Auditor Declines to Certify State Fund’s Financials
An independent auditor on Tuesday declined to certify financial statements compiled by management of the California’s state-run workers’ compensation fund, saying the insurer needs to set aside an additional $1 billion to pay future claims.
Auditor PricewaterhouseCoopers said the State Compensation Insurance Fund of California has the ability to meet its financial obligations to injured workers for at least the next year. But it said the carrier’s capital condition has deteriorated to the point that the California Department of Insurance would be justified in stepping in to run the operation.
The specter of a regulatory takeover, the auditor said, “raises substantial doubt about State Compensation Insurance Fund’s ability to continue as a going concern” over the long haul.
California businesses have flocked to State Fund in the last two years, straining its capital position, because so many for-profit carriers have gone under or stopped writing policies after incurring huge losses. California’s $15-billion system is on the verge of unraveling under pressure from soaring medical costs and premium increases.
The audit of the financial results for 2002 comes after months of behind-the-scenes wrangling between PricewaterhouseCoopers and State Fund over the adequacy of the carrier’s reserves.
The audit report said that State Fund recorded reserves of $9.8 billion as of Dec. 31, 2002, a figure PricewaterhouseCoopers said “should be increased by approximately $1 billion.”
State Fund officials on Tuesday said the carrier’s reserve levels are adequate and that the insurer is financially sound.
“We’d like to put to rest, once and for all, any reckless speculation, assertions or rumors that we are on the brink of insolvency,” State Fund spokesman Jim Zelinski said. “We want to assure our 266,000 policyholders and their employees that we will continue to meet our obligations.” He said that State Fund plans to hire another auditor to examine the adequacy of the insurer’s reserves.
Insurance Commissioner John Garamendi said State Fund’s financial condition had the “mandatory regulatory control level” that would allow the Department of Insurance to take over the operation. However, Garamendi has not committed to such an action, and State Fund recently filed a preemptive lawsuit trying to prevent it. Garamendi said he would notify State Fund officials within a week of the steps it must take to address its reserve shortfall.
