Is Insolvency for American Transit Inevitable?

Insurance is meant to protect you when unexpected events happen, but what happens if your insurance company runs out of money or goes out of business?  Although the insurance industry is highly regulated, insurance companies fail for various reasons. For example, they might underprice their products or have higher-than-expected insurance claims or possibly both.

It is the job of the New York State Department of Financial Services (“DFS”) to oversee insurance companies' financial stability. A company’s financial stability helps to assure the consumer that the company will be there to pay claims in the future.

There have been reports that American Transit Insurance Co (“ATIC”), the biggest insurer of for-hire vehicles in New York City, is insolvent and is at risk of a meltdown. The effects of what would happen if ATIC was declared insolvent are beyond the scope of this article, but some things must be stated now so the entire industry is aware. While ATIC may be the prime example of financial instability, the underlying facts reveal the failure of DFS to take action when it knew ATIC was in financial trouble going back to the 1980s

Here is a historical perspective. In 2021, Huggins Actuarial Services issued an actuarial report stating that while ATIC had a $190 million provision for unpaid losses, the loss-adjustment expenses made by ATIC were $508.8 million less than the $698 million it considered the minimum necessary. The report concluded that the ATIC reserves provisions do not meet the requirements of New York state law and are not consistent with reserves computed under accepted actuarial standards.

At the time, the CFO of ATIC said the company did not accept the actuary's projection because of the "unique nature" of the New York City commercial auto industry, the impact of "underwriting and claims fraud investigation and defense initiatives", and how pandemic-related closures hit New York City transportation. Now, fast-forward to 2024.

In a letter dated April 3, 2024, the DFS Chief Compliance and Risk Officer wrote a letter to ATIC stating that ATIC’s consulting agency agreed that ATIC’s monetary reserves are massively deficient. The statement of actuarial opinion filed with ATIC’s December 31, 2023, annual statement indicated that ATICs should have reserves of approximately $878 million. Instead, the company has reported reserves of only $187 million, resulting in a reserve deficiency of more than $691 million. Since ATIC reported a surplus of approximately $26 million, this resulted in an insolvency of approximately $665 million. In the same letter, DFS stated that New Yorkers are counting on ATIC to pay claims for personal injury, property damage, and medical expenses. The DFS letter noted that despite having collected premiums for drivers for years, ATIC does not have the assets to pay these claims.

In fact, the April 2024 DFS letter notes that there has been an ongoing deterioration of ATIC's financial condition, which was first identified as inadequate in 1979, and that insolvency has continued to increase since then. Notably, as of December 31, 1986, DFS concluded that ATIC was insolvent by $6.2 million. By the end of 1989, DFS found that ATIC was insolvent by $39.9 million. A report on examination by DFS as of December 31, 1997, which was prepared by an independent accounting firm, concluded that ATIC was insolvent by $79.3 million. DFS noted that it found as of December 31, 2007, ATIC was insolvent by $139.8 million, and by the end of 2013, the insolvency had increased to $254.4 million dollars.

DFS claims that over the years, it has repeatedly sought to engage ATIC to get the company to address its financial condition. For decades, the company has failed to address the issues identified by DFS. The result of those failures is the continued deterioration of ATIC. The shortfall of $665 million is substantial and represents an unsustainable trajectory that must be corrected by direct concrete action.

ATIC submitted a remediation plan on February 26, 2024, but DFS said it falls far short of the drastic action needed to restore ATIC to a sustainable financial condition. DFS noted that the plan lacks any substantive detail on how ATIC plans to cure the existing insolvency. DFS noted that if ATIC cannot attract capital, it will be unable to survive. DFS reserved the right to take any action it deems necessary to protect ATIC's insureds and the broader insurance market.

When necessary, DFS will work with an insurer to take all reasonably feasible actions to rehabilitate its financial situation, including supervision of the reinsurance or sale of one or more blocks of business.

As previously stated, when an insurance company has financial difficulty, the DFS Superintendent may seek an order from the New York State Supreme Court allowing the Superintendent to take over its operations if certain circumstances exist that affect its financial stability. DFS has known of ATIC's deteriorating financial condition not for several years but for several decades. Yet, it has done nothing to protect FHV drivers and those who have outstanding claims due to motor vehicle accidents.

So how did we get here? ATIC has always been known to be the cheapest in the FHV insurance market. But as most people know, sometimes you get what you pay for. I can't speak for the backroom politics of what goes on in the minds of ATIC's management. What bothers me the most is that DFS is a New York State agency that has wholly and utterly failed in its mission to protect the insureds who pay for this auto coverage. This is beyond unacceptable.

FHV drivers in New York City (“NYC”) need to know if DFS will seek to rehabilitate ATIC or if it will take it over and liquidate its assets. If such an event occurs, and ATIC goes out of business and can’t pay its claims, the NY State Guarantee Fund will step in to cover claims up to certain limits. The guaranty fund is supported by insurance companies that are licensed to operate in New York State. These companies contribute to the fund, ensuring that there’s money available if one of them fails. When an insurance company becomes insolvent, the fund covers the payment of claims and refunds any unearned premium.

The real question is what will happen if ATIC is taken over by DFS and liquidated. What will roughly 60% of all for-hire vehicle owners/operators currently insured by ATIC do to obtain insurance? Some may be able to obtain insurance from Hereford Insurance Company, the second-largest insurer of FHVs in NYC. 

The reality is that if ATIC fails, some FHV owners/operators will not be able to procure the required insurance. Few insurance companies are in the NYC FHV market, which is a specialized niche market. Big brand-name insurance companies such as GEICO, State Farm, Allstate, and Progressive do not write policies for commercial FHV insurance in NYC.

This is because most insurance companies have more rigorous underwriting standards, and rightly so. Insurance underwriting standards are crucial to balancing risk and profitability. When a company has low underwriting standards, it approves policies that don’t meet robust criteria, leading to higher claim frequencies and severities and impacting profitability.

If ATIC fails, some FHV owners/operators will not be able to afford FHV insurance or will be unable to procure a new FHV policy elsewhere. Thus, causing a massive shortfall in the supply of FHVs. FHV bases will have fewer drivers to dispatch to. The riding public will have to wait longer for their FHV to arrive, and some will be left stranded. While no one knows what will happen, I think the FHV industry is in for another major disruption. You better put your seatbelts on.

By: Steven J. Shanker, Esq.