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]

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