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Efforts to privatize state comp funds keep rolling

workers comp

The role state-owned insurers play in workers compensation continues to be questioned and privatization efforts are ramping up in some states.

Missouri is the latest state to consider moving away from a state-controlled fund with a bill introduced late last month to turn Columbia-based Missouri Employers Mutual Insurance Co. into a mutual insurer.

While it’s unclear whether the legislation will make it into law, the effort adds to a growing list of states that have ditched state-owned comp insurers over the past 25 years.

Pressure to privatize is often driven by a perception that state funds keep rates high and a desire to better manage capital, said Chris Mandel, senior vice president of strategic solutions at Sedgwick Claims Management Services Inc. in Nashville and director of the Sedgwick Institute.

“In a few places where this has been done, it has improved those dynamics,” he said.

State funds in some states, many of which were created a century ago to provide affordable workers compensation coverage in states lacking insurers and to introduce pricing discipline, have morphed into mutual insurers or private insurers.

In 1995, Michigan was among the first; its fund became the Accident Fund Co., which has since evolved into Lansing-based AF Group.

In 1999, Nevada’s state fund converted to a private mutual insurer to address a large deficit, according to 2015 research from Colorado State University. The state set up a special fund to handle the residual market at the time, and that state fund eventually became Employers Holdings Inc., which began expanding its reach to neighboring states a few years after its formation.

In 2008, West Virginia converted its state fund into Charleston-based BrickStreet Mutual Insurance Co., and in 2013 Maryland’s state fund evolved into Baltimore-based Chesapeake Employers’ Insurance Co.

When a state considers privatizing, there is usually a catalyst, such as an unsustainable monopolistic system, as was the case in Nevada and West Virginia, or a state in fiscal crisis that needed to borrow the surplus from the state fund, as was the case in Arizona, said Mark Webb, owner of Pasadena, California-based Prop 23 Advisors, a legal and regulatory compliance consulting company.

Mr. Webb, who previously served as deputy director of the Arizona Department of Insurance, said that when state officials found they could not borrow from the state comp fund surplus to manage a budget crisis, the Republican-controlled legislature in 2013 privatized the fund. It evolved into fully private Tucson, Arizona-based CopperPoint Mutual Insurance Co. and has since extended its business into several western states and also acquired Anchorage-based workers comp insurer Alaska National Corp.

A spokeswoman for Missouri Employers Mutual, which has a federal tax exemption, said she does not expect the bill, H.B. 2579, currently on its second reading in the Missouri House of Representatives, to pass, but that the move “could negatively impact Missouri’s work compensation environment.”

The push to privatize MEM started in 2012 after the Missouri State Auditor questioned MEM’s spending.

In January two prominent California newspapers publicly questioned Pleasanton, California-based State Compensation Insurance Fund’s high executive salaries; one newspaper published an editorial calling for privatization of the state fund. 

In 2011, Denver-based Pinnacol Assurance sought to privatize. Then-Colorado Gov. John Hickenlooper created a task force to consider restructuring the insurer, but the efforts stalled.

The effort received significant push-back from the claimants’ bar, said Paul Krueger, CEO and managing partner of Denver law firm Ritsema & Lyon P.C.

“(Pinnacol) is doing such a great job here, they don’t want to change it,” he said. “But clearly (privatization) has been successful in other states.”

A spokeswoman for Pinnacol said it’s likely that many state funds will look to privatization as a means to meet the changing needs of state business and to stay financially viable.

“Increasingly, the insurance industry is being populated by disruptors with very few constraints on offering multiple products and support for businesses who operate in multiple states,” she said. “Being limited to one product in one state is not the best solution for its customers. Of course, every state fund is unique.”

In Montana, bills to dissolve the Montana State Fund and increase workers comp competition in the state were proposed in 2017 and 2019. Keith Brownfield, CEO of Miles City, Montana-based Victory Insurance Co., a workers comp insurer, was behind the 2017 push to dissolve the Montana State Fund on the basis that rates in the state were not competitive. The Oregon Department of Consumer and Business Services’ 2018 study of state workers comp costs ranked Montana the 13th most expensive state for workers comp. Missouri ranked 27th.

Montana State Fund’s President and CEO, Laurence Hubbard, said in an email that states play an important role in protecting businesses and workers because, “unlike private companies who can choose who they will and will not cover, most state funds — including in Montana — must offer coverage for anyone who seeks it.”

Mr. Brownfield said he hopes that legislation privatizing or dissolving the state fund will be introduced again this fall.

Privatizing state funds can be a good move because the competition it brings to the comp marketplace “tends to improve a lot of aspects of the whole model,” Mr. Mandel said. “But who are we trying to serve here? It’s the injured worker. That should be everyone’s primary focus and goal.”