Jumping Back Into the Pool.

As workers' comp prices rise and the industry shakes out from Unicover, self-insured pools again look refreshing to businesses.

The expected upswing in workers' compensation insurance prices this year may cause a similar uptick in self-insured workers' comp pools. These pools merge their workers' comp liabilities, and members are charged a premium to participate. "It's not insurance but resembles it" said Tim Hanna, president of the Regency Insurance Group, a third-party administrator of four pools in Okemos, Mich.

Trends are pointing to a replay of the late 1980s and early '90s when workers' comp prices exploded. "Over the last several years, workers' comp rates were low, commercial carriers were buying business to maintain market share. Now, there is starting to be a turn in the marketplace," said Michael Ferguson of the Self-Insurance Institute of America. Pools have been at the mercy of the competitive marketplace, according to the Santa Ana, Calif.-based institute's 1999 survey on group self-insured workers' comp funds. Respondents said insurers were moving to provide third-party administration services and writing at prices below the cost of expected claims. Respondents also said bountiful stock-market investments allowed insurers to buy business.

Others say business owners who were drawn away from pools with cheaper insurance rates a few years ago are coming back. "The phenomenon is not the formation of new pools. But now that cheap coverage is no longer available, existing pools will recover members," said Dale Fenwick, vice president of the insurance program management firm Cannon Cochran Management Services Inc., Danville, Ill.

Membership in the Nursing Homes Risk Management Association dropped in 1996 and 1997, but about 10% of those lost returned last year. "Most came back because the first year they got wonderful prices [from commercial carriers], but the second year they saw increases. Now it seems it's turning around. With the July 1 renewal rate, it will be interesting to see who will come back," said Phylis VerSteegh, executive director of the association, which is based in Bloomington, Ill.

Marsh Inc.'s 2000 Insurance Market Review and Forecast predicts that the workers' comp market will return to a "semi-crisis" mode due to increasing combined ratios. The combined ratio is the sum of expenses and losses divided by the premiums of a company, then multiplied by 100. A combined ratio higher than 100 indicates a company is spending more than it is receiving in premium. In 1995, the workers' comp combined ratio was 97 and in 1999 the estimated combined ratio was 115, according to figures from the National Council on Compensation Insurance. The Society of Actuaries reports workers' comp writers had a calendar-year combined ratio of 115 for 1999, compared with 108 for 1998.

The collapse of the Unicover workers comp reinsurance pool last year also has led to more insurers being careful about writing business to gain market share. Unicover Managers Inc., now known as Cragwood Managers LLC, managed a pool of life insurance companies that reinsured workers' comp risk. Companies that sold reinsurance to the pool members have said they were misled into assuming more business than they expected. The pool fell apart last year when its retrocessional reinsurers pulled out of the business. As a result, charges and settlements tied to workers' comp business generated by Unicover have so far cost the insurance industry more than $1 billion as direct writers and reinsurers settle disputes over the business.

Companies, such as Sun Life Assurance Company of Canada, filed lawsuits to rescind contracts with the pool and direct writers. Marsh reported that American International Group turned away from $100 million in business during the second quarter of 1999 and that other carriers also were exhibiting self-control.

Individual states also are experiencing problems in the workers' comp area. The California Insurance Department recently announced a crackdown on the workers' comp industry, brought on by its seizure of the state's largest private workers' comp insurer, Superior National Insurance Group. The department said California's workers' comp insurers have gotten into trouble by competing solely on price in an open-ratings environment that allows them to set their own premiums. The department has even encouraged writers to raise rates by 18.4% this year to avoid insolvencies.

"There is lots of optimism now, because funds are in a position to grow," Ferguson said.

Whether a state has open ratings also affects the formation of workers' comp insurance pools. In 1995, California adopted open ratings for workers' comp insurance so insurers could write business based on what the market could bear. Open rating freed employers from the rigidity of an overpriced rating system, said Dick Stewart, executive vice president of Keenan Associates, the third-largest independent insurance broker/TPA in California. "Open rating made workers' comp a free enterprise similar to the federal government's deregulation of the airlines. It forced the survival of the fittest," Stewart said.

