One-on-One with Montana State Fund President Laurence Hubbard

In recent months, Montana lawmakers have been discussing the state’s workers’ comp system, primarily the existence and function of the Montana State Fund. There has been talk of privatizing the Fund, or selling it and coming up with alternate ways of insuring tens of thousands of policyholders.

The Fund acts as a guaranteed market for workers’ compensation insurance. Created by the state legislature in 1990, Montana State Fund is also a competitive carrier with approximately 28,000 policyholders and control of 60 percent of the private workers’ comp market in the state.

Insurance Journal interviewed Laurence Hubbard, president and CEO of Montana State Fund, about the important issues facing the workers’ comp system in Montana and the future of the Montana State Fund.

Hubbard has served as president of Montana State Fund since May 2003. He has been with the Montana State Fund since 1989 where he first served as legal counsel. Hubbard was later promoted to underwriting manager and then to vice president of underwriting & marketing. In 2000, he was promoted to the position of vice president of insurance operations. In February 2003, the Montana State Fund board of directors appointed Hubbard to serve as interim president/CEO. The board later appointed Hubbard to serve as president/CEO.

To find out more about recent legislative debate and the future of workers’ comp in Montana, please read below.

Insurance Journal: How is Montana State Fund similar to other state funds in the West? How is it different?

Laurence Hubbard: We have a file-and-use system. We’re similar to those competitive funds that also provide guaranteed market responsibility, aligning Montana with Utah and Colorado. Some state funds, such as Arizona, have an assigned risk pool, and the state fund is not required to serve as a guaranteed market but only to accept their share of the assigned risk pool responsibility. Then there are the monopolistic fund states, and Montana is surrounded by essentially three monopolistic funds: Washington, North Dakota and Wyoming. So within our region we are kind of unique.

IJ: You appeared before an interim study committee of the Legislature recently. Can you tell me if there were any issues discussed that would be of interest to independent agents?

Hubbard: I did appear before the Economic Affairs Committee. Certainly one of the issues that is very important and the study that has been occurring over the past year since the 2003 Legislature has been the study of the potential sale of Montana State Fund. Not privatization. People confuse that term because privatization suggests that the entity is released from the bonds of state ownership and is allowed to function and exist as a new entity as opposed to an out and out sale which is where we would essentially disappear and another type of mechanism would be in place, such as an assigned risk plan with no State Fund entity or survivor entity. That was the proposal. That’s under Senate Bill 304. We’ve appeared a number of times and the industry has presented information and evidence to the study committee on the advisability of sale of the Fund and the committee concluded that it would not be in Montana’s employers and citizens best interest to sell the State Fund.

The reason is that without a guaranteed market for a mandatory form of insurance, there has to be an appropriate mechanism to address the ebbs and flows of market interest in the state. Montana is four-tenths of a percent of the national market. We do not command as a state, or we don’t move markets by the potential opportunities as greatly as California or other states where there’s greater market share opportunities and revenues to be generated. The cost of infrastructure is pretty high for carriers. To make a decision to enter or even withdraw from markets is a substantial consideration. The committee concluded that we need a guaranteed market mechanism in Montana and that the State Fund in Montana serves that purpose and has served it well over the history of our organization.

We did have trouble in the late 80s and early 90s which created our Old Fund liability. That had to do with political rate suppression, inadequate competitive environment for private carriers and that was repaired by a creation of an independent board of directors for the Montana State Fund and a requirement that we remain financially sound. There are other areas that I think independent agents would be interested in, not only just the continued existence of the State Fund, but a commitment to a healthy workers’ compensation environment in Montana. That means that our rates have to be adequate, that our pricing has to be adequate, as well as our case reserves and what I call our contingency reserves (also known as surplus).

We didn’t used to use independent agents to distribute our workers’ compensation products. We actually began our program of appointing producers to represent Montana State Fund in 1997. That program in my mind has been a success story for a number of reasons. Largely it is a commitment to mutual success. Independent agents add value to our customers. They are the ones who know about the competitive choice in the workers’ compensation system and that’s important for our mutual customers to be able to have that sense of choice. Even though agents are critical in making the decisions about the best place to meet the customers’ needs, the fact that they possess many markets that they can access gives the sense that even if employers in Montana don’t have a lot of options, the fact that they have a few and independent agents can present them, that’s a critical difference.

I also believe agents are an important constituency in terms of whether or not Montana State Fund is something that should be a guaranteed market, or whether it should be sold, or privatized, or whatever the direction would be. They have a good perspective on what the market does in hard times, hard markets and soft markets. My conclusion is that they understand the value that we bring to Montana and particularly to their customers.

IJ: How do you feel about allegations that State Fund has an unfair advantage over private insurers?

Hubbard: It is routine for our antagonists to accuse Montana State Fund of having an unfair advantage. During the SB 304 hearings, the accusation was also leveled but no evidence was ever produced to ever demonstrate that that was the case. There’s a perception of that, and I believe that we are forced to deal with perceptions to the extent that they move policymakers to make decisions about our operation. We have to deal with it.

One of the recommendations that has come out of the SB 304 committee is that we pay a premium tax that will transition over several years. Private carriers have to pay a premium tax in Montana and they believe that it’s an unfair advantage for Montana State Fund not to pay the premium tax. Well the difference is in the fact that we cannot refuse coverage to any employer. We have to take any and all comers. And so we don’t have the same kinds of controls in our operations that allow a company to posture for more profitable results in any given point in time. So for every advantage that I think is leveled at us, I think we have disadvantages in terms of limitations in our ability to truly operate like a private company.

