Jobs and more on the line in R.I. as Beacon Mutual-Carcieri political saga enters critical period

Executives at Rhode Island’s largest workers compensation carrier, Beacon Mutual Insurance Co., figure they could be looking for new jobs as early as June if Governor Donald Carcieri gets his way. They expect that if they do not succeed in getting the law changed to reduce Carcieri’s control over Beacon’s board appointments by the time lawmakers adjourn in June, their days will be numbered. That’s because current law permits Carcieri to make new appointments in November.

The scuffle has been going on for more than a year, before the time when Beacon, which controls an estimated 90 percent of the employer market in the Ocean State, first attempted to get legislation to reduce the political appointees to its board and permission to write the out-of-state risks of its in-state customers. It actually began, claims Beacon Mutual CEO Joseph Solomon, when Carcieri replaced former Director of Business Regulation Marilyn McConaughy with the current DBR head, A. Michael Marques.

The battle escalated in January when one of Carcieri’s appointees on the Beacon board, Adelita Orefice, chief of the state’s labor department. informed him of allegations being investigated by the Beacon’s own audit committee. The allegations concerned whether some customers with ties to Beacon board members had received favorable pricing and terms. Sheldon Sollisy, owner of Manpower Temporary Services and chairman of the Beacon board of directors, was among those targeted by the allegations. He immediately resigned from the board.

The Carcieri administration claims that Beacon should have but never did disclose these allegations to the DBR during the latter’s audit of the company.

Carcieri has expressed concern over the Beacon’s monopoly of the workers compensation market in steadfastly opposing Beacon’s legislation. “I strongly believe that state-sponsored monopolies require more — not less — public oversight. As a result, I oppose efforts to reduce the public’s right to be represented on the Beacon board of directors,” he has said.

The following is an edited interview by Insurance Journal’s Andrew Simpson with Beacon Mutual CEO Solomon, who presents his view of this political drama that has competitors, agents, journalists, politicians and citizens wondering how it will end.

IJ: How did this battle with the Carcieri Administration get started? Have you had run-ins with the administration or the DBR in the past?

The Governor replaced, a year ago, the Director of the Department of Business Regulation here in Rhode Island with his own person. In a newspaper article announcing him, one of the charges that this new director was given was to address the domination of Beacon Mutual and its dominance in Rhode Island, its market share in Rhode Island. I believe the Governor was of the thought our market share was somehow eroding competition or preventing competition as opposed to viewing it, quite honestly, because we have the best price and best services we have the market share we have.

IJ: So, this began back when the new DPR chief was appointed, but you had by that time already attempted the legislation once, correct?

Actually, at that particular moment, no. We didn’t submit legislation until after that.

IJ: Didn’t the Governor oppose that the first time through?

Yes. They removed that taxing exemption in January that year and I don’t think we introduced the legislation until April timeframe.

IJ: Have you ever had an opportunity to sit down with the Governor or the Director of Business Regulation to get to the bottom of this and iron things out?

On a number of occasions we did. Last year in particular, our legislation passed both the House and the Senate and we got pretty bloodied in the process. There is just a lot of misinformation, a lot of people who were either opposed for whatever reason and disseminated information and mistruths. So, last year, when the Governor threatened to veto it and at that time we said, “Let’s see if we can work out a compromise.” We spent the better part of the latter half of last year trying to work out a compromise. Quite honestly, there weren’t a whole lot of issues, with one exception, that one exception being this particular Governor, today, has his first opportunity to appoint board members to our board and the majority of our board, in November of 2006. Our legislation would remove those appointments and there was just no getting over that last year. There was no getting around that. His argument last year was the company needs oversight and our argument is the company has oversight though the Department of Business Regulation and we don’t need political appointments.

IJ: Is it the political nature of those appointments that, in some cases in some states, keeps you from being able to compete?

You are absolutely correct. There’s the state control provision, which is in 24 states, I believe, which would prevent us from being able to write Rhode Island businesses, or being licensed to write Rhode Island businesses in those states.

IJ: So, it has just snowballed from there.

What happened is that … our legislation this year was approved by the Senate, rather handily a vote went 34 to 3. It was headed to the House and we had similar support in the House when we had an internal investigation ongoing, the result of a hotline call that we discovered that we were handling in a timely fashion. The only appointment, if you will, by the Governor today, is an ex-officio, which is the Director of the Department of Labor and Training, who sits on our board. … When it went through the Senate and was recognized, it was going through the House pretty quickly, she ended up betraying her duty of loyalty and gave this report to the Governor.

IJ: Which he used to suggest that there needed to be a complete outside audit, right?

Then, at that point, the Governor just made this a big political public matter and ,yes, called for the forensic audit and so forth.

IJ: The DBR is apparently doing an audit. Is that something that was routine?

There was a market conduct review, which just began at the end of the summer last year. They had competed all of their fieldwork; in fact, the people here had told us that they should have the report completed by the first week of December. Our understanding was that it was pretty routine. Obviously they would come up with recommendations, but there wasn’t anything that anyone should be concerned with. That market conduct review remained open and, again, because of the confidential draft report investigation that we were going through, now the Governor has really stepped this up. Again, we’re talking about the DBR and the Governor providing the local paper and media on a daily basis with information. It’s being played out in a very public manner not by us, but by the Administration.

IJ: Have you heard other CEOs express concern about what is going?

