The insurer of last resort for workers’ compensation coverage in Texas is seeking to cut its last ties to the state government that created it.
Texas Mutual Insurance Co. was established by the Texas Legislature in 1991 as the result of reforms in 1989 and 1991 aimed at rescuing what was at the time a workers’ compensation system that by all accounts was not working.
At the time it was created, the company was subject to oversight by state officials on several fronts. Over the past two decades Texas Mutual and the state have gradually drifted apart, and now the company is seeking to release itself from the last two significant provisions that tie it to its creators: government control of appointments to its board of directors and its role as the sole residual market for workers’ compensation.
Texas Mutual’s board in August asked management to develop a plan to facilitate the company’s final separation from the state, said Terry Frakes, senior vice president of public affairs. Now the company hopes to have a bill introduced in the 2013 session of the Texas Legislature to do just that.
“When we were created in ’91 we had several ties to the state,” Frakes explained. “The AG had to approve our use of outside attorneys. The state treasurer oversaw our investment program. We were subject to sunset review process; we were subject to open meetings, open records.”
The company received an initial $5 million loan from the state to begin its operations, set up an office and hire people. “We got that money, I believe it was in December of ’91,” Frakes said. “We repaid it with interest by April of ’92. That was the only money we ever received from the state.
“We’ve never been a state agency. We’ve never been state employees. Each of those ties has since been removed over the years, to where now the two really big ones are the appointment of the board members and the residual market.”
It’s not just that Texas Mutual no longer wants to be the only source of workers’ comp insurance for those businesses that can’t find it elsewhere. The ties that bind it to state government also serve to keep the company being able to expand into other states where its Texas-based customers have operations.
“Currently there is nothing in our statute that prevents us from seeking to be licensed in other states,” Frakes said. “What prevents us from doing that is there are 20 some states who have laws on their books that say a carrier wholly owned by another state may not be licensed in this state. Three of the four contiguous states to Texas have those laws on their books. Louisiana is the only one that doesn’t.”
Texas Mutual contracts with another carrier to write coverage for a Texas customer with operations in another state. But, Frakes said, “We have to write it on that other carrier’s paper. We have to write it at the rates that carrier has filed for in that particular state.”
One major drawback in that arrangement, for the employer at least, is that the share of business that is out of state is not eligible for Texas Mutual’s dividend program.
That program “is very lucrative,” Frakes said. “We just paid $150 million in dividends this year and we’ve paid over a billion dollars since ’05.”
Frakes said other major stakeholders in the state’s workers’ comp system – other carriers, insurance trade associations, business groups, labor groups, lawmakers and even the governor – all seem supportive of the effort. But they do want to see the language of the bill.
“I think there is a fairly large group of people that think the government stepped in in ’91 to create this entity during a crisis. There is no crisis today. For 20 something years this system has worked really good. We’ve taken steps to prevent what caused the crisis back in the ‘80s. And the state needs to get out of the insurance business,” Frakes said.
Texas Mutual gives up a fairly significant tax advantage if it is successful in untying its strings to the state. Because the majority of its board is appointed by the governor and because of its status as the workers’ comp insurer of last resort, Texas Mutual pays no federal income taxes.
“We knowingly are giving up the tax exemption,” Frakes said. “And we will be leveling that playing field.”
Texas Mutual has well under 100 employer customers – Frakes said there could be as few as 80 – that are considered to be in the residual market. That low number is a testament to the effectiveness of the state’s workers’ compensation system.
But, Frakes pointed out, it may not always be that way.
The way Texas Mutual sees it, having the whole of the residual market vested in one company may not be such a good thing if circumstances change.
“Somewhere down the line, if something were to happen, either to Texas Mutual or to the economy or to the comp system, you have a residual market that wholly relies upon the financial integrity of one company. If something happens to us, what happens to the residual market? It would strengthen the residual market if every carrier had a stake, which in the majority states that is how it is set up,” Frakes said.