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Rudolph Giuliani's consulting firm delivered in mid-April a report on the state of affairs at the board and senior executive levels of Beacon Mutual, the workers' compensation state fund in Rhode Island.

You can interpret its findings on three levels. First, there was a pattern of self-dealing among board members, with the CEO acquiescing. Enabling that was a culture of letting the board and the executives have their way. The end result was a loss of mission, which sooner or later was going to do in the company.

The legislature agreed but the governor disagreed. Brick-throwing eventually degenerated to mud-slinging. An anonymous employee within the insurer made phone calls late last year. The insurer's board chairman resigned under a cloud in February. Days after the consultants delivered their report in April, the board suspended its CEO.

The report says, among other things, that the chairman of the board refused for years to provide Beacon with payroll documentation for his temporary employment firm. Beacon simply estimated his premium then applied premium credits, a number seemingly picked out of the air.

Beacon's largest account, a multistate health-care company, was given huge premium credits despite loss ratios as high as 189 percent. Its conflict-of-interest guidelines was, as far as board members were concerned, not applicable. There was no rotation of underwriters to ensure objectivity. New board members were told to mind their manners. Beacon executives, who had ordered the study in part to pre-empt a state audit, told the consultants that even though it held 76 percent of the insured market, it still needed to grow, in particular by loosening but not severing its special status.

Ironically, the insurer has been doing a much better job than most workers' comp insurers in managing work injury risk. It has served as a sort of laboratory of good ideas. This partly explains how Beacon, founded in the early 1990s to solve a huge assigned-risk pool mess, today controls three quarters of the workers' comp insurance market in the state.

But it came to treat its legacy of having pulled the market from the flames as some kind of mandate from heaven. It wanted, in effect, to continue to borrow the state seal while pitching a nationwide insurance venture.

This gets to the governor's concern. He still, it appears, wants the insurer to remain a state fund, unaltered.

At its root, the problem is that Beacon lost its connection with a legitimate mission. One was to rescue the state from temporary market collapse, a mission that was accomplished by the late 1990s.

The other was to bind itself with hoops of steel to reduce work injury risk to negligible levels. It was working on that, and was more successful at it than many state funds. But the pursuit of getting bigger took over.

Might I remind readers that that is what got the California State Insurance Fund into trouble. Trying to turn itself around from years of binge expansion, S.C.I.F. has been without a permanent CEO for more than a year. Beacon needs to stick with a legitimate mission: manage down worker injury risk in Rhode Island. Otherwise I believe it should be privatized, completely.

PETER ROUSMANIERE is a Vermont-based writer and columnist for Risk & Insurance®. He has also worked for the state funds in California and Rhode Island.

June 1, 2006

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