I have, both within the state of Rhode Island as well outside the state of Rhode Island and we’ve got their support. They’re all watching us, as you can imagine, pretty closely. To think that you could do business in this state and if you disagree with the Governor or the Administration, they can come down on you as hard as they are coming down on us. So, yes, it’s something that a great number of my peers have had discussions and it is very concerning to them.

IJ: The concern originally seemed to have been the large market share that Beacon Mutual enjoys. What’s the history there, and what has the state done to encourage or invite other carriers to compete in the state?

You have to remember, when we were created, we didn’t enjoy any favored status, if you will. We were part of the guarantee fund. We paid taxes just like everyone else and it wasn’t until the state came to us and, we assumed, in 1993, the responsibility of the assigned risk when we received this two percent premium tax credit or exemption, if you will. Then, in addition to that, what had happened was the insurance industry came to the state and said, “Look, you just denied a 123 percent rate increase. There is no way Beacon, who is going to assume this business, can survive financially and have that stability. Ultimately, they’re going to end up going into the insolvency fund and ultimately we, the insurance industry, are going to have to pay for it.” Again, while we took on this responsibility, the insurance industry lobbied to remove us from the guarantee fund or the insolvency fund. So, there was a mechanism put in place that took us out of the insolvency fund.

As of last year, you could say that Beacon was favored, although I’ll argue differently. We got a two percent premium exemption and we no longer participated in the insolvency fund. Now, our exemption has been removed and what we’ve done in this legislation has basically said to the Director of Department of Business Regulation, “You decide. If you want us in the insolvency fund, we’ll go in the insolvency fund. But also recognize from a matter of public policy that if anything ever happened to the company and we went into the insolvency fund, basically you’ve eliminated that guaranteed coverage for the residual market.” So, it’s an issue that, quite obviously, we’re damned if we do, we’re damned if don’t. We’re going to get criticized either way and what we’ve done is say, “Look, you guys decide it. If you want us in, we’ll go in. If you don’t want us in, we won’t.”

IJ: How much confidence do you think the public would have in a DBR audit that would come out now, given all that has gone on?

I honestly don’t know; that’s a good question. Obviously, you know and understand that the Director of the Department of Business Regulation is appointed by this administration. He’s an old friend of the Governor’s who worked at a bank with the Governor. I don’t know if the public is fully aware of that, to be honest with you and I don’t know the conflicts they have. What we did because quite honestly, what we needed from a legislators standpoint to do something timely. We went out and we hired what we believe was the most reputable firm that we could find, in The Giuliani Group. Then, in addition to that, we set up a separate independent committee, which is comprised of a former governor, a Republican by the way; the dean of the business school here at the University of Rhode Island; and a recently retired adjunct general, who all, again, men of impeccable reputation.

IJ: What is the cost of the Giuliani contract?

I can tell you, in essence, what I told the board the other night, which is if you take all of this activity, we’re anticipating it’s going to cost about $2 million, and I’m talking about all the activity.

IJ: You had a subpoena quashed; the court said that it went too far grabbing information that should be private. What happens now ?

Let’s be honest here for minute, okay? What they attempted to do was come in here and turn this place upside down on a witch-hunt and hope that something falls out. In the addition to that, when we said that you don’t have the right to do that, and quite honestly we have the obligation to protect our policy holders’ confidential information, they ended up slapping on us a show cause order and wanted to revoke out license. I hope that doesn’t get missed in the conversation. When we went to court, the judge, in essence, ruled that they were over-reaching and in addition to that, indicated that she felt that one could only speculate that it was a retaliatory attempt, if you will, to muscle them on ourselves. That’s all in the court decision.

IJ: How much of senior management’s time is being taken up with all of this these days?

To be honest with you, if I said 100 percent, I’d probably be on the low side.

IJ: How do you think this is going to end up?

Costing our policyholders an awful lot of money, unfortunately. I’m hopeful, at the end of this, we’ll be vindicated and our legislation will pass the House and withstand any veto. Then again, I’m not sitting here to say we don’t make mistakes. Any company in any field who sat here and said they don’t make mistakes would be wrong and foolish. I don’t think that we are doing anything that is intentionally wrong or done in some sort of manner that would indicate there’s a pattern to anything. We’re a growing, maturing company. There are systems and controls and procedures that we put in place throughout the years that, I suspect, the recommendations will be to modify, but that’s normal. …The unfortunate thing is all these recommendations are probably going to be played out in the public arena and used against us if at all possible.

IJ: So, you’re fairly confident that with all the audits, there will be nothing unusual that comes out, nothing that can’t be taken care of in the course of business?

Yes. And again, to sit here and say we don’t make mistakes, that would be foolish. We’ve got hundreds of thousands of transactions that occur on a monthly basis. Since I fully expect that there will be recommendations, but again, am I comfortable and confident that we are a good company doing good work and have the best interests of our policyholders at hand, absolutely.

IJ: Now, that November, 2006 deadline seems critical. If the Governor can postpone a resolution until that point, he gets to name his appointments, correct?

Actually, the timetable is shorter than that because we have a part time legislature, which generally goes out in the middle of summer around June. So again, all he needs to do is drag this out beyond the session and, in essence, he’s won. The middle of April, we hope to have this through the House, end of April, May, and it still gives us a little leeway, if you will, for an override and address that.

IJ: If the Governor succeeds in making appointments in November, would you expect your job would be on the line?

Absolutely. I think that it’s fair to say that I have a lot of respect for the previous Governors, who remember what the system used to be and recognize what this company has done. As a result, they have mainly reappointed directors who were involved in the system and in the reforms. This company has never been political and, unfortunately this administration seems to politicize everything and mainly this company right now.