Potential Sale of California Workers’ Comp Insurer Assets Creates Concerns

By | June 25, 2009

California Insurance Commissioner Steve Poizner said he is “troubled by the details of the proposal” to sell some assets of the state’s workers’ compensation insurance, State Compensation Insurance Fund (SCIF).

Gov. Arnold Schwarzenegger in his 2009-10 May Revision General Fund Proposals, proposed seeking “a private entity to purchase a portion of SCIF’s book of business, with the SCIF remaining as the insurer of last resort.” The Governor is hoping that by selling some of SCIF’s assets to a private party, the state will generate $1 billion in revenue to help improve its bottom line; the state currently faces a $24.3 billion budget shortfall. He forwarded his proposal to the state Legislature on June 19.

Yet Commissioner Poizner said he was concerned about the Governor’s proposal, and issued a list of 16 considerations that policymakers should consider in such a transaction. For example, he noted that SCIF is the insurer of last resort for employers unable to find insurance in the private insurance market, as well as a market competitor, which allows SCIF to spread its risk more broadly. “What is the implication for rates if the risk pool contains only the highest risks? If SCIF loses the ability to balance its book by writing voluntary business in addition to ‘insurer of last resort’ business, will it be able to adequately manage its risk and remain viable?” he asked.

Additionally, SCIF is an autonomous public enterprise fund whose financial resources are used to ensure its ability to pay policyholder claims. Currently, any excess capital in the fund is returned to policyholders in the form of dividends or renewal premium credits. “What is the implication for policyholders if excess capital is diverted to other use? For injured workers?” Poizner added.

The proposal has three main objectives: 1) to maintain a sound workers’ compensation system; 2) continue with the SCIF as the insurer of last resort; and 3) achieve the highest value for the state, according to Rachel Cameron, deputy press secretary for the governor.

Yet “A hasty or ill-considered sale could wreak havoc on the already volatile workers’ compensation market,” Commissioner Poizner warned. “Any sale would have ramifications throughout California’s business community, affecting the availability and cost of workers’ compensation insurance for all California’s employers. Great care must be taken to ensure that a sale of State Fund assets does not place additional stress on California’s already reeling economy.”

In particular, the Commissioner took issue with the proposal’s decision to eliminate oversight of a sale by his office or the Attorney General, especially when such a transaction affects a company that writes more than one out of every five workers’ compensation policies and is the largest insurance company in the state.

“Notwithstanding any other provision of law, neither the approval of the Attorney General, Insurance Commissioner, nor of the Director of General Services is required for execution and implementation of the sale or other disposition of the assets and liabilities of the State Compensation Insurance Fund,” the proposal states.

But the Commissioner said there is no other agency in the state besides the Department of Insurance that has the necessary expertise to determine whether any systemic change to SCIF’s structure is appropriate, especially one of such magnitude.

“No such change should be made without affording the Commissioner the opportunity to assess the change, to inform the stakeholders of any associated hazards or benefits, and to ensure that the workers’ compensation market remains financially sound and that California’s employers continue to have access to affordable workers’ compensation coverage. Is it good public policy to prohibit the primary insurance regulator from having any active role in imposing possibly historical changes on SCIF? Does the current budget process provide adequate input and expertise in determining the answer to the questions posed above?” he said. “State government should cooperate to ensure the least market disruption. With unemployment at record levels, California employers and employees deserve nothing less.”

Sources: Governor’s Office, DOI

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