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Breaking borders: some state workers' compensation funds have expanded beyond their original intent--and state borders--to write business in other states, and even to write other lines of business.

Key Points

* State workers' compensation funds come in many different forms. Some are mutual insurance companies that compete directly against the private market.

* Some companies established by states to serve the residual market have grown into other states.

* Some private carriers say that if a state fund is writing business in other states, it should have to pay the same taxes and follow the same rules as the carriers in the private sector.

It sounds like a sci-fi movie plot: A creature created by the government grows and grows until it can reach out through the bars of its cage to capture people it was never supposed to be able to reach.

Take what happened in Utah.

There's nothing remarkable about a Utah workers' compensation writer purchasing a stock company to expand its business into 40-some new states, including Idaho.

Nothing unusual at all, except if the acquiring company, Workers' Compensation Fund Group, was started by the Utah state government to act as the insurer of last resort in Utah. Unlike the private carriers doing business in Idaho and those other states, the Utah state fund does not pay federal taxes and the governor of Utah appoints five of its seven board members.

So what is it doing writing business in other states?

That's what the Idaho Department of Insurance wanted to know In 2002, it questioned the authority of the Fund Group's acquired subsidiary, now called Advantage Workers' Compensation Insurance Co., to write insurance in Idaho, citing a statutory prohibition against insurance entities controlled by a government outside of Idaho operating in the state. A retired judge held an administrative hearing.

"It's a difficult situation," said Shad Priest, acting director of the Idaho Department of Insurance. "Like a lot of smaller states, we want to have as many carriers come in as possible. We like competition. We think it's healthy for the market. But it needs to be fair competition. If a company has some sort of governmental advantage, it shouldn't be moving into other states."

To resolve the issue, the Workers' Compensation Fund of Utah transferred its stock in Advantage to a voting trust, giving the trustee legal title to the shares. Since the Indiana Department of Insurance--Advantage is domiciled in Indiana--approved the transfer of the Utah fund's shares to the trust, a hearing judge found Advantage was no longer violating the Idaho law and could operate in Idaho.

Advantage has grown to become the third-largest workers' comp writer in the state behind the Idaho state fund and a Liberty Mutual subsidiary. About 24% of Advantage's book is non-Utah risks related to Utah businesses underwritten by the Utah Workers' Compensation Fund. While the Utah fund no longer owns or is affiliated with Advantage, it does retain an economic interest in the company, and can share in its profits. In 2004, the fund approved an additional capital investment of $25 million in Advantage, according to A.M. Best company reports.

Priest said if a company has to face the same taxes and the same laws as other companies, then it should be allowed to compete. "But Advantage fits somewhere between those two extremes," he said.

Other industry leaders are also troubled by Advantage.

"State funds that are tax exempt shouldn't be allowed to write business in other states, and Utah is a prime example of that," said Rita Nowak, vice president of workers' compensation for the Property Casualty Insurers Association of America.

Bruce Wood, assistant general counsel of the American Insurance Association, said the association supports the creation of state funds--and any special regulatory treatment they might get--if the state fiends are writing only workers' compensation insurance, if they write only in their original jurisdictions and if they also serve as the market of last resort.

Otherwise "state governments, and governments in general, should not be engaged in a commercial enterprise," Wood said. "They should not be selling cars, shouldn't be owning gasoline service stations, shouldn't be baking bread and shouldn't be selling workers' compensation insurance."

An Honorable Competitor

Thomas E. Callanan, president and chief executive officer of Advantage, said the company gets no special treatment, even though it was created by Utah's state workers' compensation fund.

Advantage pays all taxes, including federal income tax, and has bonafide certificates of authority in about 45 states, all subject to the scrutiny of regulators, Callanan said. Advantage has its own employees, including executive management, and an independent board of directors that meets Nasdaq standards. "We have a standalone A- rating from A.M. Best, based on our own financial picture, management and business plans," Callanan said. "I do not understand the level playing field argument."

Advantage is an invested asset for the Workers' Compensation Fund of Utah, Callanan said. Meanwhile, the Workers' Compensation Fund of Utah, the No. 1 writer in the state, with a 60% market share, does not have to face competition from Advantage: the company does not write in the state.

"We feel there are better opportunities in other places than Utah," Callanan said.

He said the company's structure is uncommon.

"But a lot of companies have unusual origins," Callanan said. "I don't understand the point that we have some unfair advantage. If someone was cynical, [this criticism] could be seen as an easy way to eliminate a potential competitor. We think we are bringing more competition to the marketplace. We feel like we are an honorable competitor and we hope to have good partnerships where we do business. There's so much regulatory scrutiny out there, but they've issued us certificates of authority and manage our affairs and we don't hear this from them any longer."

Lane A. Summerhays, president and chief executive officer of the Workers' Compensation Fund of Utah, said state funds not only have a duty to serve the residual market, but they also have a duty to remain fiscally sound.

