When someone mentions Arizona these days, it is usually because of the running battle over its recently enacted immigration laws. But a few intriguing developments in the Grand Canyon State should cause the workers’ comp community here to take note.
Most states have small economies and large state workers’ comp funds. Nevada is going through an economic crisis as serious as California’s (but with a lot fewer zeroes attached to it), and much of its business remains locked up in groups that came into being when no private insurers wrote in that state. Almost half of Arizona’s market resides in the Arizona State Compensation Fund, which by 2012 will be a private mutual insurer taking its capital and spending it elsewhere, and which has about the most arcane rate law in the region.
For years, indeed decades, the Arizona Department of Insurance has resisted regulatory or legislative changes to its prior approval law that would bring more competition into that workers’ comp insurance marketplace. But now there are signs that this policy is starting to change.
Recently, the National Council on Compensation Insurance (NCCI) filed a proposed change to Arizona’s schedule rating plan to allow insurers to forego a physical inspection of businesses with less than $100,000 in annual premium. This, by California standards, is laughable given the “what was your last quote” underwriting standard here. But by Arizona terms, this is almost a sea change. To be sure, Arizona’s schedule rating plan still will have a plus/minus 25 percent cap on it – likely to invoke even more snickers from the Golden State – but the thought that even this incremental liberalization in pricing would get a hearing in Arizona is not to be ignored.
Does this mean a sudden surge of capital into Arizona? No. Its economy won’t support it. But it is a signal that capacity in the system is looking for new places to deploy profitably. And that is why the Arizona changes should be noted.
It also isn’t just Arizona. Recently, the Colorado Legislature went through a painful and unsuccessful effort to privatize its state fund, Pinnacol Assurance. Employers in Washington state are growing weary of its monopolistic Labor and Industries, and are marching toward placing an initiative on the ballot to bring three-way into the Evergreen State. Where is the insurance industry in all this? Working to support these efforts behind the scenes, implementing a long-held policy that the state should not be in the business of providing workers’ comp insurance. A critical mass of insurers would rather see an assigned-risk plan in place than a carrier with more than half the market share that doesn’t pay federal income tax.
That brings us back to California. As carriers look for ways to open up markets in the region, regulators should be concerned because California once again is moving to the brink of systemic rate inadequacy. Thus, carriers looking for top-line growth have to go elsewhere, and in the region that means opening up markets in states such as Arizona, Colorado and Washington. Sound familiar? Rather than deal with dysfunctional California, the industry – and nervous regulators who see low premiums as a boon to flagging economies – are trying to bring California’s problems to Phoenix, Denver or even Olympia. That’s no way to make the system work, but it appears that in today’s expedient political and regulatory environments, short-term gain is far more important than the long-term goal of making workers’ comp live up to its promise.