Monthly Newsletter

In an unprecedented move, California Insurance Commissioner Harry Low has disclosed a letter to the public that he sent to the president of the California State Compensation Insurance Fund. The letter, dated May 29, and addressed to State Fund’s president Kenneth Bollier, summarized the CDI’s concerns regarding State Fund’s financial stability that surfaced during their May 24 meeting. The letter further recommended that the Fund revise their action plan previously submitted to the California Department of Insurance (CDI) on May 1. The revised plan, meant to address capital adequacy, writings and loss reserve leverage issues and action level Risk Based Capital problems, must be completed and delivered to the CDI on or before June 14.

"We’re doing exactly what we’re supposed to do. We’ve provided that stability," say Jim Zelinksi, the Fund’s spokesperson, in response to the letter urging State Fund to take further action to ensure the Fund’s financial stability.

According to Low, the CDI was "concerned that the premiums were not sufficient to paying the operating costs of the underwriting losses," and felt that action needed to be taken to correct that. Options that Low said should be considered include:

1) Increase premium rates.
2) Eliminate the large credits and discounts currently offered to large accounts.
3) Pay no policyholder dividends for the foreseeable future.
4) Reduce or eliminate the amount of commissions paid to producers.
5) Eliminate advertising and other marketing expenses.
6) Selectively terminate agents that produce unprofitable business.
7) Practice "Insurer of Last Resort" philosophy; that is, to the extent possible, only accept accounts that are unable to procure workers’ compensation coverage elsewhere.

"These, of course, are factors for them to consider," says Low, "and as I have maintained, it’s not our role to micro-manage any insurance company. We take the broader view that if we see that there is the need to stabilize that company, or there is concern about their financial condition, we try first to bring it to their attention, and then hopefully they will take corrective action. How they actually do that is certainly within their total prerogative of how they manage their company."

In response to the terms Low has suggested, Zelinski says, "We’re going to respond by the deadline that the commissioner laid out… We’re going to increase rates at an undetermined amount effective July 1."

However, Zelinski further contends, "We can’t function solely as the insurer of last resort, and at the same time write only profitable accounts. That’s impossible to do. Our mandate is to serve as a competitive carrier, and we are going to have a balanced book of business, and we’re going to have both profitable and unprofitable accounts in order to fulfill our mandate. We have to make sure that we can provide a permanent workers’ compensation market, or a market during all market conditions, including volatile, chaotic conditions, such as the conditions that have prevailed in the last several years."

State Fund has been in negotiations for a possible loss portfolio transfer with several un-named reinsurers, but as of June 6, nothing has been finalized.

Another factor of concern to the CDI is the pending litigation between A& J Liquor v. State Fund. "The primary assertion is that State Fund intentionally over-reserved on a reasonably high level to build up some sort of additional funds to compete against private reinsurers. I can tell you that central allegation is to say the least, preposterous," says Zelinksi. Low expressed his concern in the letter, writing, "Existing statutory accounting principles, in my opinion, dictate disclosure, at a minimum, and quite probably an actual balance sheet liability accrual for the lawsuit." He further advised the Fund to have their auditor, Price Waterhouse Coopers, provide a reason as to why disclosure is unnecessary.

Low warned State Fund that if the CDI did not find the revised plan acceptable, the Fund could face corrective action in accordance to the Insurance Code. Low adds, "I hope that we need not anticipate that. My plan is to continue these discussions, assuming that we can, and try to work out a plan that will be acceptable to [the Fund] as well as to the Department of Insurance, and that sufficient corrective action is taken so that the threats that we perceive are removed. There are a number of provisions in the Insurance Code that we believe we can assert, but I don’t think we need to go there at this time."

In the event that the Fund should ever become insolvent, Low says it is unclear as to who would become financially responsible. "We’re just hoping that we never need to address that."