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Years ago, many states established competitive state funds to provide a complement to the private carriers in the workers' compensation marketplace. Initially, most of them were the "market of last resort," providing competitive pricing to high-risk employers who could not get affordable coverage in the private marketplace.

Most state funds have significant market advantages over private carriers. Because of their status as quasi-state entities, they usually pay no state or federal income taxes. They are often exempt from premium taxes and assessments that other carriers pay. They were granted these market advantages so that they could break even financially while writing otherwise unprofitable business.

In certain states, the state funds have used their market advantages to go well beyond their original intent and have become the dominant carrier in the state. Is this a good thing for the states? Consider the following:

* In Missouri, several politically appointed members of the board of directors for Missouri Employers Mutual have been indicted for fraud (unrelated to their activities at the carrier). Missouri Employers Mutual has refused to disclose information about compensation packages for their executives and board.

* In California, the State Compensation Insurance Fund was previously involved in litigation with the California Department of Insurance over the fund's unwillingness to submit to oversight by the DOI. Taxpayer dollars were being used to fund litigation between state agencies. According to recent disclosures, the State Compensation Insurance Fund is currently operating at a 165 percent combined ratio and a 90 percent expense ratio. They are paying more in expenses to operate the company than they are paying in claims.

* In New York, the New York State Insurance Fund has been actively lobbying for the elimination of group self-insurance, which were their largest competitors. The New York State Insurance Fund currently controls more than 50 percent of the workers' compensation market in New York.

Fighting the 'Bully'

In researching this column, I spoke to industry people around the country and asked about the competitive funds in their states. Surprisingly, the term I most often heard in these conversations was "bully." They indicated that rather than being a complement to the traditional carriers, the funds were aggressively trying to take market share from the private marketplace by using their competitive advantages to undercut the premiums of the private market. I was also told that some state funds used their dominant presence in the market to coerce vendors, intimidate journalists and push legislative agendas. Are these really activities that a quasi-state agency should be engaged in?

By actively seeking to gain market share, these quasi-state agencies are taking business away from tax and assessment paying private carriers. This comes at a time when most states are financially strapped and are trying to find ways to increase tax revenue.

To their credit, the California Department of Insurance realized a few years ago that having the State Compensation Insurance Fund writing more than 50 percent of the workers' compensation market in the state was a not in its best interest. Since that time, the department significantly increased its oversight of the fund, and required the fund to decrease premium writings. Recently, the fund announced it was laying off 25 percent of its workforce in an attempt to reduce expense ratios to levels that are consistent with industry standard.

What is happening in California is a good first step, and other states need to take notice. Competitive state funds should be subject to at least the same level of regulatory oversight and financial disclosure as private carriers. Under no circumstances should these quasi-state agencies be allowed to use their position to bully business partners and critics.

State funds serve an important role as the market of last resort. Their market advantages of being tax and assessment free were designed for this specific purpose. They should not be using these advantages to take control of the workers' compensation market and eliminate private carriers from marketplace.

MARK WALLS is assistant vice president of claims for Safety National, as well as founder of the Work Comp Analysis Group on LinkedIn.

October 27, 2011

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