of a major catastrophe, reinsurance enables insurance carriers to honor all payments as stated in their insurance policies.
Q. How does reinsurance work?
A. Carriers pay the loss for one event as written. Part of the loss is retained by the primary company and the remainder is paid by the reinsurers. The process could be seen at work in response to a major fire at a downstate school district. Although the loss was in excess of $13 million, it was adjusted without a negative effect on NYSIR’s financial position or to NYSIR subscribers. NYSIR capped its in-house loss by paying only the first $500,000 of the loss; the remainder was assumed by reinsurers.
Q. Do all insurance companies purchase reinsurance?
A. Yes, but all reinsurance programs are not the same. It is important to know the stability and strength of reinsurers. NYSIR’s Board of Governors mandates that only the most financially secure reinsurers be used.
Q. How much surplus is enough?
A. A company’s surplus is measured in relation to the premiums it writes. Generally, at a minimum, for every $1.20 of premiums written, the company should have $1 in surplus. NYSIR maintains a 0.76:1 ratio, which results in a substantially greater number of dollars in surplus reserve than the minimum 1.2:1 ratio. That gives NYSIR a very low exposure and a strong position in the insurance industry. Larger surpluses are simply a function of size and reflect a greater amount of exposure. In relation to the amount of risk NYSIR writes, its net premium-to-surplus ratio is as strong as that of larger carriers writing school districts in New York State.
Q. What points should a school administrator consider when comparing insurance companies?
A. Key criteria to evaluate:
• Scope of coverage: Is it pertinent for a particular school district?
• Premium cost and stability of pricing
• Financial stability
• Claims management philosophy and practice
• Safety and risk management programs
More information can be obtained from A.M. Best, an independent rating service that provides an opinion of an insurer’s financial strength and its ability to meet ongoing obligations to policyholders. In addition, check with school districts that have had experience with an insurer under consideration.
Q. Insurance companies sometimes refer to another company’s combined ratio. Is that important?
A. The combined ratio is the sum of the combined loss ratio, expense ratio and dividend ratio for a given time period. A combined ratio above 100 indicates that a carrier is paying out more in claims and expenses than it is receiving in premiums. A company with a combined ratio higher than 100 still can be profitable because of investment income. NYSIR’s combined ratio over the past several years has been well under the industry average.