Following the insolvency of an insurer or certain disasters not fully covered by conventional insurance, many states fund otherwise unpaid claims by assessing insurers. These assessments are generally in proportion to the insurer's share of the relevant market, with share often measured in terms of gross premiums. Frequently, however, assessed insurers are permitted to credit a fraction of that assessment against otherwise owing premium taxes. This credit continues year after year until the amount credited is equal to the amount of the original assessment.
This Demonstration explores the economics of such arrangements. You determine the size of the assessment, the proportion of the assessment that can be annually credited against premium taxes, the gross premiums in the industry, the market share of the particular insurer of interest, the insurance premium tax rate, and the interest that the insurer would have been able to earn on funds if it did not have assessment liability. The system responds with two graphics. The first graphic shows the change in insurer cash flow resulting from the assessment and tax credits. The second graphic is a chart showing the proportions of the assessment actually borne by the government (as a result of reduced premium tax revenues) and the insurer. Both of the latter amounts are computed with the time value of money taken into account. You choose whether to use a pie chart, a percentile bar chart, or a stacked bar chart with size proportional to the amount of the assessment.
Snapshot 1: increasing the tax credit rate increases the government's share of ultimate responsibility (pie chart view)
Snapshot 2: decreasing the industry gross premiums (as a multiple of the assessment) increases insurer's share of ultimate responsibility (bar chart view)
Snapshot 3: increasing the interest rate increases the insurer's share of ultimate responsibility (pie chart view)
Snapshot 4: examining the scenario from the standpoint of the industry as a whole is accomplished by considering an insurer with a 100% market share after a large assessment (stacked bar chart view)
The default values of the parameters are intended to approximate the economic incidence of an assessment of approximately $400 million against Texas insurers following Hurricane Ike in September of 2008.