Insurance Fund Is Told to Shape Up

Battered by a rash of insurance insolvencies, the state-run company that provides a safety net for millions of California workers has been directed by Insurance Commissioner Harry Low to take emergency steps to improve its financial condition, according to documents and key state officials.

Low set a June 14 deadline for the State Compensation Insurance Fund to devise a strategy for beefing up its reserves and strongly suggested it should include a sharp increase in premium rates, the elimination of discounts for certain policyholders and a reduction in commissions for brokers and agents who sell coverage for the fund.

The fund provides workers’ compensation insurance for more than half of the businesses in the state and any rate increase would affect hundreds of thousands of employers, from local governments and school districts to private enterprises. Even without those increases, public entities such as the Los Angeles Unified School District, as well as city and county governments around the state, are wrestling with increasing worker-compensation costs; a further hike would only deepen their budget woes.

The fund’s “ongoing financial viability is of great concern and a No. 1 priority to this department and, more important, is an utmost necessity to your 260,000 policyholders and the economy of California,” Low said in a letter to the fund President Kenneth Bollier.

In response, Bollier fired off a missive to his policyholders, warning that Low’s “egregious and unwarranted directive is a recipe for economic disaster....

“It will result in horrendous increases in workers’ compensation costs for all California employers, whether insured with state fund or not,” Bollier’s letter said.

He accused the commissioner of overkill, saying the combination of suggestions exceeded what was needed to improve the fund’s financial condition.

Bollier complained that Low had bowed to pressure from private insurers who, he said, wanted to raise their rates without having to worry about competition from the government-operated insurer. “This mind-set is apparently shared by the California Department of Insurance,” he said.

In an interview, Low said the unusual action against another state agency had not come at the behest of any private insurers but had been prompted by his concern that the state fund, which has experienced phenomenal growth in the last two years, was not charging enough in premiums to cover all the risk it was assuming.

“Certainly if it continues to grow as it has grown in the last two years and if rates continue at the level they are now, I think the decline in reserves will accelerate and that will be a serious problem for us,” he said.

In his letter, Low offered to work with fund managers to improve their financial picture, but warned that if they were “unable or unwilling to develop an acceptable action plan” he was prepared to take corrective action.

The move by Low was another jolt to the state’s troubled workers’compensation system, already struggling with nearly a dozen insurance company insolvencies, skyrocketing premium rates and now the deteriorating financial condition of its biggest insurer.

“The state fund is the anchor that could take the whole system down,” said Assembly Insurance Committee Chairman Thomas Calderon (D-Montebello).

Workers’ compensation provides benefits to injured workers and covers more than 13 million employees. Last year it paid benefits to more than a million workers.

Jim Zelinski, a spokesman for the fund, said its managers have been concerned that reserves are not as high as they would like, and have proposed a rate increase to become effective July 1. It has yet to be approved.

He insisted that concern over the adequacy of reserves was something that could be easily remedied and does not mean the fund is approaching insolvency.

“We want to assure all our policyholders and their injured workers that there is no question about our ability, our financial wherewithal, to pay financial claims now and in the future,” he said.

According to experts in the field, the fund’s troubles are rooted in a 1993 legislative decision to deregulate workers’ compensation and have been exacerbated by Gov. Gray Davis’ failure to appoint a governing board.

The five members of the board were named by former Gov. Pete Wilson and their terms have expired.

“In effect,” said one legislator, “you have had a governing board who is answerable to no one.”

The state fund was created by the Legislature in 1914, with a mandate to be competitive and to serve as the insurer of last resort, meaning it was to provide coverage to those businesses that couldn’t get it elsewhere. In the mid-1990s, when deregulation went into effect, the fund was considered an island of stability in the a competitive private market.

Deregulation set off competition among private insurers who began charging premiums that were so low the insurers could not provide the reserves to cover potential losses.

By the end of the decade, the biggest workers’ compensation insurers in the state were insolvent.

Market-Change Fallout

In 2000, the state fund, which had not lowered its rates precipitously during the cutthroat years, began to absorb much of the business served by the failed insurance companies.

At the same time, the remaining private insurers were forced to increase rates to stay afloat.

The state fund held 20% of the market share in 2000. By 2001 it held 31%. In 2002, its share is estimated at 42%.

Calderon, who has monitored the fund’s activities for the last 1 1/2 years, said no insurance business can sustain that kind of rapid growth and still keep reserves high enough to cover short- and long- term losses.

“The only way you could do that is to be smarter than any other private insurer in the country, to have better loss control and to have the highest rates,” he said. “They do not have any of these elements.”

He accused the fund of being irresponsible, saying it had fueled much of its growth by an aggressive marketing strategy that included television advertisements, special dividends to big policyholders and rewards to agents and brokers who brought in a lot of business.

“We’ve heard stories where they have been part of a bidding process. They would not be the lowest bidder so they would come back the next day with a 10% decrease from the rate they had offered the day before,” he said.

“That is clearly predatory pricing and that is clearly not the role of the state fund.”

Zelinski said the fund never engaged in predatory pricing and was only abiding by its mandate to be competitive.

If the fund were only relegated to accepting the high-risk business that can’t get coverage elsewhere, he said, it could not operate.

“The Legislature did not intend for the state fund to be solely an assigned-risk carrier,” he said. “The intent was to have it serve as a stabilizing force in the system.”

In his letter, Bollier complained the fund was being unfairly attacked by Low when its presence in the market had prevented an “availability and affordability” crisis after the collapse of many companies.

But Mark Webb, vice president of the Western region of the American Insurance Assn., said private insurers have watched the fund’s rapid growth with alarm.

If the fund were eventually to become insolvent, he said, private carriers worry they will be assessed to help pay claims the fund could not handle.

“So we, by and large, think it’s a positive thing what the commissioner is trying to do for state fund,” he said.