R Street: Letter to New York Governor Hochul regarding Concerns with ATIC and New York Insurance Market for Commercial Automobile Liability Insurance
By: Jerry Theodorou
The Honorable Kathleen C. Hochul
Governor of New York
New York State Capitol Building
Albany, NY 12224
RE: R Street Institute Concerns re New York Insurance Market for Commercial Automobile Liability Insurance
Governor Hochul:
My name is Jerry Theodorou. I am the director of the finance, insurance, and trade public policy team for R Street Institute (RSI), and an analyst of property and casualty (P&C) insurance markets. RSI is a nonprofit, nonpartisan public policy research organization. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including insurance regulation. We have researched this issue since our founding in 2012 and we are one of the only think tanks engaged in dedicated P&C insurance analysis. Our efforts to advance stable, competitive and healthy insurance markets is why we want to raise some issues we have identified pertaining to the disruption in the New York insurance market for taxis, livery, and rideshare commercial automobile liability insurance.
As you may know, the American Transit Insurance Company (ATIC) is a specialist insurance company, and is the largest insurer in the New York market for taxi, livery and rideshare insurance.
In September 2024, the release of a revised Actuarial Statement of Opinion for American Transit Insurance Company (ATIC) revealed an alarmingly large deficit in ATICs loss reserves. The statement, which is normally included in the statutory annual statement of an insurance company, expresses an actuary’s opinion on the adequacy of reserves at the company.
The statement found ATIC to be carrying $187 million in bulk reserves, whereas the independent outside actuary reported that ATIC should be carrying closer to $876 million. The enormous reserve deficiency ignited a crisis in the New York City livery insurance market. The enormity of this gap means that, if ATIC fails, New York livery drivers could be at a loss to secure reasonably-priced insurance, and if it survives, drivers may have to pay significantly more for insurance if they can secure it, something that will lead to higher costs to New Yorkers who use taxi, livery and rideshare services.
A prudently-managed insurance company must maintain loss reserves of sufficient magnitude to pay for claim amounts that will be paid in the future for claims that remain open or that are expected to emerge. The movement of reserves established for open claims compared to how much was put in reserve is known as “loss development.” When the amount held in reserves is found to be more than adequate to pay those claims, there is “favorable development,” which means that some of the dollars held in reserve are “released,” and benefit the current financials. When the amount held in reserves is insufficient to pay for the expected loss development, reserves are increased, funded by current premiums. This is “adverse development.” For example, if an insurer determines that an open claim is expected to require X dollars in loss payments until that claim is closed in the future, it must have X dollars held in loss reserves. In extremis, if an insurer recognizes outsized adverse development, it may not have enough capital to pay its claims, and it may skirt with insolvency.
ATIC, which has been in business for 52 years, licensed in 1972, began writing business in 1973. ATIC has had problems with reserve adequacy since soon after its formation. The New York Department of Financial Services (DFS) and independent actuaries have found problems with ATIC reserve adequacy, with the degree of reserve inadequacy and insolvency growing progressively worse since the company’s earliest years.
The magnitude of ATIC’s under-reserving would put it among insurers with the historically highest one-year development as a percentage of surplus. A study by the American Academy of Actuaries On property/casualty Insurance company Insolvencies, found that the largest adverse development as a percentage of surplus was at Fremont Indemnity Company, whose one-year development was 729% of surplus, followed by Century Indemnity Company at 503%. ATIC reported its surplus as $94 million, which means that the actuary-calculated adverse development of $665 million represented 707% of surplus. This calculation suffers from the actuary-calculated surplus being only $26 million, and the adverse development being so large as to cause the company’s surplus to be negative. Notwithstanding the true value of the company’s surplus, ATIC’s adverse development could be proportionately on the order of Fremont’s and Century’s. The DFS, which regulates the New York insurance industry, concurred with the view that “ATIC has had reserves that are “massively deficient.”
When a claim is opened at an insurance company, a reserve amount is established depending on a reasonable expectation of how much will be needed to pay over the life of the claim until it is closed. This amount is known as a case reserve. In addition, claims may be reported late, or may remain open for many years. An amount sufficient to pay future expected development of open claims, is known as a bulk reserve, a/k/a incurred but not reported (IBNR) reserves. The reason claims may be open for many years, especially for insurers of commercial vehicles, is because claim amounts include future payments. For example, if a third party is injured in an accident caused by a policyholder who is a policyholder of the insurance company, the injured party may sue the insurer for the cost of future medical and rehabilitation services, which can span many years.
