December 15, 2004

Member Assessment : Dangers of Under-reserved S/I Plans

Under-reserving for workers compensation claims since 1999 has caught up with a group self-insurance plan in Kentucky. Member employers (and former members) are being assessed to shore up inadequate reserves that allowed underpricing for years.

The assessments provide a hard example of the hazards of "pay as you go" financing in insurance programs designed to cover "long tail" exposures. Such financing allows managers of such funds to charge premiums that are lower up front than that charged by competitors that do reserve adequately. As a result, such plans can take business away from more responsible providers. But some day, the bills will come due, as 4,000 employers in Kentucky are learning today. 4,000 Businesses In Group Comp Fund Owe $51 Million In Ky. Self-Insurance Claims

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Assuring sound reserving and financial management is one of the roles of the insurance regulatory authority. That role is sometimes opposed by those whose prime goal is offering insurance cheaper than the competition, in order to grow its market share. For a current example on a scale larger than that in Kentucky, see the ongoing struggle between California Insurance Commissioner Garamendi and the management of the State Compensation Insurance Fund (State Fund). See, e.g. "Judge's Key Ruling Favors California Department of Insurance in Trial Concerning Regulatory Authority Over State Compensation Insurance Fund," (Calif. Ins. Dept. Press Release, December 13, 2004).

This dispute has been ongoing for over a year, and raises memories of similar controversies in states such as Texas. In 2002, the California Commission on Health and Safety and Workers’ Compensation released a comprehensive white paper "State of the Workers’ Compensation Insurance Industry in California" that is worthwhile reading on this subject. See Unintended Consequences: Drive Down Comp Costs, not Premiums, says Garamendi (September 4, 2003).

Posted by dougsimpson at December 15, 2004 06:13 AM | TrackBack