AIK Comp: Kentucky’s Enron’

AIK Comp’s precarious financial situation in Kentucky should serve as a wake-up call for the workers’ compensation group self-insurance market in the Bluegrass State.

Lawmakers and regulators in Kentucky need no greater signal than AIK’s recent revelation of its $53 million shortfall that some funds in this market are being under-priced and mismanaged. This degree of a financial plunge from a major group self-insurance fund raises broader issues concerning the oversight and financial stability of Kentucky’s entire market. As state auditors evaluate AIK Comp, we urge the state to take sweeping action that will ultimately produce a more accountable workers’ compensation system in Kentucky.

In specifically addressing AIK Comp, the state needs to determine how best to divide the current deficit and what actions can be taken to restore faith in AIK Comp. AIK Comp is required by law to collect the $53 million shortfall—a deficit equaling more than one year of its premium—from its 2,500 client companies state-wide. This comes after years of underestimating their reserves and under-pricing their product to employers. If AIK doesn’t receive the $53 million to cover its expected shortfall, the fund will be officially bankrupt and will dry up by January. Whether AIK Comp ultimately stands or falls, however, employer members of AIK Comp will still need to cover payments made to injured workers.

After the independent audit is done and a remedial plan is approved so AIK Comp can begin assessments, a stabilization board should be created to monitor and provide strong oversight of AIK activities. Such a board should consist of employers, industry and insurance department representatives. This kind of strong action is needed to address the anger and mistrust that has ensued since AIK Comp’s financial revelations and to restore public confidence in the marketplace.

AIK Comp should not be the end of the road for the state’s investigation. A close examination should be done of each group self-insurance fund in Kentucky to determine its financial stability. At a minimum, the state should examine the reserves, pricing structure, and marketing materials of the group self-insurance funds. Kentucky should also regulate group self-insurance funds as they do for workers’ compensation insurers, mandating the same accounting and regulatory scrutiny. Gov. Ernie Fletcher took an important step in this direction by ordering oversight of the group self-insurance funds to be transferred from Kentucky’s Office of Workers Claims to the state’s Office of Insurance, which regulates much of the insurance industry. The Office of Insurance has more expertise to evaluate the financial stamina of these group self-insurance entities and has more regulatory options. The insurance office should also mandate that the funds be rated by A.M. Best, like all insurance companies, so consumers themselves can judge how risky it is to transact business with them. After all, these funds have been acting more like unregulated insurers than a group of employers agreeing to fund their liabilities. The type of business each fund insures should also be limited so that risk can be better predicted.

While current model legislation and regulation has focused on the approval and structure of a group self-insurance entity, ongoing solvency oversight has been a missing piece in the equation in most states.

Besides AIK Comp in Kentucky, examples include the essential meltdown of group self-insurance in Florida in the late 1990s and ongoing issues with specific funds in Illinois. After being faced with similar problems with self-insurance groups, Florida turned to stronger oversight. In addition to the above recommendations, Kentucky should implement the changes that took place in Florida:

• An annual report prepared by a member of the American Academy of Actuaries addressing the actuarial soundness of the group fund;

• Filing of the same quarterly financial statements that the more-regulated insurers do with the National Association of Insurance Commissioners;

• Verification of the annual filing of a balance sheet and statement of operations by a board member or an administrative executive appointed by the board.

With these changes, employers will know that whoever provides them coverage has adequate reserves to guarantee payment of claims. Employers would then also be able to estimate what the actual premium would be, and have the confidence that they would not be confronted with the surprises and assessments that current AIK policyholder members face. More importantly, employees will have peace of mind that they will receive benefit payments in time for their mortgage and other bills.

Greg LaCost is regional manager and senior counsel of the Property Casualty Insurers Association of America (PCI).

Topics Florida Legislation Workers' Compensation Kentucky