What is more, prudently-managed insurers must price their business such that the premium is neither exorbitant nor inadequate. Because the ultimate cost to an insurer of an insurance product is not known at the time of sale, it is important that company underwriters and actuaries use their best estimate of the premium to charge such that there will be enough to pay for current and future losses. In liability insurance business, claims can be open for decades.
Some insurers have found it tempting to underprice business because it is an easy way to build market share. For example, a prudent insurer that charges $100,000 in premium for a policy that may result in $50,000 in claims in the first year, $25,000 in the second year, $15,000 in the third year and $10,000 in the fourth year, will reserve $100,000. A company that is more interested in growing market share may charge significantly less than $100,000 and not establish sufficient reserves. To be sure, inadequate loss reserves for liability lines of business are the leading cause of impairment for P&C insurance companies.
A collapse of ATIC would leave tens of thousands of livery drivers uninsured and without a source of income. ATIC has the largest share of the New York taxi and for-hire market, with a market share of approximately 60%, covering 72,000 of the city’s 114,000 taxis. An eventual collapse of ATIC could be economically devastating for livery drivers, passengers, health care providers, and the New York economy, and would disrupt vital transportation services, and lead to higher prices for traditional taxi and transportation network company rides.
The New York City taxi and limousine market has several unique challenges that has made it difficult for any insurance company to operate there profitably. For close to three years New Yorkers were hunkered down because COVID-19 reduced the volume of business available, as miles driven plummeted.
In the past decade the number of drivers of taxis declined as transportation network company (TNC) business grew. Because the TNC business model was new and limits were high, a lack of historical data on the performance of this segment found insurers underpricing the business. New York is also a hotbed for insurance fraud, including criminal rings that stage accidents in cahoots with complicit attorneys and health care providers who submit claims for injuries that are padded or nonexistent. What is more, there is a pattern of abusive billing with no-fault coverage prevalent in New York. Insurers, including ATIC, have been using biomechanical experts to combat such fraudulent or inflated claims.
While difficult, it is possible for insurers to write livery business in New York profitably. For example, ATIC’s main competitor, Hereford Insurance, reported operating ratios below 100% since 2021, signifying profitable operations. Hereford, which wrote $90 million of commercial automobile insurance direct premium in 2023, also obtained reinsurance protection from 7 reinsurers. ATIC does not have reinsurers.
A review of ATIC’s troubled history leads us to wonder why the regulator did not take action? There were numerous red flags. In addition to the solvency issues there were governance issues as well. The board, which continues to include many family members of the company’s founder, met only once a year. ATIC has not purchased reinsurance since 1999. It is almost unheard of for an insurer not to purchase reinsurance protection. In view of this reality and the known troubled financial picture of ATIC, why did the DFS not take action? The two overriding duties of the insurance regulator are policyholder protection and maintaining the solvency of insurers in its jurisdiction. The ATIC saga shows that the regulator failed in both areas.
At the regulator, there seems to have been a fair amount of turnover. The DFS website lists 48 current openings, including 9 for actuaries. There has also been significant turnover in the role of the head insurance regulator at the New York DFS, the Executive Deputy Superintendent. In less than a decade, since 2016, this role has been held by Scott Fischer, Laura Evangelista, My Chi To, John Finston, and now Bhavna Agnihotri.
New Yorkers deserve access to a more stable insurance market for taxi, livery and rideshare insurance, supervised by a more effective regulator. The long-running ATIC saga should be a wakeup call that regulators need to take action to ensure adequate reserves are maintained by insurance companies in New York. For these reasons, I strongly urge your action to ensure regulators are ensuring the state has a stable, competitive and healthy P&C insurance market.
I welcome the opportunity to speak with you or your staff further about this important issue should you have any questions, or want to discuss it in greater detail.
Sincerely,
Jerry Theodorou
Director, Finance, Insurance, and Trade Policy
R Street Institute
jtheodorou@rstreet.org