New Broker Model Adopted for Workers' Comp in California

The new distribution system will require up to 3,500 smaller brokers to go through two "access partners."

The California State Compensation Insurance Fund has introduced premium thresholds for brokers to qualify for direct contact with the fund, which is the largest provider of workers' compensation insurance in the state.

The new broker-distribution model requires brokers that have written less than $100,000 in any of the past three years to go through the StateFund First, administered by Arthur J. Gallagher & Co. Insurance Brokers of California Inc., or RIC Insurance General Agency Inc. The change becomes effective on Jan. 1.

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"The move makes sense," said Joseph Paduda, a principal at the Health Strategy Associates consultancy and blogger at Managed Care Matters, which focuses on group health, workers' compensation and other issues.

He said in an email that the $100,000 premium limit is "a pretty low bar. ... [It] is not cost effective for the Fund to manage thousands of brokers that do little business with the Fund."

Jennifer Vargen, senior vice president of marketing and communications at SCIF, said the threshold will rise to $250,000 for new contracts. "What we want to avoid is a lot of moving back and forth between channels. That would be a lot of ... administrative work.

It is estimated there are about 5,000 brokers in the state, and the change will affect about 3,500 of them. She noted that the 1,500 contracts retained by the State Fund "represent 94 percent of our paid broker premium."

She said the change will allow SCIF to streamline operations, save money and improve service, clarity and communication inside the broker-distribution network.

Brokers were notified of the new premium thresholds in November, 2011, according to the SCIF.

Brokers that use the wholesalers will retain full commissions the first year, Vargen said. The second year, they will begin to share commissions, with the percentage varying, depending on whether it is new or a renewal.

Vargen said fewer than 25 organizations went through the "arduous" request for proposal and screening process. "By its very nature, it doesn't make everybody happy," she said.

Paduda noted that most insurers use a similar broker-distribution system "as dealing with thousands of brokers who only write a couple small policies a year is cost prohibitive."

--By Anne Freedman

November 1, 2012

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