California’s State Insurance Fund Sale Considered Unlikely

By | August 26, 2009

The state of California plans to sell off some of its State Compensation Insurance Fund, which writes workers’ compensation policies, for $1 billion. Or does it?

A growing number of officials and experts now think the sale, adopted as part of a state budget deal, is unlikely to happen. Others say it will be a seriously bad deal for workers’ compensation in the state if it does occur.

“It is not really imminent,” said Patricia Lombard, a communications consultant for Insurance Brokers and Agents of the West. “It is one of those things that has taken on a life of its own. But that doesn’t mean it is likely to take place.”

A recent newspaper article said that the mere mention of the sale “draws snickers around the Capitol.”

The State Compensation Insurance Fund (SCIF) was inaugurated in 1914 when the state first required employers and it has since become the insurer of last resort for workers’ compensation insurance for small and high-risk employers in California. The fund currently has about 20 percent of the state market, but as recently as 2004 it had 56 percent.

The notion of selling its assets came about as the legislature wrestled with passing a state budget that was deeply in the red and egregiously, as the legislators cast about for ways to balance a budget without raising taxes or cutting services.

Even the board of directors of SCIF, which is often referred to as a quasi-public agency, have voiced their opposition to the sale, and that has become the basis of some debate. The bill that authorizes the sale of assets requires that the board review those assets identified by the state and determine if they are appropriate to sell. The debate centers on whether or not the board’s opinions are binding, or whether they are just advisory.

It is assumed that if the SCIF asset sale goes through SCIF would sell its best, safest policies. That would leave the Fund with only the high-risk policies for more dangerous occupations. The Fund might, therefore, have to raise its rates and that would hurt small business, defeat it’s purpose and might threaten it’s viability, Board members have said.

Mark Webb, vice president of government relations at Employers Direct Insurance Co., says the sale will create turmoil in the market, leading to loss of confidence and, perhaps, some companies opting to stop writing policies in California, something that occurred not too long ago.
“I think that carriers would be reluctant to write more business in California,” he said.

Some experts have noted another reason the sale might never take place. The sale would probably take 2-3 years, and by that time its contribution to this budget would be meaningless. That has happened before. In 2007, the state authorized sale of EdFund, an entity that guarantees student loans. The sale has never taken place.

Michael D’Arelli, executive director of the Alliance of Insurance Agents and Brokers, Sacramento, said the sale would be “devastating” and called the plan “ludicrous.”

“A lot of our members write business with SCIF and thank god it is there,” he said. “We want SCIF around and we want it healthy.”

SCIF is said to write one in every five workers’ compensation policies in the state. It currently covers about 180,000 California companies and is estimated to have assets worth a bit more than $20 billion.

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