Schafer: Insurers aren't in the collection business

From the files of why the business community gets aggravated by the legislature comes a proposed $5 surcharge that insurance companies will be asked to collect on auto and homeowner's insurance policies.

No loud complaints from insurers about shoring up police and firefighter pensions, the purpose of raising the money. But there's plenty of aggravation at being turned into another collection arm of the state of Minnesota.

It's a low-profile issue compared with proposed tax increases on everything from income to beer, and it's just one small provision in the big tax bill being considered by a house and senate conference committee. But insurers are paying very close attention.

"It's just so inefficient and so costly," said Jeff Mauland, the CEO of North Star Mutual Insurance Co., based in Cottonwood. "There are already better methods in place to collect taxes or fees. It's the type of thing businesses just hate to see."

The idea of a surcharge came from a group of public employee groups, and the money it would raise will go to several places, including the Police & Fire Plan of the Public Employees Retirement Association of Minnesota. This plan had an unfunded actuarial accrued liability of $1.6 billion as of its most recent year end. As recently as 2004 the plan was fully funded.

Brian Rice, a Minneapolis attorney and lobbyist for public employee groups, explained that traditional sources of funding for these plans have declined. A state tax on fire insurance dates from the 1870s, for example, but as the risks of fire have declined, the amount of homeowner's insurance premium that goes to fire protection has also declined. The amount of state fire aid was $31.8 million in 2006, and it was $22 million in 2012.

The surcharges would largely make up that decline as well as a similar decline in funding for police. At $5 each, the surcharge on 3.1 million auto policies in the state would raise $15.5 million, and the 1.5 million or so homeowner's policies would raise $7.5 million.

"The pension people I represent would gladly accept the $23 million in this formula from either" the surcharge or the general fund, Rice said. "The reason we started with the surcharge is that is the traditional nexus in funding these plans."

Plus, he added, a surcharge is a fix that gets the $23 million off the table as legislators struggle with tax policy and general fund spending priorities.

To which to the insurance company managers say, well, that's exactly the problem. This surcharge idea takes a public funding need and drags it from where it belongs and turns it over to insurance companies to collect, and at their expense.

North Star Mutual is in Cottonwood, with a population of only 1,212, but it's actually a sizable insurer in rural Minnesota. Mauland said that nearly 100,000 North Star policyholders would be affected by the proposed surcharge.

He estimated costs to update North Star's software in the "tens of thousands" of dollars to accommodate the surcharge, in addition to costs for such things as a simple cover letter to policyholders explaining why they are getting a surcharge.

Mauland said North Star works with many of the 90 or so township mutuals that remain in the state, a segment of the financial services industry that doesn't show up on the radar often. Formed when big insurance companies would not underwrite risks in rural areas, they are in effect neighbors banding together to insure one another.

Some are as small as two- or three-person operations, and while some will be supported by the back office of partners like North Star, Mauland said, others will have to implement the surcharge on their own.

Fairmont Farmers Mutual Insurance Co. in the southern part of the state has just over 9,000 policyholders. Mutual manager and treasurer Paul Stueven said the surcharge wouldn't apply to all of its policies, and when asked about the scope of changes in information systems required to bill and collect the surcharges, he had to think for a minute.

"I would be willing to bet we'd have $7,500 tied up pretty easily," Stueven said. "Programming time at a few hundred dollars an hour, it doesn't take that long to generate a large bill."

At Leenthrop Farmers Mutual Insurance Co. in Montevideo, manager Paul Larson estimated that between 400 and 500 of his company's roughly 1,700 policies would be subject to the $5 surcharge.

If the surcharge gets passed, the insurers say, fine, we will figure out how to collect the money and send it to St. Paul. It is not a game-changer.

"But it's certainly a burden," Mauland said. "I think it would be for any business, all of sudden, 'Oh, would you collect this for us?' I don't think that gets thought of enough."