Smaller employers generating less than $1 million in workers' comp premiums in open-rating states are better off joining pools that buy insurance rather than self-insure, Stewart said. When open ratings were established in California, more than half of all risk pools switched to purchasing pools. Purchasing pools have the advantages of knowing the absolute cost in advance, increasing purchasing power and reducing ultimate costs, and they don't carry the added responsibilities of managing claims and investment decisions, he said. "Self-insurance pools want more control over their affairs and enjoy taking on the burden of being a small insurance company," Stewart said. But they must analyze cost structure and be aware that claims development, such as state laws and medical programs, change daily and can cause pitfalls for pool members.

Pools Vary by State

Only 34 states allow self-insurance pools, and the regulatory agencies that govern them vary from state to state. Pools are created by each state's legislature. Some states, like Ohio, balk at creating pools, because they worry that their existence may reduce members in state workers' comp pools and, therefore, affect remaining members, according to the Self-Insurance Institute of America.

Some states, like Michigan, are very conservative in their structure, said Regency Insurance Group's Hanna. Michigan, which allowed pools to form in 1974, has 39 workers' comp self-insured pools, one of the highest number in the United States. In 1998, Michigan had 10,000 employers in the workers' comp self-insured fund, with $87 million in premium. Michigan's Consumer and Industry Services regulates the pools through its Workers' Comp Bureau. The bureau's conservative approach controls the size and ensures the expertise of its members. Its pool guidelines reflect the state's success in this area, Hanna said. Michigan allows only homogenous pools to be formed and do business in the state and requires each pool to carry excess insurance to limit its risk. The Self-Insurance Institute of America's survey shows 91% of pools in the United States are homogeneous. Pool members also must sign an agreement to be liable for all obligations of the members of the group, and there must be enough money in the fund to cov er every outstanding and present claim.

Pools generally attract industries more prone to risk, such as nursing homes, trucking, restaurants and contractors. In the late 1980s in Alabama, workers' comp coverage for truckers was expensive and difficult to buy, said Kimball Coaker, chief executive officer of the Alabama Trucking Association's Workers' Compensation Self-Insured Fund. "There was great volatility in the comp market, no stability," Coaker said.

The Montgomery, Ala.-based association began in January 1993 with contributions of $2.4 million and has grown to $11 million in 2000. Because these pools are not overseen by Alabama's insurance department, the premiums are called contributions. The association was founded to create a stable marketplace and to help truckers control losses. Recently, it has faced heavy competition from the commercial industry. Its revenue has dropped 25% in recent years, but its retention rate is 97%. "The market looks like prices will go up. We operate at what costs are," Coaker said. "We don't have to worry about outside forces. We don't have to answer to stockholders, it's not an issue for us."

Still Holding On

Despite intense price competition in recent years, control is the allure of self-insured workers' comp pools. The pools' homogeneous nature gives members of the same industry the ability to share risk-management knowledge and to devise programs that target safety issues that control costs. When claims are low in pools, members are refunded a portion of the unspent premiums, much like a mutual insurance company pays dividends.

The homogeneity of self-insured groups allows their adjusters and risk managers to specialize in one area, thereby saving businesses money. In Fenwick's firm, which oversees 40 self-insured workers' comp funds in the Midwest and Southeast, adjusters and risk managers specialize in one area, such as nursing homes or construction. Because different industries have varying rates of severity and frequency of claims, the specialization allows adjusters to treat each industry's claims in a special way.

Nursing home claim patterns can be characterized as high frequency and low severity; a claim amount greater than $5,000 is considered significant, Fenwick said. In contrast, construction claims are low frequency and high severity, with most claims exceeding $20,000. "When one of our nursing home adjusters investigates a $10,000 claim, she gives it a lot of attention. It doesn't get neglected for a $20,000 construction claim," Fenwick said. "We know how a nursing home works."

