As part of an effort to privatize government units, Texas State Comptroller Carole Keeton Rylander has recommended that the Texas Workers’ Compensation Insurance Fund be sold to the highest bidder.
The recommendation, which came as part of a late December package of recommended government revisions called e-Texas, has taken many in the industry by surprise. It also has some worried about the future of the state’s residual market.
“You’re looking at taking an action that would leave the state without a residual market,” said Terry Frakes, a spokesman for TWCIF, commonly known as The Fund. “I think the state’s providers remember the hard times-it wasn’t that long ago that [the state’s residual market] was $5 million in debt.”
Rylander’s recommendation concludes that the very success of the Fund “especially given the near-elimination of the residual market, raises the question of whether the state still needs to own and control the Fund, rather than selling it to one or more new owners in the private sector.” The plan outlined in the report calls for the Fund to be sold for at least $300 million in a closely monitored auction, with the proceeds earmarked for the state Economic Stabilization Fund.
The report also concludes that privatization of the Fund would allow the state to “realize the benefit of the assets developed by the Fund while maintaining its commitment to the public policy goals served by the Fund under state ownership.”
The size of the surplus would become immaterial according to the report, since privatization would not directly affect it. Instead, the board and management of the fund could determine its ideal size based on incentive-driven business judgement, Rylander concludes in the report. Rylander could not be reached for comment in time for this article.
The Independent Insurance Agents of Texas have reviewed the proposal with Fund staff and legislators, concluding that the Fund has and is successfully fulfilling “its role as a competitive force and residual market.”
“We are concerned about any proposal that would disrupt the Texas insurance marketplace for independent agencies and their customers, and this idea certainly has that potential,” said IIAT President Don Medlin in a prepared statement. “We believe the State Fund has played a major role in stabilizing our insurance markets, so we will be deeply involved in any actions the legislature takes in response to Ms. Rylander’s recommendation.”
Meanwhile, the Texas Department of Insurance is maintaining a cautious approach to the recommendation. “We think the comptroller’s proposal to sell [The Fund] is worthy of discussion, and we look forward to learning more about it,” Commissioner Jose Montemayor said in a statement. “Obviously, an action of this magnitude requires careful analysis, including a careful review of how a private entity could replace the fund as the residual market. The Fund has been a stabilizing force in the workers’ compensation marketplace for nine years, and it would be very advisable to develop a thorough understanding of all the potential consequences if the entire Fund is privatized.”
The comptroller’s recommendation does state that, should the Fund be privatized, it would remain subject to the “continuing obligation to serve as an insurer of last resort and an insurer for small enterprises. The legislation authorizing the sale should require the company acquiring the Fund to assume these obligations.”
The recommendation is based on the sale of the Michigan Accident Fund in 1993 in which the state contracted with an investment banking firm to advise the state on privatization. The resulting auction drew a winning bid of $291 million, with an additional $3.9 million as equivalent tax payment. Employees of the Fund were then given the opportunity to beat that bid-an effort that proved unsuccessful.
Similarly, Rylander recommends selling the Fund through an auction directed by the Texas Department of Insurance. Just how the Fund should be sold, however, would be left up to the Legislature, though Rylander did provide several suggestions.
The first provides for sale of the Fund as a whole unit. Both the authorizing legislation and the contract for sale would require the acquiring company to continue to serve as the state’s insurer of last resort and as an insurer for small employers.
The second would offer the Fund in its entirety, with an allocation mechanism for residual market employers. “With the radical decline in the size of the residual market, the burden of such cases is greatly reduced. A new allocation mechanism could distribute this burden fairly and evenly among more than 250 workers’ compensation insurers in the Texas market.”
The third option offered by Rylander would provide for a spin-off and sale of part of the Fund’s portfolio. Under this option, the state could choose to sell only part of the Fund’s portfolio by creating another insurance company, transferring part of the portfolio to the new company, and then selling the company. For example, the new company could include many or all of the small employers and other policyholders. The new company could be sold with an obligation to sell such policies to small employers. The remainder of the Fund could continue to operate otherwise unchanged, including its obligation to serve as the insurer of last resort.
The final option would divide the Fund into two or more companies for sale. The Fund could be divided into several companies, each of which would receive part of the current portfolio, including a proportionate share of the small employers and high-risk residual market policies. The successor companies would continue to be obligated to accept such customers, but TDI could limit the obligation so that none of the successor companies would receive a disproportionate share of residual market cases.
Meanwhile, Frakes at the Fund remains steadfast that the current framework is what is best for Texas insurers and insureds, saying the comptroller’s recommendation is based on what he believes is the inaccurate assumption that the workers’ comp market in Texas will remain hard for an infinite amount of time. “I just don’t think history will prove that out,” he said. “As anyone in the industry knows, insurance is very cyclical.”
California’s worker’s comp market is a prime example of what could be coming down the pike for Texas. And while Frakes and others believe the market could soften over the next few years, it will likely be nothing as bad as what California is beginning to experience.
“I think a lot of that has to do with the way their comp law is written,” Frakes said. “Open rating has lead to a lot of under pricing. I don’t suspect that the same thing is going to happen in Texas, at least not to the same extent as it has in California.” But during 1999, the amount of premium written in the residual market in Texas more than doubled, from $7 million in 1999 to more than $14 million in 2000.
“And there was a 25 percent increase in policies in the residual market,” Frakes said. “Is that a one-year aberration? It’s too early in ‘2001 to draw any conclusions for what will happen this year.”
Was this article valuable?
Here are more articles you may enjoy.
Cancer Victims Lose Bid to Block Proposed J&J Talc Bankruptcy 
Changes at American Coastal Insurance After Florida OIR Action on ‘No-Fly List’ 
Law Firms Smell Opportunity as Supreme Court Guts Agency Powers 
US Home Insurance Still Priced Too Low for Climate Risk, Says Swiss Re Chair From This Issue
