Reaction to a decision by State Compensation Insurance Fund to restructure its broker distribution model has ranged from guardedly optimistic to visceral the day following the announcment.
Under the new deal announced on Tuesday premium thresholds are being established to qualify for a direct contract with the quasi-private state agency. The deal is part of a fiscal resturturing of State Fund to reduce losses that has been ongoing since 2010, and includes massive workforce reductions.
Those who do not meet a $100,000 minimum must now deal with Access State Fund, giving them a choice between two authorized broker access partners were selected under the new model. Those wholesalers are StateFund First, administered by Arthur J Gallagher & Co. Insurance Brokers of California, Inc., and RIC Insurance General Agency Inc.
An estimated 3,500 agents and brokers will be impacted.
Listen to a podcast with one of State Fund’s new partners.
Historically State Fund has insured about a quarter of the state’s workers compensation market each year. Considered California’s largest provider of workers’ compensation insurance, State Fund reports 130,000 policyholders and more than $1 billion in premium, and has partial autonomy from the state government – though it answers to the California Department of insurance like others in the industry.
It’s status as a state-created agency had some wondering why it shouldn’t be directly accessible to all.
“The State Fund is a government agency and should be open to all insurance agents having a license and been appointed by it according to its own ruling, but apparently it is planning on becoming more sophisticated and thinking it will be saving money, but at the end of the day it will continue to deteriorate as retail agents will look for other sources,” said Manuel Acevedo, with Farmers Insurance in Santa Ana.
Glenn Mavros, president of an agency under his own name in Torrance, said the change won’t affect his business, but he believes it will have a negative impact on other agents.
“It won’t affect us at all, but I expect there are a number of agents who will realize less revenue simply because State fund is forcing them to use a third party for access,” he said. “State Fund has a terrible service reputation amongst middle market policyholders for the past 10 years. Even when I defend them or praise their few virtues I get deaf ears. For the past five years they priced their services way above market, which made it virtually impossible to sell them. So now they impose this brilliant idea to cut the number of agents who can directly access their overpriced services. All in the name of ‘streamlining?'”
He added, “State Fund was once one of our largest carriers by far. I really don’t think cutting the number of agents is going to help them a bit. It has alienated even more agents against them now. How can this be a good thing, I don’t know.”
There were also those who questioned whether commissions would drop, and exactly how State Fund’s deal with the wholesalers is structured.
State Fund would not disclose how much the wholesalers are getting from the deal, only that agents and brokers would not see their commissions change for the next year.
“At this point our contracts with them are not public documents,” said Jennifer Vargen, senior vice president of marketing and communications for State Fund.
She noted that under California’s public records laws those contracts will become public record a year after they were executed.
Regarding brokers’ and agents’ commissions, the insurance code grants the right to one year’s renewal and the full commission for that renewal.
“In the first year their commission will not change,” Vargen said.
However, it’s not clear how commissions will be structured following that first year.
“Following that there will be a different commission structure,” she said, adding that the second year and beyond will resemble other types of wholesaling for brokers and agents. “It will be more in line with the market in terms of commissions through wholesalers.”
The change takes a scant amount of workers’ comp business from 3,500 agents and brokers and filters it through two wholesalers, improving efficiency, according to Vargen.
“We’ve been cutting staff in anticipation of this move,” Vargen said. “It is definitely going to help us streamline.”
While it may reduce the workload in accounting it has not been made clear how filtering the business through wholesalers will reduce costs in a new system that is intended to be reflective of a market in which wholesalers typically earn 5 or 10 percent on top of an agent’s commission.
Both state fund first and RIC insurance were thoroughly vetted, and part of why they were chosen was they each had a proven commitment to provide service to brokers and agents, Vargen said.
She noted than 90 percent of State Fund’s brokered premium comes from those agents and brokers who will retain direct contracts.
“We will retain 1,500 direct contracts with these brokers,” she added.
State Fund was established in 1914 by the state legislature, but other than that it operates like a business, and like others in the insurance industry it is governed CDI.
Vargen said State Fund has met with the CDI quarterly and updated them on the restructuring.
“As our regulator we always keep them informed with what we are doing,” she said. “There’s nothing political about this. This is a decision that will streamline State Fund. I think the solution we’ve come up with is quite elegant.”
That solution, she noted, set a $100,000 threshold, but that allows for just one year at or above the threshold in the past three years.
“You have to have had it in one of the last three years,” she said. “We recognize we play a unique role in the marketplace. There’s nothing political in this decision. We are doing our very best to meet the needs of all California employers.”
Some agents expressed understanding that the change would enable State Fund to deal only with those with a focus on and solid understanding of workers’ comp and how State Fund works.
“We got a letter late Friday from them that basically says if you don’t have $100,000 in volume with them then you will have to choose one of the aggregators for State Fund,” said Jim Armitage, with Arroyo Insurance in Arcadia, which writes enough business to be above the premium threshold. “I just think that they’re trying to deal with backlogs, and having to deal with a lot of different agents, some of which are not very knowledgeable about having to work with State Fund.”
Bill Kulchin, CEO of Kulchin Ross Insurance Services Inc. in Tarzana, said he believes the new deal could eventually lead to higher premiums for policyholders and reduced commissions. He also agreed the change makes State Fund’s operations more like those in the standard market.
“The difference with (State Fund) taking this approach, is that many (State Fund) policyholders and their agents don’t have a choice of carriers if their class of business is simply outside the standard market appetite,” said Kulchin, who writes enough business to keep a direct contract with State Fund. “So that means (State Fund) has a unique responsibility to the market, and the market includes both the policyholders and their agents who faithfully service all the other coverage lines.”
Kulchin offered a bright-side view as well:
“But it’s not like they can’t access (State Fund) at all. And maybe they lose a few points of commission on their small book. It might actually encourage these agents to get off the sidelines and grow their book.”
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