The same story is told in risk management. The Nursing Homes Risk Management Association, a self-insurance pool for nursing homes in Illinois, employs five risk managers--consultants who visit each nursing home in the pool at least two times a year, offering advice to reduce risks. "It's not just a safety inspection like commercial carriers do," VerSeegh said. In an industry where the average injury claim is back-related and costs $2,000, the association's risk managers train the staff of the group's 212 members to use mechanical lifts.

The pools' risk-management programs are designed to get safety messages out to business owners, said Hanna of the third-party administrator Regency Insurance Group. "Our inspections are not just walk-throughs telling you that lightbulbs are out. We teach our members how to look for safety features in their locations. We're much more proactive than commercial insurers," Hanna said.

The same attention to detail is duplicated in underwriting, where pools generally have stricter guidelines. Where most commercial workers' comp writers in Illinois use standard Acord applications, the Nursing Homes Risk Management Association has strict underwriting procedures. The association asks prospective members for payroll information and loss runs over the last five years. Because they are homogeneous, pool members know who runs their businesses well and can control who enters, said Fred Haring, a vice president of the regional third-party administrator ASU Group in Okemos, Mich. "We look at the financial stability of members in the pool, their safety records and their business philosophy We're not looking for lowest costs, we're looking for statistics," Haring said.

Said Fenwick, "Our job is not just to evaluate risk with our members but to help business owners to control their losses."

Staying Out of the Deep End

Pools' monoline structure is both a curse and a blessing to their continued growth.

Because pools only deal in one business, they can't subsidize one line for another when business dips. That characteristic also keeps pools from reducing premium, VerSeegh said. In a worst-case scenario, when one member does poorly, all of the other members are assessed a charge and have to pay for someone else's problems. Recently, Illinois gave its insurance department greater regulation over workers' comp pools because of this problem.

The state extended the authority of the insurance department regarding pools and put in statutory form what was previously done by regulation, said Jack Messmore, deputy director of the insurance department's financial division. Legislation outlines licensing procedures for pool administrators, gives the department greater authority in the creation of a pool and sets up the Workers' Compensation Pool Insolvency Fund to replace the current Group Self Insurers Insolvency Fund.

The changes are in part a reaction to the severe financial problems that a few pools experienced a few years ago, Messmore said. Upon dealing with the problems, the department discovered it needed greater authority in this area.

Pools also must work harder to differentiate themselves, as commercial insurers develop expertise and niches. "The challenge is to get the message out to prospective members about pools' value," Fenwick said. "It's difficult, because they are often being marketed like insurance coverage."

Election May Stall Compromise on Patients' Rights, Health-Plan Liability

As the November presidential election nears, the chance that the House-Senate conference committee will pass a patients' rights bill diminishes. Both sides in the bipartisan committee want to keep the opposing party from using the issue as ammunition so close to the election, said Michael Ferguson, a spokesman for the Self-Insurance Institute of America in Washington, D.C.

The debate over the bill has continued for months. Committee Chairman Sen. Don Nickles (R-Okla.) once hoped to have a conference report as early as April, but now he is "busy making sure conference members practice policy rather than politics," said Gayle Osterberg, a spokeswoman for Nickles.

The patients' rights bill would, for the first time, establish comprehensive federal standards for private health insurance, especially health maintenance organizations and other forms of managed care. For decades, insurance has been regulated mainly by the states.

The conference committee must forge a compromise between versions of the bill passed by the House and the Senate last year.

The House bill expands patients' right to sue and the remedies available for participants in fully insured and self-insured group health plans that fall under the Employee Retirement Income Security Act of 1974. The House version allows participants injured by improper coverage decisions to recover damages under state personal injury or wrongful death laws after all appeals have been exhausted, according to an analysis published last month by the Henry J. Kaiser Family Foundation.

The conference committee has approved the part of the bill that deals with the external-review process, which would allow patients access to an independent review of denied claims. But the widest area of disagreement in the committee centers on liability.

Republican members of the committee say a liability provision in the bill isn't necessary if a strong external-review process is in place, Ferguson said. "Right now in one version of the bill, employers are on the hook for unlimited damages," he said.

Ferguson said many scenarios are possible including allowing employees to sue after going through a series of steps.