Management shaken up, investigations ensue at Calif. State Fund

By | April 9, 2007

California Gov. Arnold Schwarzenegger’s administration is continuing its efforts to clean house at the State Compensation Insurance Fund, most recently with a management shakeup.

Jeanne Cain, the administration’s appointed president of State Fund’s board of directors, announced that the state-chartered workers’ compensation insurer’s board ousted President James Tudor and Vice President of Group Programs Renee Koren.

While SCIF said it could not comment directly on the firings because they are personnel actions, Cain said in a written statement that State Fund directors took the action after receiving the results of an internal review commissioned by the board.

“Those results convinced the board that a leadership change was in the best interest of the organization and, most importantly, State Fund’s policyholders,” Cain said. She added that the board “is committed to ensuring that we continue to follow the correct procedures and process in handling this matter.”

Investigating group programs
In the wake of the sacking of the two executives, the Senate Banking, Finance and Insurance Committee held a hearing to examine State Fund’s operations, which Committee Chairman Mike Machado said is “the first step in an ongoing process to scrutinize the State Fund.”

At the hearing, Nanci Clarence of the San Francisco law firm of Clarence & Dyer LLP, which is overseeing an internal investigation of SCIF, testified that the investigation is focused on the administrative fee program that provides discounts to group programs. She explained the program began in 1993 to provide group members discounts to reflect lower risk due to workplace safety programs run by the groups.

Clarence testified that evidence uncovered during the investigation was of such importance that it required an interim presentation to the board before the investigation was completed. That presentation led to the firings of Tudor and Koren, which came several months after the Schwarzenegger administration confronted two State Fund directors over potential conflicts of interest over administrative fees they received from State Fund in connection with group workers’ compensation insurance programs they manage.

Frank DelRe, president of Western Insurance Administrators of Long Beach, Calif., and Kent Dagg, CEO of the Shasta Builders Exchange in Redding, Calif., resigned after administration officials discussed the potential conflicts with the two directors.

“We are following the evidence wherever it leads us” and involves extensive examination of electronic data and dozens of interviews with State Fund employees, Clarence said.

New directives
Meanwhile, California Insurance Commissioner Steve Poizner has ordered an audit of SCIF. “This audit will be an independent, thorough, top-to-bottom examination of SCIF to include a review of matter relating to the recent dismissals, as well as all aspects of the organization and its governance,” he said.

Poizner also issued directives regarding structural and operational changes. He asked SCIF to respond to his call to action within 14 days or face formal regulatory action, which could include a public hearing.

The Commissioner advised State Fund to address:

1. SCIF must transfer internal audit oversight to the board of directors or to an independent audit committee of the board of directors.

2. Establish an audit committee comprised exclusively of board members to maintain oversight and communication with the internal and external audit functions to ensure the integrity of financial statements, internal controls, compliance with legal and regulatory requirements, and findings of internal and external audits.

3. Immediately establish a chief financial officer and a chief investment officer position. SCIF does not currently have those positions.

4. Limit the general counsel’s responsibilities to legal services only so as to maintain objectivity and to avoid potential conflicts of interest.

5. Immediately dismiss or place on administrative leave of all management who knew of, or who by virtue of their positions should have known of, improper payments made by SCIF.

6. Adopt a clear conflict of interest policy and code of ethics for board members and management staff to avoid the types of conflicts of interest which have occurred at SCIF in recent years.

“California’s businesses and injured workers depend upon SCIF to serve as a healthy, functioning organization,” Poizner said. “Anything less than full public accountability and transparency is wholly unacceptable.”

Schwarzenegger’s fixes
In addition to the personnel housecleaning, the Schwarzenegger administration is sponsoring bills AB1682 and SB746 to make unspecified changes in SCIF’s operations and management.

“Right now we’re just working with the bill authors on what potential fixes are needed,” said Administration Spokeswoman Sabrina Lockhart. “We’re still working to get a broader grasp on what’s occurring and what fixes need to be made before we put forth specific language.”

Lockhart noted Schwarzenegger approved legislation last fall, Assembly Bill 2125, authorizing the governor to appoint a recovery administrator in consultation with the Legislature should State Fund’s risk based capital decline to the point the DOI would be authorized to place an insurer under regulatory supervision. The governor also approved legislation that subjects State Fund to oversight by the Bureau of State Audits.

Multiple factors came together in 2002 and 2003 that led to increased political pressure and calls for more stringent oversight of SCIF that set the stage for increased scrutiny by the Schwarzenegger administration when it took office in late 2003.

Volatility in California’s workers’ comp insurance marketplace following rate deregulation in the 1990s led to the insolvency of numerous private insurers, ballooning State Fund’s typical 20 percent market share to a high of 53 percent in 2003. That year, rates were on a rapid ascent, leading to calls from employers for rate relief that magnified attention on the State Fund and its majority market share.

State Fund’s rapid growth led to concerns by rating houses, regulators and lawmakers that it could not maintain sufficient surplus to pay claims. At the start of 2002, State Fund’s surplus had reached a level requiring the insurer devise a plan to boost its reserves, prompting then Insurance Commissioner Harry Low to order State Fund to do so.

State Fund then locked horns with Low’s successor, John Garamendi, who ordered it to revise its business plan and reduce its writings. State Fund unsuccessfully sued Garamendi, claiming he was meddling in its management and lacked authority to oversee its financial solvency.

The suit was settled legislatively after administration officials oversaw negotiations between CDI and State Fund that led to the enactment of AB 2125 last year — but not before State Fund spent more than $1 million prosecuting the litigation.

Conflicts also developed over State Fund’s role in California’s workers’ comp insurance marketplace. State Fund believed it was to serve as a competitive market, but Low, Garamendi and lawmakers such as then-Assembly Insurance Committee Chairman Tom Calderon believed it was to serve as a market of last resort. Calderon also complained State Fund stonewalled and was uncooperative with his committee’s efforts to conduct legislative oversight of the workers’ comp insurance industry. Cain testified that State Fund’s market share is projected to fall to 26.7 percent in 2007, down from the high of 53 percent reached in 2003.

As SCIF sorts itself out, attorney and industry consultant Lawrence E. Mulryan was named interim president. The board is conducting a national search for a new president. Mulryan retired last year from a 14-year stint as executive director of the California Insurance Guaranty Association.

Former president Tudor was named permanent State Fund president in Sept. 2006. He was a 35-year veteran of State Fund and replaced Dianne Oki who retired in March 2005.

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Insurance Journal West April 9, 2007
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