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Friday, March 25, 2011

A New "Life Line" for Group Workers' Comp. Funds in New York

In the wake of several high profile group workers’ compensation funds (SIGs) failures a few years ago, the future for other SIGs operating in that state has been looking bleak.

With the state on the hook for unpaid claims totaling between $300 million and $800 million (depending if you believe industry or government estimates) , policy-makers were formally recommending that most funds be shut down and impose such rigorous new regulations on the remaining funds that it would be almost impossible for them to continue to operate.

But just as the obituary for the state’s SIG industry was being written, the conversation has apparently turned from focusing on shutting everything down to finding a solution for letting the well run SIGs continue thanks to an effective lobbying campaign initiated by industry leaders and Group participants.

Specifically, a serious proposal has been floated to allow SIGs to post some form of security in amounts calculated based in their anticipated liabilities to satisfy regulatory concerns about solvency issues going forward.

This proposal may well serve as the framework for a solution, but there are key details which still need to be resolved in order secure “buy in” from both the state and the industry.

The first detail to determine how the security amount should be calculates so that it satisfies regulator concerns but still allows funds sufficient access to cash to pay claims. This is not such an important issue for well-established SIGs with large cash reserves, but is critical to those SIGs that have not had the opportunity to build up such large reserves.

Another open question is the specific "security vehicle" the state would require and the additional transactional expense to the Group. Industry experts have expressed concerns about surety bonds that are fully secured with irrevocable letters because the bond underwriter has the LOC in their hand, so SIGs could never use that cash until it is given back and then replaced with a lesser LOC (assuming it goes down), which can be a difficult process and can be further complicated if the state remains inflexible to changing requirements that could occur depending on cash needs.

As an alternative, it has been suggested the security vehicle be in the form of a restricted investment/ cash account that would require signoff by the state Workers’ Compensation Board but is not wrapped up in an instrument such as an LOC or surety bond.

Another alternative suggestion would be to utilize Reg 114 trusts in which the reinsurer post the cash, freeing up SIG assets to capitalize a captive.

We’ll see how all this plays out but at least there is a viable “lifeline” in the water for the state’s well run SIGs.

In the meantime, we are aware that the state has received proposals for loss portfolio transfer arrangements in order transfer future liabilities back to the private sector, but out sources tell us that disagreement regarding the amount of the liabilities has prevented any deals from being finalized so far

Finally, we continue to wait on an appeal from a State Supreme Court ruling that determined it was constitutional for the state to assess member companies of financially solvent SIGs for the claims liabilities incurred by now insolvent funds.
This should be an easy ruling assuming an objective review of the law, but this is New York after all, so stay tuned. We will report on the ruling when it is announced.

2 comments:

  1. Great blog post as always, Mike. I believe the New York Workers Compensation Board is taking an important and logical step by maintaining a regulatory framework that allows successful trusts to continue operating.

    Allowing successful trusts to develop and grow is the correct avenue to follow and benefits many businesses and provides for additional economic development in many local communities. Self-insurance continues to be a successful and cost effective business option for employers when funding their insurance needs.

    Those trusts that fell into insolvency were a result of the inappropriate operation of a few programs that had serious consequences to the workers’ compensation system of New York. The self-insurance group industry as a whole is a sound mechanism for risk transfer as the approximate 425 successful groups operating around the country can demonstrate.

    The NYWCB has many challenges ahead of it as it works to clean up the insolvent trusts and fund the claims of injured workers. As the market leader for group excess self-insurance Safety National stands at the ready to assist the NYWCB and to continue providing protection for the members and injured workers of New York self-insured trusts.

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  2. It's sad that it has come to this! NYWCB failed to do its' job and regulate a few bad apples. It's great that NYS has passed legislation to stop the bleeding, but it's my opinion it's too little too late. Many financialy strong SIG's have felt the negative effects of NYS Self Ins. Dept. lack of oversite.

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