State Fund Responds to Calif. Commissioner’s Warning

A little less than a month ago, on May 29, California Insurance Commissioner Harry Low stirred the pot in the State Fund situation when he released to the public a letter that he had sent to the president of the California State Compensation Insurance Fund, Kenneth Bollier. The letter summarized the California Department of Insurance’s (CDI) concerns regarding State Fund’s financial stability that surfaced during a May 24 meeting between Low and Bollier. It further recommended that the Fund revise their action plan previously submitted to the CDI on May 1.

Both parties maintain that they had no intention of releasing the letter to the public, however, Low apparently did so after he was contacted by several people who had seen the contents of the letter.

Bollier wasted no time in responding to Low’s warning, firing off a letter June 9 to State Fund’s policyholders, saying that compliance with Low’s “egregious and unwarranted directive is a recipe for economic disaster.”

Additionally, Bollier’s letter pointed to the advent of open rating in 1995 as being the culprit of California’s workers’ comp problems. He further said that State Fund has maintained its’ role as an “always-available market and a fairly competitive carrier,” during the past couple of years that have seen the workers’ comp crisis come to boil in California as carriers left the market.

According to Low, the CDI was “concerned that the premiums were not sufficient to paying the operating costs of the underwriting losses,” and felt that action needed to be taken to correct that. Options that Low said should be considered included an increase in premium rates and to practice the “Insurer of Last Resort” philosophy, among others.

Low said the suggestions were simply “factors for them to consider… If we see that there is the need to stabilize that company, or there is concern about their financial condition, we try first to bring it to their attention, and then hopefully they will take corrective action. How they actually do that is certainly within their total prerogative of how they manage their company.”

Bollier responded in his letter by saying, “With the exception of the ‘termination’ item, all of these suggestions, particularly the last one, would lead to draconian price increases for thousands of California employers and far exceed what State Fund needs to achieve surplus adequacy.

Low warned State Fund that if the CDI did not find the revised plan acceptable, the Fund could face corrective action in accordance to the Insurance Code. Low added, “I hope that we need not anticipate that. There are a number of provisions in the Insurance Code that we believe we can assert, but I don’t think we need to go there at this time.”

Bollier, however, contended that the Fund is financially solvent. As he wrote in his letter, “We have over $9 billion in assets. Our reserves for future losses and loss adjustment expense are $7.6 billion. These reserves are backed by $8.7 billion in bonds on deposit with the State Treasurer of California. Cash flow will be over $2 billion positive in 2002.”

In the event that the Fund should ever become insolvent, Low said it is unclear as to who would become financially responsible. “We’re just hoping that we never need to address that.”