"If you can't be successful by simply serving the residual market without competing in the voluntary market," Summerhays said, "you have to be able to generate net income from the voluntary market to offset the residual market losses. To do that, you need to write the most profitable accounts, which are your larger employers with multistate operations."

While the Workers' Compensation Fund of Utah could share in Advantage's profits, "that will takes years," Summerhays said. "It's a very small company."

Entrepreneurial Spirit

Maine's situation is similar to Utah's. Maine's workers' comp market is dominated by its state fund, Maine Employee Mutual Insurance Co., which carries a 64% market share in the state. It is the insurer of last resort in the state, but is able to reject businesses that fail to follow its workplace safety recommendations or fail to pay its premiums. MEMIC is also one of the most profitable workers' comp underwriters in the United States, producing a combined ratio of 94.8 in 2005.

Like Utah, MEMIC has branched out into other states. MEMIC Indemnity, a subsidiary, is licensed to write in 33 states and plans to expand to reach a total of 44.

To expand outside of Maine, MEMIC needed approval from the state Legislature, which it won.

John Leonard, president and CEO of MEMIC, attributed the company's desire to grow to "we have a touch of Yankee independence in our heritage up here. It was desirable in the minds of people to just bite the bullet and make this a private enterprise."

Leonard said mutual companies that don't attempt to get licensed outside of their home state are making a mistake.

"One of the big problems they run into is when a policyholder has locations in other states. Then they have to get into a fronting arrangement with another carrier. You have to pay fees to use their paper, and you are putting your business at risk when you are depending on someone else,' Leonard said.

One of MEMIC's goals in growing outside of its state was to provide growth for its employees, Leonard said. "If you decide your structure is a single-state structure, what growth opportunity do you have for your employees? It's exciting times for MEMIC Indemnity; therefore, it's exciting for our employees."

Leonard noted that MEMIC has no advantages over other carriers in the marketplace, and no restrictions that might face state funds. Two of the nine board members are still appointed by the governor.

Maine and Utah are "classic cases," of state funds with entrepreneurial management, Woods said. "They aren't bothered by the philosophy of their origins. All they want to do is write workers' compensation wherever they can. With all due respect, if that's what you want to do, maybe you should work for a private insurer."

Just One of the Gang

In Texas, the Texas Mutual Insurance Co. is charged with both acting as the workers' comp insurer of last resort and keeping insurance affordable and available to all employers, said Terry Frakes, senior vice president for the company.

The company enjoyed some special treatment in its early years--it had tax advantages and was not a member of the guaranty fund--but since then, it's asked the state Legislature to remove the tax exemption and put the company into the guaranty fund, where it will be assessed to help pay claims for future insolvent companies. The company converted to a mutual insurer in 2001.

"We've worked very hard in making ourselves much more like any other carrier out there," Frakes said. The governor still appoints four members of the board and the chairman, while policyholders elect the other four board members. Employees of the Texas Mutual Insurance Co. are not state employees, and the company does not go through the state purchasing system to buy supplies or equipment.

While the company does not write insurance in other states, Frakes noted the major advantage that all private carriers have over state funds: They have the ability to move in and out of the market as their business needs dictate. "We can't do that. Not one of them would ever trade that ability, I guarantee you. That's a huge advantage. Right now, things are great, but insurance is very cyclical. It got bad in the late 1980s, and none of the carriers wanted to write. That market will come back; it's only a matter of time," Frakes said.

Like Maine and Utah, other companies born of state workers' comp funds have sought to grow by branching out in new directions, not always with the same level of success.

A member of the New Mexico Mutual Group, which the state created to write preferred business to depopulate New Mexico's workers' comp assigned risk pool, wrote personal auto in Arizona and homeowners in both Arizona and New Mexico before state regulators found it was unsound in 2002.

"A state fund should operate according to its historic mission," Nowak said. "If a particular fund is expanding its mission acting as a competitive insurer operating outside of its historical jurisdiction and mission, it would seem that type of entity should be regulated as private insurers are regulated."

However, if a state-controlled fund became fully independent and followed the same rules as private carriers--paid all taxes, followed all regulations--the industry would applaud a new player in the market, Wood said. He pointed to the EIG Mutual Holding Co., the parent company of Employers Insurance Company of Nevada, the former state fund of Nevada.

EIG, which is owned by its policyholders, has applied for permission to issue stock and become a publicly traded company. In its demutualization plan, filed Aug. 22 with the Nevada insurance department, EIG said if its initial public offering is approved, the company would distribute its surplus to policyholders. At June 30, the surplus was $554 million.

"It's not only a success story, it really didn't get the attention that the story deserved. It's quite astounding," Wood said. No other state fund has been privatized and issued an IPO. Michigan came the closest, when it privatized its state fund by selling it to Blue Cross Blue Shield of Michigan in 1994.

West Virginia, which is moving from a monopolistic state to an open private market July 1, 2008, is another positive example. There, the state created a new company, Brick Street Mutual, and is creating a traditional assigned risk plan.

