Despite falling insurance costs stemming from workers compensation reforms in California, self-insurance groups are gaining in popularity.

There are now 22 authorized self-insurance groups, with more applications pending, according to Mark Johnson, manager of the Self Insurance Plans office of the California Department of Industrial Relations, the Sacramento-based state agency that authorizes employers to self-insure for workers compensation losses.

California regulations adopted in 1993 allowed companies in the same industry to form self-insurance groups—or SIGs—for workers comp. But because of plummeting insurance pricing, employers did not immediately gravitate to them. The first SIG approved by the state did not begin operating until January 2002, when prices were rising.

And even though rates are dropping again, self-insurance proponents say the groups will continue to recruit new members.

A California Department of Insurance report shows that, in the wake of workers comp reforms adopted in 2003 and 2004, insurers filing rates in June for July 1 renewals planned to reduce their rates an average of about 15%.

The report also shows that many insurers complied with or exceeded Commissioner John Garamendi's recommendation last month that work comp insurers reduce their rates by 18%, with some reporting reductions as high as 26%.

Even with falling insurance rates, though, Chris Stafford, assistant vp for ABD Insurance & Financial Services in Redwood City, Calif., said he still expects that SIGs can draw strong participation.

ABD Insurance currently is marketing Independent Banks Self-Insurance Group Inc. The recently approved pool hopes to begin insuring community banks by Aug. 1 and has several banks now seeking the Self Insurance Plans office approval to participate, Mr. Stafford said.

If you exclude 20% of California's community banks-those with the worst loss history-then the remaining banks have a loss ratio of about 30%, Mr. Stafford said. Therefore, there remains a significant gap between the price insurers charge banks with a good loss history and the banks' claims costs, Mr. Stafford said. Additionally, his pool should be able to maintain lower administration costs than an insurer, he said.

But the falling insurance rates are making SIGs less competitive on price, other pool administrators say. Nonetheless, they say they still expect SIGs to continue growing.

For example, a pool for members of the San Francisco-based Western Independent Bankers association had enjoyed a 30% to 40% pricing advantage over insurers, said Anne K. Scully, president of the Western Independent Bankers Services Corp. But with recent insurance rate declines, insurers are nearly matching the Western Independent Bankers Self Insurance Program of California's pricing.

Still, Ms. Scully said the four-month-old pool continues to attract interest by touting its ability to insulate members from future insurance market volatility.

The recent and rapid growth in SIGs, however, has California's Self Insurers' Security Fund concerned about the oversight-or possible lack thereof-of the groups, said Jeff Pettegrew, SISF's executive director. The Sacramento-based security fund has a vested interest in the financial health of SIGs because it would be responsible for unpaid claims should one of them fail to meet its liabilities.

The vast majority of SISF's members are individual self-insured companies. Risk managers for large corporations such as San Ramon, Calif.-based Chevron Texaco Corp.; Burbank, Calif.-based The Walt Disney Co.; Bethesda, Md.-based Marriott International Inc.; and Pleasanton, Calif. based Safeway Inc. serve on the security fund's board of trustees.

In contrast, SIGs are attracting smaller companies such as restaurant owners, construction entities, truckers, plastic manufacturers, private schools, and community banks, according to information from the Self Insurance Plans office.

A Senate bill introduced earlier this year would have required SIGs to submit financial reports to regulators annually instead of biannually. But S.B. 187, supported by SIGs and sponsored by state Sen. Charles Poochigian, R-Fresno, would also have loosened requirements for security deposits that SIGs must now post with the state in case they are unable to pay claims.

Supporters say the bill's intent was to make self-insurance available to more California companies.

The bill, which was opposed by the security fund, has been shelved for now. But with SIGs continuing to grow, the SISF plans to meet July 21 with the Self Insurance Plans office to discuss ongoing regulation needs, Mr. Pettegrew said.

John Kalb, administrator for the six-month-old California Restaurant Mutual Benefit Corp., said he can understand the security fund's concern with the rapid rise of SIGs and isn't opposed to regulations that ensure SIGs' viability.

But his group is financially strong, he said. It sets its rates about 10% above actuarial recommendations and was launched with a core group of 30 members. It now has a net worth of $40 million to $50 million and has 135 members, who own nearly 800 restaurants.

Mr. Kalb also points out that self-insurance groups have the same requirements that individual self-insured funds have for financial reporting. SIGs also must purchase excess coverage just as individual self-insureds are required to do, and they have the same investment restrictions as insurers, Mr. Kalb said.

While Mr. Pettegrew acknowledged SIGs have reserve requirements and comply with other regulations, the security fund has questions about the consistency of their management from group to group.

Some SIGs are managed by out-of-state entities and not enough may be known about their qualifications or potential decision-making, Mr. Pettegrew said. He said he is concerned, for example, that pool members could pressure their administrators to pay out a dividend that could exhaust the funds necessary to pay long-tail claims.

But there are safeguards against such a scenario, Mr. Stafford of ABD Insurance said. He noted that regulators must first approve any dividends paid out by SIGs. Additionally, SIG members are joint and severally liable and would be assessed and a security deposit posted with the state would be tapped in case of a fund's inability to meet its obligations, Mr. Stafford said.