The woes of financial services giant AIG were displayed publicly in the world press over the past week. Simultaneously, insurance regulators across the nation, and NAIC leadership, were quick to hit the send button on statements reassuring policyholders that the insurance operations of AIG were sound and not to panic. Our own California Insurance Commissioner Steve Poizner did the same, assuring Californians of AIG’s continued ability to underwrite a variety of insurance products while quickly pointing out that the primary responsibility for ensuring that AIG remains afloat rests with the New York and Pennsylvania regulators and not himself. These are two states with less than stellar records.
This is eerily similar to the commissioner’s oft-stated comment, inherited virtually unchanged from his predecessor, now-Lieutenant Governor, John Garamendi, that while the commissioner approves workers’ comp pure premiums, he lacks the authority to control rates charged by insurance companies, an authority he has in other lines of insurance by virtue of Proposition 103.
The limitations of the commissioner’s authority appear to be communicated to industry and consumers alike most often by the commissioner himself. This was on display this past Tuesday when the commissioner participated in the hearing to determine whether to grant a 16% pure premium increase as requested by his statistical agent, the Workers’ Compensation Insurance Rating Bureau (WCIRB).
Interestingly, the commissioner issued a press release earlier that day outlining his concern about the increase, his efforts to reform the operations of the Bureau, his efforts to improve the operations of the State Compensation Insurance Fund (SCIF), and his recommendations to improve workers’ comp fraud enforcement. In this case, it appeared as though the commissioner felt the need to explain not only what he can’t do in terms of workers’ comp insurance rates but also what he can do relative to the workers’ comp system as a whole. Thanks.
There is no question that whatever the commissioner decides to do on the pure premium issue will have no effect on the ongoing viability of AIG. On the other hand, he has stated that the pure premium rate serves as a benchmark for industry pricing. He has also openly stated that SCIF is the “market leader.”
But at the pure premium rate increase he questioned aloud whether any data from SCIF should be included in the pure premium calculation, not just recent medical data determined by the WCIRB not to be credible because of system changes at SCIF. SCIF’s expenses are beyond industry norms. It is fair to question whether this would even be contemplated if SCIF’s ”market leading” data would result in lower pure premiums were they to be included.
We are at a crossroads in the insurance marketplace. For the first time in recent memory, there is evidence to indicate that costs are increasing and that loss experience from prior years is deteriorating. This manifests itself in many ways, including compelling national carriers — such as AIG — to answer to their domiciliary regulators — as pointed out by our commissioner— and to their boards of directors as to why they are investing their capital and surplus in a deteriorating California market. It also leaves no doubt that reserve redundancy is shrinking as loss ratios increase from year to year.
What it also means is that SCIF, regardless of the use of its data in ratemaking, continues to be the market leader. Approving a pure premium rate that excludes credible SCIF data would further isolate its operations from the market it is compelled to fairly compete in, and would further insulate its market decisions from competitive pressures.
In its history, SCIF was never intended to be one tier of a two-tier system. As is contemplated in ratemaking mechanisms throughout the nation, SCIF‘s higher losses and lower expenses are contrasted to the private market having higher expenses, but, as the theory goes, better loss experience. When combined, a rate is developed that allows both public and private carriers to underwrite to their strengths while providing a competitive market to keep downward pressure on out-the-door premium.
So much for the theory. The commissioner appears perilously close to creating that two-tier system, perhaps in hopes that that newly reformed SCIF, at least according to the expectations of some when SB 1145 (Machado) is signed into law by Governor Schwarzenegger, will fulfill its mission of acting “… as both a moderating and stabilizing influence on the workers’ compensation market,” a mission statement apparently abandoned even by SCIF in late 2005.
Separating SCIF’s experience from the rest of the market separates SCIF’s market conduct from the rest of the market as well. Ending the symbiotic relationship between SCIF and the private market, created by the founders of California’s workers’ comp system, begins that invasion into the realm of private enterprise that Governor Hiram Johnson warned against almost a century ago.
Though many employers, labor advocates, and applicant attorneys will say, “And your point is what, exactly?” to such an event, exposing the entire workers’ comp system to the risk of catastrophic failure in the form of concentrating too much business in SCIF violates not only the newfound sensitivity to risk claimed by SCIF but also violates the prime directive of the insurance commissioner. And that, Commissioner Poizner, falls squarely on your watch.