By DAN REYNOLDS, senior editor of Risk & Insurance®
Everyone had so many positive things to say for so many years about Gov. Arnold Schwarzenegger and his efforts to reform workers' compensation in California that it makes one wonder if all those efforts were in vain.
Look what's happened. A brutal state budget shortfall in the neighborhood of $24.3 billion has got the state rooting around for spare change. One of the places it's looking is California's State Compensation Insurance Fund.
In July, Schwarzenegger signed into law a bill that authorizes the state's Director of Finance, Michael Genest to sell as much as $1 billion in State Fund assets to help close the budget shortfall.
But the state's elected insurance commissioner, Steve Poizner, isn't charmed by the idea. He finds it so distasteful, in fact, that he has gone so far as to file a lawsuit challenging the move.
Poizner, who we might add seeks the same office now held by Schwarzenegger, is seeking a judge's ruling that would halt the sale of any State Fund assets and provide a permanent injunction against Genest, or the state's Treasurer Bill Lockyer from carrying out such a sale.
Poizner's main objections are two-fold, according to the lawsuit, filed August 27.
On a constitutional level, he feels the bill signed by Schwarzenegger circumvents the will of the people. Under California's Proposition 103, passed in November of 1988, the state's insurance commissioner is an elected position, not a gubernatorial appointment.
Unlike Poizner, Genest, the director of finance, was appointed to his position by Schwarzenegger.
"The voters who enacted that initiative could not have intended that the commissioner's regulatory duties be given to a nonelected, appointed official," according to statements filed by lawyers with Howard, Rice, Nemerovski, Canady, Falk & Rabkin in San Francisco.
"Moreover, the statute provides that the sale need not be approved by the Insurance Commissioner, the State elected official with the statutory duties of regulating the insurance industry, ensuring the solvency of insurance companies (including SCIF) and protecting insurance policyholders. This transfer of responsibility from the Insurance Commissioner to the Director of Finance will not further the purposes for which Proposition 103 was adopted--which included making the Insurance Commissioner politically accountable."
That angle might come across to some as flat-out bureaucratic wrangling. But Poizner also claims that if the state is allowed to raid the State Fund, any such action will destabilize the workers' compensation market in California.
"The sale or disposition of SCIF's assets and liabilities authorized by (the law) could have disastrous consequences for SCIF itself, for the buyer or buyers of its assets or liabilities, for other workers' compensation insurers in California, for hundreds of thousands of businesses in California that purchase workers' compensation insurance from SCIF and for the overall operation of workers' compensation insurance in California," the filing also states.
For the most part, insurance industry associations in California are taking a wait-and-see attitude toward Poizner's filing.
"I think that there have been concerns raised that it could potentially raise rates for small businesses," Nicole Mahrt, a Sacramento-based spokeswoman for the American Insurance Association, said of the proposed sale.
"There are issues in that the money is really owned by the policyholders. So it's not really a pot of money that the state can come in and just take out. So those are questions that will have to go before the court," Mahrt said.
This issue is so hot that many industry associations are taking a pass on comment at this point. A spokeswoman for the California Chamber of Commerce told Risk & Insurance in early September that her group isn't taking a public position on the issue.
Likewise, Sam Sorich, president of the Association of California Insurance Companies, said his organization considers the issue a little too dicey for comment.
According to Chris Rauber of the San Francisco Business Times, the State Fund, California's workers' comp insurer of last resort, saw its share of the state workers' compensation market soar more than 50 percent in the early years of the decade, when many private insurers stopped writing workers' comp in the state.
The fund still controlled about 23 percent of the market in 2008, with about $1.7 billion in premiums written.
One of Poizner's public objections to the sale of any State Fund assets is the fact that an estimated 180,000 small businesses are covered by the fund. Any action taken by Genest, Lockyer, or Schwarzenegger for that matter, to pull out any of the fund's assets will leave those small businesses without adequate coverage options, he said.
"Ever since the proposed sale of SCIF came out there has been nothing but questions and very few answers," said Jerry Azevedo, a Sacramento-based spokesman for the Workers' Compensation Action Network, a coalition which pushed for the workers' compensation reforms that were enacted in California in the earlier part of the decade.
Coalition members include various chambers of commerce and trade associations, dozens of small businesses, a number of muncipalities and school districts and a smattering of larger employers such as Boeing Co. and Marriott Corp.
"I think the lawsuit from the insurance commissioner was the next logical shoe to drop," Azevedo said.
Azevedo said the workers' comp marketplace in California, which is now seeing carrier combined ratios above 100 and spiking rates, is already gripped by uncertainty, in advance of any sale of State Fund assets.
"There is one potential upside, some revenue for the government," Azevedo said of the proposed sale. "But there are seemingly endless downsides and potentially negative consequences and it doesn't appear that anyone has gotten to a place where they have gotten the right answers or the right information to quell the fears about doing this."
Should a private carrier come in and buy a piece of the State Fund's book, it would have to be at more attractive pieces, leaving those businesses that remain under the fund's coverage facing a more unstable carrier force to raise prices to survive.
"What is that SCIF has to sell?" Azevedo asks.
"They have their more profitable book of business to sell and that is the only thing that anybody would buy from them. You sell off the good part of SCIF's book of business and you are left only with the worst risks in California in terms of the businesses that they are insuring. And if you don't have the better part of the SCIF book of business to help balance out what is on their very high risk side where those employers could literally get insurance nowhere else in the marketplace, then you are left with a book of business that can not be anything but a money loser unless you are going to jack up the rates so high on those high risk employers to cover the losses."
"Whoever is left in the SCIF swimming pool is going to be hit with tremendous rate increases," Azevedo said.
But that's not where the questions end.
"There are a lot of questions, say someone comes in and buys a portion of SCIF's book of business. What happens to that book of business? Does it in perpetuity belong to that buyer or can SCIF turn around and go compete for it again? There are all of these questions floating around out there that certainly the legislation was silent on and we haven't really heard anything more about it since it was enacted," Azevedo said.
"From our perspective what we support is slowing down to answer all of the questions. And if the questions can't be answered and you really can't count on anything other than potential disruption then slowing down to the point of stopping is where we would land," Azevedo said.
The bill signed by Schwarzenegger gives the State Fund's Board of Directors the right to approve any sale of fund assets. In July, that board issued a resolution opposing the sale of any piece of the State Fund.
October 1, 2009
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