The recent release of a study supporting the creation of a mutual insurance company to cut automobile rates in Baltimore has been enthusiastically greeted by city politicians eager to find a magic bullet to kill high automobile insurance rates.
But while the study found that such a company might be able to offer rates that are 21 percent below the average, it said very little about where the city would get the estimated $9.5 million necessary to launch this project. City drivers pay two to three times as much as drivers in other parts of the state for auto insurance. Even if the city finds the money, a large part of the amount could not be repaid until the company is able to amass adequate capital on its own -- a process that could take years. There is also the possibility that millions of dollars could be lost if the operation fails.
The $52,000 study, done by R&B Unlimited Inc., comes after two years of effort by the City Wide Insurance Coalition, a community group, to create an alternative insurance operation that would offer cheaper rates to Baltimore residents. A bill to establish a board to take the first steps in creating the organization, including formulating rates, was introduced last night at City Council.
A. Robert Kaufman, the president of CWIC, estimates that this process will take four to six months and could cost the city anywhere from $125,000 to $200,000.
But even as the supporters get ready to rev up their engines, the question of where the millions of start-up dollars will come from is still unanswered.
The most critically needed money is $3.75 million that is required by state law to fund the company's required capital surplus. This money would be set aside to ensure that the company will have the financial strength to pay the claims of policyholders.
The amount of capital surplus is a key factor in safety of any insurance company. During the last session of the General Assembly, legislators raised the minimum from $1.25 million to $3.75 million to bring Maryland's regulations in line with the rest of the nation.
A mutual company, where the policyholders are the owners of the company, is allowed to raise the required capital surplus by borrowing the money in the form of a "loan surplus."
But there are restrictions on the loan that do not apply to other loans, according to Charles Siegel, associate commissioner in the state Insurance Division. The loan, which can have a %J maximum of only 6 percent interest, cannot be paid back to the lender until the company accumulates adequate capital through its operations, he said. Also, the money can not be returned without the specific prior approval of the state insurance commissioner, Siegel said.
The loan for the capital surplus would also be at greater risk than other borrowings. If the company failed, all the other creditors would be paid before the lender of the capital surplus. "He's last in line," said William G. Lashley, an administrative officer at the Insurance Division.
Also, if the mutual company loses money in the first year, it would cut into that capital surplus and the lender might have to put up more money or risk having the company taken over by regulators.
One proposal for raising the necessary money is for the Baltimore government to put public lands in Baltimore County up for collateral and borrow the money from a bank or other financial institution, according to Kaufman. Such property might include the Loch Raven Reservoir or Robert E. Lee Park.
Ideally, the money would be paid back by the insurance company, but if the company defaults, Kaufman said, Baltimore County -- not the city -- would step up to pay the loan because the county would not want such property to fall into private hands. In essence, the county government would back up the city loan.
However, Kaufman is doubtful this plan will happen. "I think it should be pursued, but I'm not betting on it," he said.
Another plan proposed by Kaufman is for the city government to go to the Baltimore business community and ask for property as collateral in consideration of the cooperation the businesses have gotten from the city in the past. "We will find out how grateful the business community is," he said.
Kaufman also said the group might go to the labor unions, which represent 90,000 workers in the city. He estimates that the new insurance company could save each member $300 a year, or a total of $27 million.
Should those plans fail, Kaufman said, the group would push for a bond issue during the 1992 election. "It would be [done] if the business and labor turn their backs on the city," he said.
Despite Kaufman's confidence about finding the money, others are more skeptical. The new company would "have a very heavy burden to bear," said Bryson F. Popham, who represents the Professional Insurance Agents Association and is a director of the Agency Insurance Co., a Baltimore insurance company created in 1989. "Where are they going to get that kind of money?" he said.
He also questions the feasibility study's claim that 21 percent could be cut off the average cost of insurance primarily through more efficient operation. "If that were true, we wouldn't have companies that are withdrawing from Maryland."
Jacqueline McLean, the Democratic nominee for city comptroller, also wonders where the money will be coming from. "In a city that is strapped for finances . . . I don't see how in the world we are going to finance an insurance company," she said.
McLean is expected to succeed Hyman Pressman on the city's Board of Estimates and would have a large say in how city funds are spent.
Besides doubting that the city has the money, she is worried that insurance and politics won't mix. "People are tired of so many things where politics are involved," she said. "They [CWIC] are playing with people's pocket books and they are playing with people's emotions. "I don't think it's fair."