California State Fund Restructures Broker Distribution

By Don Jergler | September 4, 2012

California’s State Compensation Insurance Fund has changed its broker distribution model, requiring most of the roughly 5,000 brokers and agents the entity deals with to go through one of two wholesalers.

The change, which is effective Jan. 1, 2013, establishes “premium thresholds to qualify for a direct contract,” San Francisco-based State Fund announced on Tuesday.

State Fund is launching Access State Fund. Two authorized broker access partners were selected under the new model—StateFund First, administered by Arthur J Gallagher & Co. Ins Brokers of California, Inc., and RIC Insurance General Agency, Inc.

The change doesn’t apply to all agents or brokers. It applies to those whose books business are $100,000 in premium or less.

An estimated 3,500 agents and brokers will be impacted. Those affected have until Oct. 1 to select an access partner. Brokers were notified of the new premium thresholds in November of 2011, according to State Fund.

As the system is set up now, State Fund goes through a large number or agents with little volume, but reducing all that business down to two aggregators will improve efficiency, Tom Rowe, president and CEO of State Fund, told Insurance Journal.

Rowe noted the changes are part of State Fund’s ongoing fiscal restructuring plan, which included a massive reduction of employment ranks last year.

“What you’re looking at today is probably 20 months into a transformation plan adopted in 2010,” Rowe said. “As you get further into that long-term restructuring, the public or the marketplace gets to see more of what you’re doing. This is a process of change that’s been under way for quite some time.”

State Fund released its annual report in April showing just over $1 billion in net premiums earned, a drop from 2010’s figures. State Fund reported adjusted actual net premiums earned of $1.002 billion for the year. That’s down from 2010’s reported $1.136 billion.

Some of those losses were incurred before some of the savings from workforce reductions could take effect, but they are also being driven by escalating costs in California’s workers’ comp system, something that Rowe said he hopes legislation headed to Gov. Jerry Brown’s desk will begin to address.

Senate Bill 863 promises to increase benefits to injured workers by more than $700 million annually, while reducing overall costs.

“We’re evaluating 863 and from our analysis we see it reducing system costs in the order of magnitude of over $500 million annually,” Rowe said. “Because we come from a position of fair, balanced and adequate rates, we’ll be able to transfer that system-wide savings to our policyholders should it be signed and should it be implemented as is according to our preliminary assessment.”

Attorneys who represent injured workers have stated continued opposition to the bill, and some in the industry have questioned the amount of savings that the bill’s proponents are touting.

In 2010 State Fund announced its plan to reduce annual operating expenses by around $250 million a year. The restructuring decision followed a detailed review of State Fund’s business, including comparing State Fund to other state funds and specialty companies that write workers’ compensation in California.

“And we’re on track to do that this year,” Rowe said of the plan for savings. For fiscal year 2012, State Fund is on track for a $200 million anticipated reduction for the year through the first seven months of 2012. State Fund is heading for a three-year target reduction of $300 million, he added.

Much of that is workforce reduction, as well as reduced inefficiencies, he said.

“By the end of this year we will have reduced staff by 3,000 employees,” Rowe said, noting that figure is from 2010. He added that the most recent change is not just to reduce the inefficiencies of dealing with so many producers, but “it’s focusing at improving the accuracy of our rates.”

Riley Binford, executive vice president of State Fund First, said he believes the efficiency of State Fund will be increased greatly with the change.

“By going from a large number of agents that were producing very little premium volume to working with only two wholesaler-aggregators, also known as access partners, this does improve their efficiencies,” Binford said, adding that agent commissions will not be cut.

Jennifer Vargen, a spokeswoman for State Fund, the costs associated with dealing directly with 5,000 brokers factored into the decsion to make the change.

“More than 70 percent of those contracts had less than $100,000 in premiums placed with us,” Vargen said. “And many of them had significantly less.”

The remaining 1,500 brokers and agents who will be left to deal directly with State Fund account for 90 percent of their brokered business, according to Vargen.

Rowe acknowledged there may be some blow back from agents and brokers not happy with the switch.

“Any time you change anything you always generate some questions and some disagreement,” Rowe said. “We’re pretty convinced we’ve done the right thing to improve the efficiency of the system for everybody.”

Brokers who are not eligible for a direct contract any longer can continue to access State Fund through the Access State Fund partners at the start of the new year: Arthur J Gallagher, Riley Binford (855) 784-4433, ext.  8438 riley_binford@statefundfirst.com; RIC, (855) 851-7827, accessstatefund@ric-ins.com.

California brokers– Let us know with your comments how you feel about this change and how it will affect you and your customers.

 

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Latest Comments

  • September 10, 2012 at 12:45 pm
    Riley Binford says:
    Hi All - This is Riley Binford from StateFund First, one of the approved Access Partners to the State Fund. I noticed that many of you have voiced concerns about the possibili... read more
  • September 6, 2012 at 6:50 pm
    gman says:
    why lose the commissions by having client go direct? and you are right on the taxes/fees....but these wholesalers are not going to work for free, they will put a broker fee on... read more
  • September 6, 2012 at 6:37 pm
    Furrie Princess says:
    gman, not all wholesalers are excess/surplus lines. Surplus lines premium taxes and stamping fees only apply to business written with non-admitted insurers. So there will not... read more
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