The board of directors for State Compensation Insurance Fund (SCIF) heard the news last week — the carrier’s declining market share conspired with its still high loss adjustment expenses to push its combined ratio to 161.5. The carrier’s market share is now likely below 20%, down from a high of more than 50% just a few years ago.
Interim President Doug Stewart pointed to that massive drop-off as he sought to explain the jump in the combined ratio. He says much of this was driven by an increase in its loss adjustment expense (LAE) ratio from 36.7% to 46% — a problem he says SCIF is trying to manage through on a longer-term basis.
“We recognize that our LAE and resulting combined ratio are well above industry benchmarks and deserve discussion,” Stewart told the board. “As you know, State Fund has a substantial inventory of open legacy claims from 2001 to 2006 when our market share was unusually high due to the workers’ comp crisis in California. Stated differently, we are servicing a higher volume of claims than would be typical for an insurer writing our current premium level.”
A recent Rand report suggests that SCIF’s market share grab exacerbated the crisis that resulted in the demise of many small carriers and its increased market share. That market share resulted in the heavy claims load.
It is unknown at this time what increases to reserves (if any) SCIF has made in the past quarter.
As to that shrinking market share, Stewart maintained that the carrier’s leadership is focused on its underlying financials. “We know it is better to forgo market share to maintain a sound underwriting discipline,” he said.
Overall, a number of factors contributed to SCIF’s performance.
“The soft market and rate pressure from our competitors resulted in a big reduction from what we thought we’d make in terms of revenue,” said Chief Financial Officer Jay Stewart in explaining that SCIF ended the year with direct written premium of $1.25 billion. This missed budget by more than $300 million and was down $438 million from last year.
But in net income, the carrier came in well above budget.
Stewart noted that SCIF budgeted just $4 million in net income but reported $143 million. In past years this would have been $213 million, but the carrier now accounts for other post-employment benefits (OPEB) — primarily retiree health care expenses — and that brought the total down by $70 million.
Three factors played a role in the better-than-budgeted bottom line: slightly lower than expected underwriting losses, slightly better investment returns, and a reduction in the amount of uncollectable premium.
Stewart said underwriting losses ended the year at $723 million compared to a budget of $795 million. In 2008 the total was $736 million. Investment income came in $58 million over budget at $908 million, a 4.6% yield. And premium write-off was basically half of the 2008 total — $46 million compared to $88 million.