According to the Department of Industrial Relations, more than 2,000 California businesses now secure their workers’ comp obligations with self-insured groups. In some businesses, such as automobile dealers, this “alternative” funding program is now a market of choice – something not lost on brokers who place business in these groups, commonly referred to as SIGs. In addition, 2,400 of California’s major employers, about half public entities, are self-insured.
There is a major difference between the group self-insureds and the stand-alone self-insureds. That is what makes the point of this commentary so important.
SIGs have many of the attributes of insurance companies. Their premiums are determined by actuarial projection of ultimate losses, establishing a rate applied to the member’s payroll. This is a pretty standard insurance concept. SIGs are required to have an independent audit and an actuarial certification of losses as part of the financial oversight exercised by the Department of Industrial Relations, Office of Self-Insurance Plans (OSIP). Insurance companies do the same thing.
Of course, there is one major difference. An agent or broker, a business, injured worker, or anyone else on the street can go into the appropriate office of the Department of Insurance and get a copy of the annual audited financial statements of insurance companies. If you try to do that with a SIG, you are, undoubtedly politely, shown the door.
In fact, the lock and key under which SIG financials are kept are so absolute that current regulations proposed by OSIP have to clarify that if one of those 2,000+ SIG members asks its SIG for financials, then the SIG has to give them up, strongly suggesting that not only does OSIP treat SIG financials as state secrets but SIG managers themselves feel quite comfortable treating their own members as—dare we say it—mushrooms. This is not about individual employer members’ financials but rather the results of the group plan.
In the SB 899 world, it is difficult to botch things too badly if you are a claims administrator. Insurance companies are sufficiently profitable that the California Labor Federation introduced legislation to allow the insurance commissioner to skim the top off the profits and require rebates to policyholders. SIGs advertise their dividend payouts as one more reason to join up and walk away from those nasty but financially transparent insurance companies.
Group insurance is at the heart of the State Fund scandal, and yet there hasn’t been a whiff of a legislative response to problems in that arena. State Fund—the other insurance mechanism that is part of the Department of Industrial Relations—has its own set of problems with transparency.
So as long as these SIGs go merrily on their way, what is the problem? Well, the idea of group financial documents being available for public inspection has at its core the notion that the public, every once in a while, wants to make sure that those charged with the public trust actually do their job. Making these financial statements public also would give the business community an opportunity to make sure these organizations are as good—year after year—as their administrators and others say they are.
There is another issue, too. While SIGs by and large walk and quack like insurance companies, there is one major difference: Each employer insured through a SIG is jointly and severally liable for losses of the group.
Many SIGs state that members are proportionately liable for part of the losses or deficiencies based on the employer’s premium. But what SIGs rarely say is that joint and several liability does not bind the SIG administrator to assess the employer only for its proportionate share of losses. In other words, with joint and several liability comes the right of contribution. Each employer is liable for all the losses of the group and can seek contributions from its other members.
There is no question that a single employer can be held liable for the entire losses or deficiencies in the SIG and then have to sue the other members to seek reimbursement. As OSIP regulations currently state, each member must execute “(a)n agreement under which each member of a group self insurer agrees to assume and discharge, jointly and severally, any compensation liability under Labor Code Section 3700-3705 of any and all other employers that are parties to the group self-insurer indemnity agreement.”
We all have an interest in making sure that SIGs, like their insurance company cousins, are subject to appropriate oversight. Given the consequences, lack of transparency in SIG oversight and operations should be a concern to all. That should include the Department of Industrial Relations, which at present seems to be more interested in keeping the lid on.
Brokers could be held liable if a group self-insured fails, a key member bankrupts, or its employer client is assessed huge contributions. Employers need to know where they stand and how the group has done and is doing.
OSIP should let some sunlight in.