Labor & Industries: Washington’s Workers’ Comp System Is Sound

Characterizations by a recent Washington State Auditor’s report on the state’s workers’ compensation insurance system has the state Department of Labor and Industries (L&I) worried that people will incorrectly believe that the system will become insolvent.

The report, which audited the financial statements of workers’ compensation funds administered by the L&I from July 2, 2008 through June 30, 2009, noted that during that fiscal year, the contingency reserves for both the Accident Fund and the Medical Aid Fund declined substantially. The decline was due to a decline in the market value of investments as a result of the nation’s economic recession and financial crisis; loss and loss adjustment expense liabilities; insufficient premium rates in 2008 and 2009.

The auditors further said considering L&I’s rate increases for 2010 – 4.5 percent in the Accident Fund and 8.4 percent in the Medical Aid Fund – the contingency reserve funds have a potential to fall below zero.

Specifically, the report said there would be a: 74.4 percent chance of insolvency in the Accident Fund within two years; and a 3.9 percent probability of insolvency in the Medical Aid Fund in two years.

The report noted both the Accident Fund and the Medical Aid Fund have sufficient assets to pay claims and perform day-to-day services, but that the contingency reserve funds have a potential of falling below zero. The auditors also indicated they thought L&I’s proposed rate increase for the Accident Fund was “outside a range of reasonable estimates.”

Judy Schurke, L&I director, said when the audit mentions “insolvency,” it is referring to the contingency reserve, which is only a small portion of the system’s total assets of $11 billion.

“The issue that was raised is that we could exhaust our contingency reserve. That’s true, but the system is not collapsing,” said Bob Malooly, assistant director for Insurance Services for L&I. “We’ll be able to pay our obligations for a long time.”

Malooly emphasized that L&I does not want people who are injured and dependent on payments from L&I to be concerned that there is not enough money for their care. He said his department realizes the 2010 rates are less than what the actuaries indicated would be necessary, but that L&I didn’t want to overreact to temporary effects caused by the economic downturn and raise workers’ comp insurance rates when employers could least afford to pay them.

“Having a zero contingency is not where anyone wants to be,” Malooly said. But he said L&I has operated with a negative contingency reserve in the past. “Given all of the economic stress that everyone is under, [operating with a negative contingency reserve is] a better risk to take than the risk of raising rates too high in this circumstance, and then finding a couple of years down the road that we have too much money.”

“The fact is, we made a deliberate decision to draw down the contingency reserve in order to keep premiums low and help businesses keep their doors open in this tough economic time,” Schurke added.

Washington’s workers’ compensation State Fund covers nearly 2.5 million people and 168,000 employers. It provides benefits to injured workers and insurance to employers from costly claims and lawsuits.

Malooly said instead of raising rates as high as actuaries recommended, L&I hopes to lower costs in the system by helping injured workers to return to work more quickly.