California Governor Proposes Selling Some State Workers’ Comp Insurer Assets

California Gov. Arnold Schwarzenegger is proposing to sell a portion of the state workers’ compensation insurer State Compensation Insurance Fund for $1 billion, Rachel Cameron, deputy press secretary for the governor, confirmed.

In his 2009-10 May Revision General Fund Proposals, Schwarzenegger proposed seeking “a private entity to purchase a portion of SCIF’s book of business, with the SCIF remaining as the insurer of last resort.”

Established by the California Legislature in 1914, SCIF is a self-supporting, nonprofit enterprise that provides workers’ compensation insurance to California employers at cost. With assets resulting from its book of business, surplus and reserves, selling part of the quasi-public insurer could bolster the state’s general fund. The state is facing a $24.3 billion budget shortfall.

The Governor’s office forwarded the proposal to the state Legislature on June 19. As proposed, the state’s Director of Finance would be authorized to act as agent for the state to sell a portion of or otherwise obtain value for SCIF assets and liabilities to an entity that the director determines will provide the best combination of:

• the highest price for SCIF’s insurance assets and liabilities and/or the best value to the General Fund;
• the greatest security for the payment of the purchase price and/or the best value to the General Fund; and
• demonstrated competence and professional qualifications for the continued satisfactory performance of the workers’ compensation insurance services offered for sale or other disposition.
• The proposal has three main objectives: 1) to maintain a sound workers’ compensation system; 2) continue with the SCIF as the insurer of last resort; and 3) achieve the highest value for the state, according to Cameron.

Janet Frank, SCIF CEO, said she was aware of the legislative proposal to sell State Fund assets, and said her organization would “continue to work with all stakeholders during this process to ensure that State Fund retains its ability to fulfill our mission of providing California businesses a strong and stable option for their workers’ compensation insurance.”

However, Insurance Commissioner Steve Poizner voiced concerns over the Governor’s proposal, and issued a list of 16 considerations that policymakers should consider in such a transaction.

For example, he noted that SCIF is the insurer of last resort, as well as a market competitor, which allows SCIF to spread its risk more broadly. “What is the implication for rates if the risk pool contains only the highest risks? If SCIF loses the ability to balance its book by writing voluntary business in addition to ‘insurer of last resort’ business, will it be able to adequately manage its risk and remain viable?” he asked.

He also questioned the proposal’s decision to remove oversight of any sale from his office or the Attorney General, especially when such a transaction affects a company that writes more than one out of every five workers’ compensation policies and is the largest insurance company in the state.

“Notwithstanding any other provision of law, neither the approval of the Attorney General, Insurance Commissioner, nor of the Director of General Services is required for execution and implementation of the sale or other disposition of the assets and liabilities of the State Compensation Insurance Fund,” the proposal states.

Yet no other agency in the state besides the Department of Insurance that has the necessary expertise to determine whether any systemic change to SCIF’s structure is appropriate, especially one of such magnitude, Poizner said.

“No such change should be made without affording the Commissioner the opportunity to assess the change, to inform the stakeholders of any associated hazards or benefits, and to ensure that the workers’ compensation market remains financially sound and that California’s employers continue to have access to affordable workers’ compensation coverage. Is it good public policy to prohibit the primary insurance regulator from having any active role in imposing possibly historical changes on SCIF?” he said. “State government should cooperate to ensure the least market disruption. With unemployment at record levels, California employers and employees deserve nothing less.”

This is not the first time talk of selling all or a portion of SCIF’s assets has surfaced. The issue arose under former Gov. Pete Wilson. Also in May 2008 as the state predicted a $3.3 billion shortfall for that fiscal year, Schwarzenegger’s administration confirmed that the idea for a sale was floating around and put forth by a couple of people, although at the time Cameron said it was no more likely to become a reality than any other budget proposal being discussed.

SCIF’s Frank noted the issues surrounding a sale of SCIF’s assets are “incredibly complex” and “require substantial and thoughtful analysis not only because of their complexity but because the stakes associated with them are so high.”

“Many Californians rely on the security and certainty State Fund offers the state’s employers, particularly small businesses and new ventures – keys to California’s economic recovery; and injured workers and their families,” she added.

Frank said the State Fund is needed as a viable and affordable option when market conditions worsen and private insurance companies scale back their product offerings as was the case in 2000-2002, when 28 private carriers claimed insolvency and left the California market.

“State Fund stepped up to fulfill its leadership role as a critical safety net for the market by providing coverage for most of those policy holders and preventing a workers’ comp market collapse and subsequent drain on the state’s economy,” Frank said.

As the Legislature evaluates ways to close its budget gap, the Governor’s office “welcomes and looks forward to a debate of the proposal, but will not support anything that rolls back the Governor’s historic workers’ comp reforms,” Cameron concluded.