Colorado Gov. John Hickenlooper and Pinnacol Assurance, the state-chartered workers’ compensation fund, made the right decision earlier this month in deferring further consideration of plans to restructure Pinnacol. There remains considerable misunderstanding about the future of Pinnacol, the state’s government-sponsored insurer for workers’ compensation insurance. Now there is time to clear away the fog of confusion surrounding Pinnacol’s purpose and future, and to do the job right.
The proposals were mischaracterized as “privatization” or “separation.” That was inaccurate and evaded fundamental questions about the future role of Pinnacol and of the state’s involvement in that enterprise. At stake is the workers’ compensation environment if Pinnacol, which by law guarantees insurance coverage to any employer, is put financially at risk through its reorganization.
Because Pinnacol would have become a member of the state’s property and casualty guaranty fund, the insurance industry’s financial backstop to guaranty benefits owed injured workers by insolvent insurers, the private insurance market’s assets would have been jeopardized.
All parties should reconsider their approaches and, rather than the faux privatization or separation envisioned, follow the lead of other states – Arizona, Nevada and West Virginia – that have privatized their state’s workers’ compensation insurance funds in recent years.
Confusion Over What Privatization Means
There is fundamental confusion about what privatization means. Ask any Colorado business if it believes giving the state an ownership stake in its business is compatible with private ownership. Would these businesses feel independent of state government with the governor appointing a majority of their boards of directors?
Accomplishing a bona fide privatization begins with repealing Pinnacol’s statutory authority – the legal foundation for its existence – and permitting Pinnacol to operate as a mutual insurance company in compliance with Colorado laws.
The current board and operational members, designated by the governor, would sunset upon filing of its new charter. Then, establish a clearly defined residual market mechanism (independent of Pinnacol) designed to be self-funded, ensuring that better, safer employers do not subsidize losses of less safe employers. Next, financially secure pre-privatization liabilities through reinsurance, insulating the private market from Pinnacol’s retroactive liabilities once it becomes a member of the guaranty fund. Pinnacol would operate on a completely level playing field.
Instead, this year’s proposals sought greater marketing freedom for Pinnacol while retaining key features of a government-created insurer. The result would have been an enterprise guaranteed a market (residual risks) that is able to deploy its assets to compete unfairly against the private market, in Colorado and other states, while tasked with new public functions – “funding economic development and higher education scholarships.”
How is a supposedly private entity mandated by statute to use its capital to finance unrelated public policy objectives?
Pinnacol would continue to be governed by a majority of its board, appointed by the governor. It is not possible for Pinnacol to be deemed private (or separate) with its board appointed by government designees, any more than it would be for a private insurer’s board to be so designated.
The governor and Pinnacol contended their proposals were fair because Pinnacol would pay federal income and state premium taxes, just like private insurers. However, so long as Pinnacol is tethered to the state, the legislature and governor can change the terms of the deal.
Neither the governor’s nor Pinnacol’s restructuring proposal would have been “privatization” nor a “separation,” in view of the indicia of state interest Pinnacol retained. There now is an opportunity to do the job right: Leave Pinnacol alone, or get the state out of its business completely and free Pinnacol to compete as a private insurer in fact.