There is little sympathy for the insurance industry these days. From Wall Street to Pennsylvania Avenue to Sacramento, insurers have been targets of public disapproval. California workers’ comp insurers are not immune to this wrath. Neither the governor nor the insurance commissioner care to look at increasingly adverse loss ratios or an unworkably complex system. To take such a look might affect costs, and all these politicians care about is price. Don’t even ask a Democrat whether problems loom on the horizon for workers’ comp carriers.
Now the elephant in the room, State Compensation Insurance Fund (SCIF), has posted a disturbingly high combined ratio – 164%, to be exact – that reflects long-awaited recognition of some retirement medical costs for this quasi-public agency but also the same trends driving loss ratios upward for the entire industry.
What was the response to this news from the regulator? Still waiting. From the governor? Buried in the doomsday scenario of a postapocalyptic California – as his budget “reform” measures flame out in defeat May 19 – is a brief reference to $1 billion in one-time revenue to the starving General Fund by finding an entity “… to purchase a portion of SCIF’s Book of Business, with the SCIF remaining as the insurer of last resort.”
Funny, Publius doesn’t know of a “For Sale” sign in front of SCIF headquarters in San Francisco – and we know SCIF management doesn’t think there is one there, either.
This is not a raid on SCIF’s surplus, per se. Efforts to do that in neighboring states such as Oregon, and more recently over in Colorado, have met with failure largely because, truth be told, the state does not own the surplus – it is owned by its policyholders. This is a more subtle escapade, one that inures to the General Fund what is in essence one really, really big commission, selling off either large chunks of business or a loss portfolio transfer that wipes incurred liabilities off SCIF’s increasingly troubled books.
Last year, when this was first floated, it made some sense. It provided a way for SCIF to return to its historic mission while providing some much-needed cash to the struggling state. Now the bloom is off the rose. The system is not performing well, and we are close to revisiting a disturbing trend – irresponsible pricing in the insurance marketplace being confused with systemic cost reductions. To be sure, as the Workers’ Compensation Insurance Rating Bureau and others have said, there have been considerable cost reductions since the 2003-2004 reforms. But these reductions are not automatically sustainable. There is a point where the true cost of the system needs to be understood and discussed – an imperative no more attractive today than it was a decade ago to policymakers or self-anointed advocates for labor or business or medical providers or lawyers.
What does this have to do with SCIF? For the governor to find a buyer for this proposal, he needs to find insurers or managing general agents who are, for want of a better term, sufficiently gullible to believe this is a financially viable proposition. That will be more difficult than it was a year ago, but still not as difficult as it should be. In an environment of climbing loss ratios, incomprehensible decisions from the Workers’ Compensation Appeals Board, and escalating medical costs in part due to a system that still values lawyers’ opinions on medical treatment over doctors’, it should come as no surprise that the California workers’ comp insurance marketplace is far less attractive than it was a few years ago.
SCIF has a considerable surplus, profits mightily from its reserves, and is capable of sustaining a high loss ratio for the time being. But tinkering with that should be done very carefully. A loss portfolio transfer that is too large will cut off necessary investment income. Selling large books of business – even assuming that the governor and Legislature can compel such a sale – may create a cash flow problem that wipes the remaining surplus off the books and impairs SCIF. If policymakers had embraced the benefits of maintaining a stable, competitive marketplace, then there may have been enough capital to make this proposal work. But now we should all be as skeptical of the buyer as we are of the seller.