"Apparently, they are beginning to operate like a real insurance company," Wood said. "Miracle of miracles, Brick Street is actually going out and forcing policyholders to pay their premiums. It's one reason the state fund in West Virginia has $4 billion in debt."

He said the AIA "doesn't have a theological objection to the existence of state funds, but ultimately, it comes back to a question of what do you see as the acceptable role for state government in insuring a coverage of a mandatory social insurance," Wood said, adding: "we are unabashedly in favor of the private market."

Learn More

Employers Insurance Group

Territory: Nevada and seven other states

A.M. Best Company # 18602

Structure: Reorganized into a mutual holding company in 2005; filed application to become publicly traded stock company in August 2006

History: Originally incorporated in 1999, was formerly the state fund of Nevada. The state transformed from a monopolistic workers' compensation market in 1999 into a competitive worker's comp market.

Milestones: Acquired Fremont Compensation Insurance Group in 2002

Distribution: Independent agents and brokers 2005 market share: No. 1 workers' comp writer in Nevada with 18% market share

Board: 10-member board elected by the policyholders of Employers Insurance Company of Nevada

2005 financials

Net premiums written: $439.7 million

Net income: $96.9 million

Policyholders surplus: $530.6 million

Combined ratio: 84.7

Maine Employers' Mutual Insurance Co.

Territory: Maine and 27 MEMIC other states

A.M. Best Company # 11387

Market: Voluntary in Maine and other states and residual workers' comp market in Maine

History: Incorporated as mutual company in 1992 to replace state's residual market pool

Milestones: Launched subsidiary Memic Indemnity Co. in New Hampshire in 2000

Distribution: Independent agents and brokers

2005 market share: No. 1 workers' comp writer in Maine with 64% market share

Board: Two of nine members are appointed by the governor

2005 financials

Net premiums written: $154.3 million

Net income: $15.0 million

Policyholders surplus: $173.5 million

Combined ratio: 94.8

Texas Mutual Insurance Co.

Territory: Texas

A.M. Best Company # 11453

Market: Voluntary and residual workers' comp market in Texas

History: Created in 1991 to replace the Texas Workers' Compensation Insurance Fund

Distribution: Independent agents and brokers

2005 market share: No. 1 workers' comp writer in Texas with 26% market share; 13th largest workers' comp writer in the United States

Board: Five of nine members, including chairman, are appointed by the governor and confirmed by the state senate

2005 financials

Net premiums written: $696.9 million

Net income: $113.2 million

Policyholders surplus: $1.2 million

Combined ratio: 105.5

Workers' Compensation Fund

Territory: Utah

A.M. Best Company # 03482

Special privileges: Exempt from federal income tax

Structure: Not-for-profit, quasi-public corporation operating as a mutual insurance company

History: Formerly operated as state fund; became independent in 1988. Acquired ManagedComp National Insurance Co. in 1998; changed name to Advantage Workers' Compensation Insurance Co. In 2001, Advantage was to write insurance in Idaho, Nevada and Montana, but the Idaho Department of Insurance questioned Advantage's authority to write insurance, citing a statutory prohibition against government-controlled insurance entities operating in Idaho.

Market: Voluntary and residual workers' comp market

2005 market share: No. 1 writer in Utah with 60% market share

Board: Governor appoints five of seven board members

2005 financials

Net premiums written: $263.6 million

Net income: $44.9 million

Policyholders surplus: $365.3 million

Combined ratio: 105.4

Source: A.M. Best Company Reports; A.M. Best Co. State/Line Reports

RELATED ARTICLE: State funds--a strange breed.

Most people wouldn't expect state governments to be in the business of writing commercial insurance. State legislatures have opened the door to the insurance business through workers' compensation--an unusual line of business. Originally designed as a no-fault system that provides for the medical care and lost wages of injured workers, workers' compensation is mandated in all states except Texas. It's a heavily regulated line, for which states often set rates and benefits.

In difficult market cycles, private insurers have pulled out of some states, or refused to write difficult business, leaving state lawmakers to ponder how they can require employers to purchase an insurance coverage that isn't available. Even in good times, some risks cannot find a private carrier willing to write their policies. So states have responded by creating their own vehicles to write workers' comp insurance.

In some cases, the lawmakers launched a mutual insurance company. In other states, the vehicle is a quasi-state agency that can act like a mutual by returning dividends to policyholders. Sometimes, the entity is called a mutual insurance company, but the governor--not the policyholders--appoints the majority of the board. About 27 states have a state fund that acts as the residual market, taking all comers, as well as writing voluntary business. Other states have established a risk pool to write the residual market, and all voluntary writers in the marketplace pay an assessment to the pool. In at least one case, where the pool became the majority of the market, the state legislature launched a company to take voluntary business.

"If you've seen one state fund, you've seen one state fund," said Lane A. Summerhays, president and chief executive officer of the Workers Compensation Fund of Utah. "They're all so different."
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Article Details
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Title Annotation:Property/Casualty; Idaho Department of Insurance
Author:Green, Meg
Publication:Best's Review
Geographic Code:1USA
Date:Nov 1, 2006
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