Peter Rousmaniere's article "An Analysis of Arrogance" (Risk & Insurance®, Apr. 1, 2005, p. 28) was a very good and much-needed look at California SCIF's notorious operations and unique position in the marketplace. I'm wondering if Mr. Rousmaniere plans to do a follow up article in light of the passage of SB 1452--a bill that allows the California State Auditor to scrutinize SCIF as it would a state agency.
On behalf of my clients, I keep a close watch on California workers' compensation, premium rate outlook, and the role SCIF has as the too-powerful court of last resort for beleaguered blue-collar industries, in particular.
SCIF has become increasingly desperate to keep existing business--even high-mod, high-risk business--increasing broker commissions by several percentage points and price-slashing (stated as "changes in underwriting procedures") to keep existing clients on the books.
This kind of overextension could likely result in adverse selection and instability that could ultimately have dramatic effects on California's economy.
JANA L. GANION
As collateral issues are often on our clients' minds, I read your recent article in Risk & Insurance® magazine with interest ("Collateral Damage," Oct. 1, 2006, p. 26). And while I believe it was a good topic to discuss with your readers, I think your section "How Carriers 'Pick' On You" is misleading.
In your premise, the loss forecast, or "pick," of $5 million at the beginning of year one is reduced by $1 million in paid claims at the end of the year. If the ultimate loss for this year remains at $5 million, and $1 million has been paid out, then there would be loss reserves of $4 million (a combination of case reserves and IBNR/RBNE) that still need to be secured or collateralized. So when you add the second year's $5 million forecast, the total collateral need is, indeed, $9 million.
Your comment--"So you're already over collateralized"--is incorrect. However, if you are saying that at the end of the first year, the original $5 million loss "pick" was conservatively high, and that the ultimate loss is now projected to be $1 million, then I would agree with you that the original collateral should be reduced accordingly.
Generally, about 20 percent of ultimate loss for workers' comp is paid out in the first 12 months. If the ultimate was, in fact, $1 million, then I would expect somewhere around $200,000 of paid loss at the end of the year, 20 percent of $1 million. If I saw this result, I would have a strong actuarial argument to go back to the carrier and get the collateral for the first year reduced.
It would not surprise me if some of your readers are now screaming at their brokers and/or carriers demanding reductions in collateral that are not justified. Perhaps an article on helping clients better understand loss development would go a long way to help clarify the collateral mystery.
RICHARD W. WRIGHT
SENIOR VICE PRESIDENT
Willis Risk Solutions
Willis Of New Jersey Inc.
Florham Park, N.J.
December 1, 2006
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