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In New York State, we trust: some self-insured workers' comp trusts, hobbled by mismanagement and a tougher investment environment, have taken a beating. Kentucky and Illinois come to mind. But New York State, where the funds are heavily regulated, stands out as a success story.

While much has been recently publicized about the failings and shortfalls of group self-insured trusts in the workers' compensation markets of Kentucky, Florida, and Illinois, one story has not yet been highlighted: the New York success story of a responsible approach to group self-insurance regulation.

In 1998, the New York Workers' Compensation Board made a commitment to implementing a system of fair, yet prudent, oversight of the group trusts which the Board authorized to operate within the state.

The rulemaking process in this area involved an extensive public outreach program with input from many constituents within the workers' compensation community and took many months to complete. The resulting regulations reflected an enhanced degree of scrutiny of the trusts by the regulators with respect to the internal financial condition as well as the external market conduct of the trust. This was accomplished through a rigorous reporting and review process.

The New York approach touches upon virtually every significant aspect of a group self- insurance trust's internal administration and market operation. The regulations provide agency oversight of member applications and terminations, trust bylaws, security amounts, capitalization thresholds, investment limitations, actuarial reviews, financial reporting and solicitation guidelines.

In addition, and of key importance in promoting and preserving the integrity of each trust, is the regulatory provision authorizing the agency to utilize the outside expertise of independent actuaries, auditors, accountants, attorneys and consultants for review of the trusts and to charge back to the trust the charges and fees attributable to the specific services provided by those professionals.

Utilization of these outside professional services is, in fact, done on a regular basis. While certain trust administrators may contend that the expenses are onerous and duplicative, this objective, third-party review mechanism has nonetheless been a valuable component of an effective regulatory program.

As a result of these comprehensive regulations as well as the dedicated efforts of the agency staff, seven years into this endeavor and after much examination of the trusts by the Board, as well as numerous audits by outside independent actuaries, accountants and consultants, the group self-insurance market in New York is thriving.

There are now more than 80 private groups covering hundreds of millions of dollars of payroll and providing the vehicle for the timely and appropriate delivery of benefits to thousands of injured workers each and every, week.

The majority of the trusts in New York are currently operating with "no funding issues" or restrictions identified by the regulators. Some have minimal funding issues and others with more significant funding concerns are working to craft and implement detailed remediation plans, as authorized by regulation, to improve their trusts' finances through limitations on growth, member profiles, assessments and other necessary measures.

The situations where group trust funding issues exist are not necessarily reflective of irresponsibility or incompetence on the part of these groups, their trustees, or the administrators. More accurately, these circumstances demonstrate the qualities and diligent efforts of the regulators to preserve New York's tradition of a healthy and safe group self-insurance market, particularly in the midst of this ever-changing insurance marketplace which has caused several well known national private carriers to be liquidated or moved into rehabilitation.

In addition to promoting an inaccurate portrayal of the funding of New York's group trusts, some critics have sought to mar the image of the group self-insurance market by portraying it as risky, with joint and several liability exposure looming overhead at all times.

This liability is, in fact, an inherent part of any group self-insurance arrangement and one which any member of a trust should fully understand. As evidenced in the regulations governing this area, however, there are so many additional layers of protection for the New York trusts, including security and reinsurance, that exposure through joint and several liability is simply one of many safety nets intended to ensure the delivery of benefits to injured workers who rely upon a healthy trust.

All in all, this regulatory structure and the manner in which it has been vigorously enforced by the regulators is a responsible regulatory approach which provides cost-effective coverage to employers, protects the benefits of injured workers and preserves the group self-insurance industry.

ROBERT SNASHALL is founder and principal of Snashall Associates, a workers' comp consulting firm. He was also chairman of the New York State Workers' Comp Board from 1995 to 2003.
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Title Annotation:SELF-INSURANCE
Author:Snashall, Robert R.
Publication:Risk & Insurance
Date:Nov 1, 2005
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