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By JOSHUA CLIFTON, a Chicago-based writer who covers workers' comp and disability issues

Colorado lawmakers are bracing themselves for an estimated $1.3 billion shortfall for the fiscal year that begins in July. And while officials have been searching far and wide for solutions to prevent budgetary Armageddon, Gov. Bill Ritter Jr. has keenly set his sights on Pinnacol Assurance, the state-chartered, but independently run and funded, workers' compensation insurance firm.

Senate President Brandon Shaffer, D-Longmont, recently downplayed the idea, saying that lawmakers are not in a rush to seriously consider the sale of Pinnacol, which currently accounts for nearly 50 percent of the workers' comp market in Colorado.

A legislative committee--convened last year to look into alleged claims that the insurer spent excessively and amassed an extraordinary level of surpluses while improperly denying injured workers' claims--also wasn't sold on the idea. While the group discussed a possible sale, it ultimately concluded that privatization would not be in the state's best interest, fearing that a loss of control over Pinnacol could result in higher premiums for employers.

Instead, the committee voted to push forward a handful of pending bills aimed at strengthening the state's oversight of Pinnacol and increasing transparency of the insurer's operations and management.

PINNACOL'S PLAN

The lack of privatization support among legislators, though, didn't stop the insurer from offering up its own plan. In February, Pinnacol proposed giving the state $200 million in exchange for its freedom.

In a response posted on her blog, Sen. Morgan Carroll, D-Aurora, a vocal critic of Pinnacol's practices and chairperson of the legislative committee that grilled the insurer, called the offer the "best laugh I have had all year."

"Perhaps this joke is meant to look so bad that when they make their next 'offer' to the state, it can only look better in comparison," she said.

Carroll noted that Pinnacol's assets have been valued at $2 billion and, therefore, the state would receive 10 cents on the dollar in the deal. In addition, she said the insurer has asked to retain its tax-exempt status and that lawmakers drop the proposed oversight legislation.

"I have never seen a quasigovernmental (or even a private entity, for that matter) so adverse to any oversight or checks-and-balances," Carroll wrote. "It reeks of a culture of autocracy."

Ken Ross, Pinnacol's president and CEO, has vehemently denied the allegations levied by the insurer's critics, saying that the firm is already subject to oversight by two state agencies and is audited annually through the Colorado State Auditor's Office. Pinnacol, he emphasized during the committee's hearings, places a top priority on stable rates, injured worker care, workplace safety and operational efficiencies. Ross said that the insurer's success and business model were validated multiple times in testimony heard by the interim committee. He also pointed out that Pinnacol's retention rate is over 91 percent, and its customer satisfaction scores have increased every year for the past five years.

THE INDUSTRY'S RESPONSE

Lawmakers aren't the only ones raising questions about a potential sale or privatization of Pinnacol. Representatives from the American Insurance Association (AIA) said they are concerned that a sizable portion of the insurer's surplus could be diverted to state coffers under the guise of a restructuring agreement that would, in turn, accord the firm a level of authority that is "completely inappropriate" for a state-sponsored insurer.

Bruce C. Wood, associate general counsel and director of workers' compensation at AIA, said it would be wrong for the state to raid Pinnacol's surplus and call it a "restructuring" or "privatization."

"It is nothing of the sort," he said. "Pinnacol's assets and surplus are now owned by its policyholders, and the state has no legitimate claim to either."

Wood said that AIA is not opposed to true privatization or a potential restructuring that preserves Pinnacol's public-policy purpose of serving as the market of last resort.

"But true privatization requires a new residual market structure, protection for the private market against Pinnacol's legacy exposures and the elimination of all regulatory preferences that have given Pinnacol an unfair competitive advantage," he said. "A bona fide privatization requires Pinnacol's statutory authority to be repealed, resulting in either a sale of assets or segregating and securing pre-privatization liabilities."

According to AIA, privatization cannot be achieved simply by enacting legislation to define Pinnacol as a mutual company or requiring that it operate as such, while it simultaneously retains authority to operate as the market of last resort. The group said that it believes the insurer should not be allowed to avoid paying premium taxes, that its governance is changed to comply with legal requirements for designating a new board, and that Ritter's appointment authority be extinguished.

"A self-sustaining alternative residual market would need to be established so that voluntary risks are not subsidizing residual market risks," Wood said. "And the surplus of a restructured Pinnacol must be beyond the reach of state government."

Ritter's office has indicated that the governor has not made up his mind on the potential sale and is waiting for Morgan Stanley to complete its appraisal. However, many believe that the administration has already chosen its course of action, one that it hopes can go a long way in saving the state from financial collapse.

March 4, 2010

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