Calif. State Fund: Getting Better Day by Day

In the ever controversial topic of workers’ compensation insurance in California, State Compensation Insurance Fund President and CEO Tom Rowe seemingly offers a bit of Zen. Rowe, who took the helm of the company in July 2010, readily expects challenges in the near future – the Legislature is expected to tackle workers’ compensation insurance in the next session and there is a general industry consensus that there will be upward pressures on pricing. However, the president is energized by his job, as he appears to live and breathe insurance.

Rowe’s genuine interest in the industry began right out of college. After graduating as a business major with a specialty in finance from Towson State College, he started as an underwriter trainee at The Hartford Insurance Group. From there he grew in the industry, working for Arthur J. Gallagher & Co., Fireman’s Fund Insurance Co., Trilogy Insurance Services, and eventually forming his own technology consulting company for the property/casualty insurance industry

“I liked the business model of insurance and fell in love with it right away,” Rowe said of his affinity for the industry. “It just always made a lot of sense to me relative to collecting the fixed dollars of the many, the premium, and then collecting that and being ready to respond when life throws us curve balls, whether they be workplace injuries like workers’ compensation, or a fire in your home, or an accident with your car. Insurance is pretty much all I’ve done with my entire professional career.”

It’s no wonder then that now, many years later, several in the industry characterize Rowe as well-informed, and “gracious” in hearing their concerns. Leaders at both the Alliance of Insurance Agents and Brokers (Agents Alliance) and the Insurance Brokers and Agents of the West (IBA West) have said they were initially impressed with Rowe’s understanding of the role of State Fund and its financial condition, as well as his apparent willingness to “do the right thing” even while they disagree with the insurer’s broker of service policy in not paying commissions.

So despite what Rowe describes as “the dynamic period, which I think we’re entering in California [workers’] comp,” he and others in the industry said they are hopeful for positive changes at the Golden State’s quasi-public workers’ compensation insurer.

A Yes Company

Rowe plans to lead State Fund according to its charter, which says State Fund exists to provide an open and stable market for California workers’ compensation insurance; the company has an open-door policy when it comes to writing California businesses.

The company believes this unique role in the marketplace has led State Fund to the unique financial position it is in today. The fact that State Fund was able to carry over half of the market when California experienced a workers’ compensation crisis created the $20 billion investment portfolio it has today. That dynamic impacted State Fund’s current expense ratio following market recovery, return of competition and dramatically lowered rates following reform.

That dual role also means despite concerns about the carrier competing with the private market and becoming too large, State Fund plans to grow – and will say “yes to everybody.”

“We aspire to serve that portion of the market that finds our offers valuable,” Rowe said. “So for clients, for employers, that for whatever reason have few, if any, choices, we’re an open market for them. For clients that have a wide variety of choices, if they believe the strength of our balance sheet, if they believe the competitiveness of our price and the quality of our services are a great value, and many do, we aspire to serve them too. We have the capacity and the appetite to get better and better at what we do.”

He explained that if State Fund focuses on workplace safety, a quick and effective response when workers get injured and have claims, and provides an efficient product at a competitive price, then the marketplace will determine how big or small the carrier gets. “It is not a strategy or focus on market share,” he said.

Moderate Price Increases Ahead

As the new leader of State Fund, Rowe said he is reviewing all operations of the 96-year-old company. He expects rates to increase somewhat, but not at the 27 percent level recommended by the Workers’ Compensation Insurance Rating Bureau of California. The insurer’s strong balance sheet will help to moderate prices, he said.

State Fund recorded net income of $143 million for 2009, up from $75 million for the prior year, which allowed the company to add $161 million to policyholders’ surplus. The company’s loss ratio was 75.3 percent, identical to the prior year, which translated to $940 million of incurred loss in 2009 versus $1.3 billion the prior year. Underwriting expenses in 2009 were $456 million, down from $538 million in 2008.

