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.

Advertisement




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.

Advertisement




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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

Advertisement




That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

Advertisement




Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]