Workers' Comp Legislation

Legislation to Collateralize Workers’ Comp

Some states want fully liquid collateral backing large deductible workers’ comp programs.
By: | August 1, 2016 • 4 min read

Money’s no good if you can’t get your hands on it.

That’s what’s motivating insurance regulators to seek legislation that would require collateral backing large deductible workers’ compensation insurance programs to be available in liquid form and not co-mingled with other funds.

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When an insurance company becomes insolvent, a state guaranty fund steps in and pays the claims of policyholders. The National Conference of Insurance Guaranty funds, a support group for state guaranty funds, is one of the chief drivers for the legislative change.

The group wants to see more liquid options for the backing of large workers’ comp programs, particularly if the carriers is a monoline workers’ comp carrier.

“They are supposed to be collateralized, in case they can’t reimburse the carrier — but that’s where it falls apart,” said Barbara Cox,  a senior vice president of legal and regulatory affairs for the NCIGF.

“Sometimes insurance companies comingle the collateral with other collateral, or it is in illiquid form, or another entity controls it.”

It is up to the insurance company what it accepts as collateral and whether the insurance company controls it, or allows it to be in the hands of a third party, she said.

State statutory provisions make sure large deductible programs are adequately collateralized, but now legislation has been enacted in Illinois to make sure the collateral is kept in liquid form and not comingled with other funds.

If in any of these cases, if the collateral is not available, the carrier becomes insolvent and guaranty funds are obligated to pay claims on dollar one, she said.

Those funds then have to be replenished by tax offsets or some other means. Guaranty funds therefore try to get as much money as possible from the remaining assets of the insurance company.

“But because of the collateralized arrangements, or undercollateralized arrangements, the funds are not available and guaranty funds are left holding the bag – that is not what anyone had intended,” Cox said.

“We are concerned about that because of the ultimate costs to the public.”

State statutory provisions make sure large deductible programs are adequately collateralized, but now legislation has been enacted in Illinois to make sure the collateral is kept in liquid form and not comingled with other funds.

Other states may propose similar legislation in 2017, she said.

Illinois is currently in the process of adopting a rule pertaining to that legislation, Senate Bill 1805, which was signed into law by Gov. Bruce Rauner last August.

Under the proposed rule, workers’ comp insurers with an A.M. Best Company rating below “A-” and less than $200 million in surplus would be required to limit the size of their policyholder’s obligations under a large deductible agreement to no greater than 20 percent of the total net worth of the policyholder at each policy inception.

The rule also requires full collateralization of those outstanding obligations owed under a large deductible agreement by surety bond, letter of credit or cash/securities held in trust.

“I would certainly encourage support of legislation of that nature,” Cox said.

“These are very complicated collateral arrangements, particularly with large deductible programs, and such legislation can only help make the transition to liquidation easier for everyone.”

The Illinois law also states that smaller insurers have to put up a certain amount of capital to play in the space, according to staff at the National Association of Insurance Commissioners in Kansas City, Mo.

Many of the carriers suffering insolvencies are workers’ compensation-only companies that can’t fall back on the profits they make from other P/C divisions.

In its summer issue of its biannual Insolvency Trends 2016 white paper, NCIGF highlighted several recent high-profile insolvencies. Affirmative Insurance Co. was ordered into liquidation in March.

While the Illinois carrier’s primary line of business was substandard auto, it also wrote a small number of workers’ comp policies. As such, about 14 guaranty associations were triggered as a result of Affirmative’s liquidation.

Many of the carriers that have been involved in insolvencies are workers’ compensation-only companies that can’t fall back on the profits they make from other P/C divisions.

Then in May, Lumbermen’s Underwriting Alliance, which wrote mainly workers’ comp policies along with a small book of liability and property coverage, was ordered into liquidation.

A court appointed Missouri insurance regulator John M. Huff and his successors in office, as the statutory receivers of Lumbermen’s U.S. Epperson Underwriting Co.

Several states enacted liquidation act amendments to deal with this issue, according to the white paper.

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Indiana and Missouri state lawmakers passed bills to codify the treatment of these programs in an insurance liquidation context, but Missouri’s bill was vetoed by the governor.

The Missouri legislature is expected to take the matter up again in its September veto session.

Florida may also be considering similar legislation in 2017.

Another bill is pending in Illinois. That bill would revise the priority of distribution of remaining assets from an insolvent estate, according to NCIGF.

If enacted, the bill would call for property & casualty administrative expense claims to be paid after the receivers’ administrative expenses.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]