The loss adjustment expense (LAE) ratio, on the other hand, increased about 10 points to 46 percent, contributing to a 2009 combined ratio of 161.5 percent because of the large inventory of open claims dating from 2001 to 2004 when the carrier had an “unusually high” market share. Rowe said State Fund is working to lower expenses and expects the ratio will come down over time.

Given the state’s economic and payroll challenges, competition, rising medical costs and rebalancing of the workers’ comp insurance market now that the benefit of 2004 reforms have been discounted away, Rowe said, “we’re nearing an inflection point where prices are likely to rise.” Nevertheless, he said State Fund has the financial capacity to handle its obligations. “We are in a very strong and relatively stable position, where you’ll see less movement in our prices. We at State Fund are anxious to communicate our pricing model,” he said.

Although State Fund is heavily invested in bonds and economists are predicting depressed interest rates over the next few years, Rowe believes the quality of his company’s portfolio remains “outstanding.” All of State Fund’s investments are NAC1, which is the highest rating the National Association of Insurance Commissioners gives investments, and its quality ranks at or close to the top for insurance companies and other state funds.

As the workers’ comp insurer looks out over the next year, less than 10 percent of State Fund’s portfolio will mature. The investment rate on those maturing bonds has an average yield of 3.45 percent, Rowe said, emphasizing this will not drive down the company’s overall yield because it’s only 10 percent of the portfolio over 12 months.

Additionally, the carrier plans on reinvesting in a mix that includes corporate bonds, so it expects to reinvest at a rate of 3 percent or better.

Rowe predicts 2011 will be a financially stable year for the insurer. Meanwhile, he plans to increase transparency and drive efficiencies into the company to make it easier for agents and brokers to work with the carrier.

“We’re making progress and intend to make more progress in ease of access and ease of doing business with State Fund, where we’ve begun to deploy and we’ll continue to deploy technologies to make it easier and faster to get a new quote, to get a renewal quote,” he said.

For example, State Fund plans to improve the process of validating premiums and payrolls, and premium audits.

“There are always areas for any company to improve, and State Fund certainly is in that community,” Rowe added. “We have opportunities to become more efficient, to become more productive, in a variety of areas, but areas that are common to the operations of any large insurance company. And so we’ll continue to work on those.”

Valuing Independent Agents

These efficiencies will no doubt aid agents, Rowe said, adding that he hopes to improve communications with independent insurance agents and brokers. Recently, the agent and broker community criticized the carrier’s Broker of Service policy that helps a broker with documentation to service an account that was previously written direct then later was written by an independent agent, but does not pay the broker a commission. Agents instead want State Fund to recognize broker of record (BOR) letters and pay them commissions for their work on accounts.

“I think independent agents and brokers do valuable work, that is certainly the reflection [I have] over a long, long career. They’re viewed as trusted advisors, and they’re important to this process, and then certainly they are important to State Fund,” Rowe said. While he said he has no changes to communicate yet in the company’s distribution system, “I believe [agents and brokers] are a critical part of our distribution strategy and will continue to be an even bigger part of our distribution strategy going forward.”

State Fund said a little more than half of its policies are written by agents and brokers, with about 90,000 policies directly written. Thus, having agents and brokers as trusted advisors to help articulate State Fund’s value proposition as it differs from other competitors, and its commitment to the state in this marketplace as it differs from other competitors, is a “unique” and “valuable” relationship, Rowe acknowledged.

Ultimately, people should not expect dramatic changes from State Fund under Rowe’s leadership, but rather improvements in what it does best, he said.

“What State Fund does is one of the purest expressions of what I fell in love with relative to the insurance industry – the requirement, the obligations from the Legislature 96 years ago to stand as a stable and open market for all employers of this state; to first serve those employers by trying to reduce the frequency and severity of workplace injuries; to help make the workplace safer, then recognize that industrial accidents are going to occur, and when people do get hurt, get them excellent care,” Rowe said. “My goals and objectives are just to help us get better and better, day by day, quarter by quarter.”