Are Self-Insurance Groups Safe?

Does the insolvency of New York self-insurance groups--to the tune of perhaps $600 million in deficit--have implications for self-insurance pools elsewhere?

By PETER ROUSMANIERE, an expert on the workers' compensation industry

The recent insolvencies of 15 self-insurance groups have thrown New York's entire system of group self-insurance into turmoil. While forensic audits continue to inspect the carnage, a governor's task force reported this month that the total deficit for all 15 insolvent groups could be greater than $600 million.

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The first of these groups closed down in 2006. Over the next few years, the scope of the problem grew from manageable to disastrous. To pay for the unfunded liabilities of these groups, the New York State Workers' Compensation Board, which has oversight over them, hiked its annual assessment of all active groups from about $8 million to more than $60 million.

One group administrator, Compensation Risk Management (CRM), was associated with most of the insolvencies. The largest single failure is a healthcare industry trust with $220 million in unfunded liabilities. New York's regulators are suing CRM's corporate parent, CRM Holdings, which is headquartered in Bermuda.

Does this collapse have lessons for self-insurance groups elsewhere? If there was a failure in state oversight, which appears to be the case, could that happen elsewhere? These liabilities are so large, after all, that they must have taken years to develop under the nose of the Workers Compensation Board.

These points were put to several executives with extensive experience in the management of self-insurance groups.

Keith Tagman, an experienced auditor of self-insurance groups, has seen a wide range in quality of state oversight. A certified public accountant, Tagman is a shareholder at Orlando, Fla.-based Shores, Tagman, Butler & Co., which has gotten to know the insurance regulatory culture in more than 30 states by auditing many self-insurance groups.

"We see extremes on both ends (of regulation), both of which can cause problems," Tagman said. "In one extreme, you have regulators and regulations so onerous, so counter-productive and so difficult to comply with it makes it difficult for even the best of the best to work. On the other end of the spectrum, we see instances in which regulators have so little knowledge of what they are looking at that they could never recognize a potential failure no matter how bad the warning signs are."

MISDEEDS AND MISCONDUCT

Driving up the risk of group failure are group administrator misdeeds, according to experts.

From the viewpoint of Harold Pumford, CEO of the Prague, Okla.-based Association of Governmental Risk Pools, most cases of financial trouble "are the result of self-dealing third-party administrators, consultants and brokers who, through loose or nonexistent state oversight, are able to evoke a sense of security within the governing board."

Too often, according to Pumford, board members think these parties "are the experts.

"So we look to them for guidance," he explained.

Instead, board members should be seeking independent advice from individuals and organizations that have no direct financial stake in the program, he added.

Administrator abuses include charging excessively high fees, generating more fee income by expanding a group through aggressive underpricing and suppressing loss reports, in part by low-balling estimates of incurred but not reported losses.

Brent Wilkes calls for self-insurance groups to apply independent, reputable benchmarks and sources of standards. Wilkes is president of Latham, N.Y.-based Public Employer Risk Management Association Inc. (PERMA), a self-insured, workers' compensation trust for 461 public entities in the Empire State. He noted that he adheres to advisory standards promulgated by Pumford's association and that PERMA obtained a certificate in excellence in financial reporting from a public financial executive's association.

As for the responsibility of a group itself, all three of these professionals agreed that a group's board must be informed and active. For Wilkes, a clue of failing governance is when members cannot explain or are unfamiliar with financial statements.

"Every board should engage a person whose role it is to challenge and show weaknesses in recommendations of those who stand to receive income from continued operations (of the group)," Pumford said.

In its report, the New York governor's taskforce recommended closing down the self-insurance group option, a policy that Tagman called throwing the baby out with the bathwater.

"Participants in the vast majority of self-insurance funds (nationwide) are happy with their experience," he said. "Self-insurance funds are without a doubt the most efficient way to provide a stable source of workers' compensation over the long run at cost. It does not get any better than that."

Read more at the WORKERSCOMP Forum^TM homepage.

June 16, 2010

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