IJ: I understand that this is the sixth consecutive year that State Fund has issued dividends to policyholders. Why do you think that you are able to do this? What factors contribute to State Fund’s success?

Hubbard: Dividends are an important part of an insurance company’s operations insofar as it’s rewarding customers that have good experience and have contributed to the overall financial success of the company. It’s rewarding them in a very targeted fashion because most dividend programs, even general dividend programs from a State Fund perspective are returned to our policyholders based on their premium size and loss ratio.

Now even in times when the company overall may have adverse operating results, a dividend declaration is essentially an excess/surplus release. Our board determines what the appropriate level of targeted surplus in any given year is for the company. Should we achieve that, any excess amounts can be released to our customers as a return for successful operations and their contributions to our successful operations.

IJ: I also understand that premium rates are on the rise and have been since the year 2000. Why do you think this is? What factors are contributing to the rise in rates?

Hubbard: Largely the increase in rates over the last several years is driven by loss costs. While Montana follows the national trend in terms of frequency (reduction essentially, of frequency of accidents) we’re no different from what we see nationally. We are seeing an increase in medical severity driving the cost of claims. This is in terms of raw medical inflation, in terms of per unit costs.

But more importantly it’s in the form of greater utilization of medical services by injured employees. There are a lot of studies going on as to what’s causing the increase in utilization. There’s speculation that it has to do with the aging workforce. Even though older people don’t tend to get injured as frequently as younger people, when they do get injured their injury severities seem to be greater. There’s some fiscal evidence of that. We’ve got new modalities of treatment that are being offered and new kinds of medications that are used as therapeutic modalities to return injured employees back to work. It is in the medical area, the severity is that it also follows a national pattern. That is driving rates.

What is driving overall cost is the combination of not only the cost of claims but also the lack of higher investment returns to offset negative results. Insurance companies have experienced the pressure of demanding greater underwriting profit in their operations and I think that has also put pressure on the rate structure and markets.

IJ: Is there a concern with fraud in Montana? Is excessive litigation a problem?

Hubbard: There has been concern. Montana State Fund was an early leader in establishing a dedicated prosecutor in our own Attorney General’s office for our customers to prosecute fraud claims, whether it be injured employee fraud, provider fraud or employer fraud. We have a detection unit within Montana State Fund and then we refer claims that we believe have potential for fraud to the Montana Criminal Investigation Bureau. And then if there’s a decision to prosecute, that’s handled through the Attorney General’s office and various county attorneys in Montana. We have a zero tolerance to fraud. We certainly believe we have a high return on investment in terms of when you catch fraud you usually enjoy substantial savings, particularly on the claims side. Those reserves can be taken down and also it’s a substantial deterrent effect.

Litigation continues obviously to be a challenge because the kinds of claims that we find ourselves litigating are more complex. Montana’s litigation environment is characterized by what I consider a very proactive supreme court on workers’ compensation issues regarding constitutional bases or reasons for overturning workers’ compensation legislation. There seems to be a to and fro between our Legislature that’s trying to set workers’ compensation policy and our courts that are trying to ensure that constitutional rights are protected. That creates a lot of volatility and uncertainty, instability in the workers’ comp system and it’s more and more difficult for adjusters to know what the appropriate level of benefits are for injured employees and employers to know what their exposure is to workers’ comp losses. One positive thing that we’ve done in Montana is we have a mandatory mediation process. Our experience shows that approximately 70 to 75 percent of our claims that are mediated resolve without further litigation.

IJ: In California, policyholders pay very high workers’ comp premiums and receive very little benefits. How does Montana compare? How does Montana’s premium rates compare with other states in the nation? Are benefit payouts pretty good compared to other states’?

Hubbard: The Legislature sets the level of benefits and they’re the policymakers in regards to the level of benefits. Our job is to administrate them appropriately and charge the right amount of premium for that.

There’s been several studies by the National Council on Compensation Insurance, and Montana has been studied several years ago in terms of why our costs appear to be higher on average than workers’ compensation benefit costs, tend to be higher on average compared to our region. In the study that was done by NCCI, they found that our permanent partial disability claims tend to cost more on average.

One of the suggested conclusions is that Montana is a very rural state. We do not have high concentrations of populations in metropolitan areas and therefore when injured employees cannot return back to their time of injury employment, it’s more difficult because of physical moving requirements and all of the things that you can imagine that crop up when someone has to move across country or across state for new employment opportunities. That puts pressure on our system, whether it be real pressure or tacit, providers are of course advocates for their patients, so there’s a temptation to want them to be able to stay in their community. There’s a lot of dynamics that have to do with demographic aspects of Montana that don’t exist in Arizona or Utah. We’re a highly rural state.

We also have a lot of small businesses in Montana. 22,000 of our 28,000 policyholders have premium under $5,000 per year. Montana business is small business and that I think has a certain impact on the average cost of our workers’ compensation claims. Our benefit levels, if you just compare statutory benefits state by state, NCCI tells us that they’re about average with the states in the region. However our costs for employers, our average rate for employers, are higher than average, driven largely by the cost of those permanent partial disability claims.

IJ: There was an attempt to privatize the State Fund back in March that was unsuccessful and the SB 304 hearings that focused on the potential sale of the State Fund. Do you think that these issues will come up again soon?

Hubbard: There’s always that potential as a public entity. You’re subject to political processes and people that have access to the political system. So yes I believe the privatization and sale issues could crop up time after time. I can’t predict the future; however, it’s important for us to be very proactive in communicating our role and purpose to policymakers and decision makers, being very upfront and credible with regard to the services we provide to Montana employers and our operational responsibilities as well as our advantages.