N.Y. Workers Comp Insolvency Fund Could Survive Until End of March; Quick Action in Albany Sought

By | February 18, 2005

The New York State Workers Compensation Security Fund, which officials last month predicted would run out of money by the end of this month, could go on paying claims until the end of March, thanks to early access to funds from an out-of-state liquidation and monies from the second injury fund.

The fund received an unexpected early distribution of $6.8 million from the liquidators in New Hampshire of The Home Insurance Co. and an additional $2.3 million from the state’s own second injury fund. While the workers comp guaranty fund may now survive for a few more weeks, regulatory officials told lawmakers this week that quick legislative action would still be needed to keep it paying claims of injured workers after that.

That news of the brief reprieve for the troubled insolvency fund came out of a legislative hearing earlier this week into its administration and what should be done to fix its financial problems.

Lawmakers were told that even the prediction of enough monies to last another few weeks is not cast in stone. “Like the estimates provided in January, though, this projection of course assumes that the fund’s distribution patterns remain consistent. Should the fund’s payouts increase over the next month, the fund may become insolvent sooner,” Peter Molinaro, senior deputy superintendent of insurance, who oversees the fund, told the labor and insurance committees this week.

Based on the current one percent assessment rate (which by statute the fund must stop levying when it has $74 million), the fund collects about $20 million a year. Payouts from the fund totaled $46.6 million in 2002, $59.6 million in 2003, and $82.9 million in 2004. According to the latest projections, $88.2 million will be paid out in 2005.

The assessment monies are supplemented by recoveries from the estates of insurers including from other states that have been placed in liquidation. Those funds from liquidated estates amounted to $46 million in 2004. Even with those estate funds, however, the New York pool is facing monthly payouts that far exceed its assessments and recoveries.

The fund is responsible for paying claims to about 7,500 claimants, mostly injured workers in need of medical treatment or permanently disabled and dependent on their monthly checks from the fund to support themselves on a day-to-day basis.

Assemblyman Pete Grannis, chair of the insurance committee, and Assemblywoman Susan John, chair of the labor committee, called the hearing. They asked why the legislature was not notified sooner about the financial crunch. According to the hearing notice, the insurance department first notified the legislature in late January of this year that the WCSF would be bankrupt in a matter of weeks and unable to pay claims as of March 1, 2005.

Contrary to the impressions given at the legislative hearing, the financial weakness of New York’s insolvency fund for workers compensation was not sprung on lawmakers at the last minute, according to Molinaro.

“This did not fall out of the sky,” he commented after the hearing in an interview with Insurance Journal. Signs of trouble came as far back as 2001, he noted.

Molinaro outlined a history of warnings, reports and proposals dating back to at least 2001, when Reliance Insurance Co. was declared insolvent.

“There is no question that the insolvency of Reliance in 2001 served as the first warning that the current assessment rate was insufficient to meet the fund’s current and projected liabilities,” Molinaro stated.

Also, the potential shortfall was discussed with legislative staffers last April and possible fixes were included in stalled legislative proposals in 2003 and 2004, according to Molinaro.

The effect of the Reliance failure has been significant. In 2002, some $31 million, or more than two-thirds of the fund’s total disbursements, were to Reliance policyholders. By 2004, $38 million or 71 percent went to cover Reliance claims.

However at that time in 2001, the fund carried a note from the state for $67 million that the state has been gradually repaying. The fund has been required to carry this note as an asset against the mandated $74 million threshold, which has prevented it from restarting insurer assessments.

The insolvency of Legion Insurance Co. in 2003 also had a major impact. In 2003, the fund paid some $8.7 million in Legion claims and in 2004, $20.1 million.

The state’s repayment of the $67 million allowed the fund to meet its obligations but those payments ended in 2004. Since 2001, when assessments were resumed, the fund has been operating below its $74 million threshold.

Molinaro devoted much of his testimony explaining the imprecise nature of predicting what and when insolvency claims will become due from liquidations of companies in the state and those handled by other states.

He noted that the department is currently closely monitoring two insurers, one in the state and the other from outside the state, and must be prepared for the possibility that additional liquidations are ahead.

The Pataki Administration has proposed granting the workers’ compensation fund the authority in an emergency to transfer funds from another security fund, the property casualty security fund.

The administration has asked that $50 million be funneled into the workers’ comp pool from the property casualty pool. It is also recommending that the current 1 percent of written premium assessment on workers’ comp carriers be raised to 2 percent to provide additional monies.

Molinaro said he was disappointed that so much effort at the hearing went into trying to affix blame for the problem but remains confident a solution will be found “for all parties, injured workers, insurers and the public.”

“We hope we advanced the cause forward,” he told Insurance Journal.

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