California Insurance Insolvency and Safety Net for Injured Workers

California Insurance Insolvency and Safety Net for Injured Workers

This is an update that focuses primarily on California Insurance issues.

Workers compensation is a social insurance.  What happens if the insurance company becomes insolvent or if the self insured employer cannot meets its obligations to provide benefits to the injured workers? Many are not aware of the organizations that provide the safety net for the injured workers.

Most employers and claims examiners or brokers only learn about these institutions when the claims examiners have CIGA as another insured in a cumulative trauma case, or when an employer’s insurance company becomes insolvent.  However all employers pay for these services one way or another.  It is always good to know what you are paying for.

I believe that a visit to their respective websites will provide a good start on getting to know such an important part of the insurance process in California.

At the recent CHSWC meeting I saw a presentation on insurance company pricing volatility by Rand at the Commission on Health and Safety and Workers Compensation meeting (see below).  One of the charts outlined the insurance company loss ratios and how it has dramatically increased and then decreased over the last ten years.  There was also an interesting corresponding chart concerning the number of insurance insolvencies.  There seems to be a direct relationship between sustained poor loss ratios and insurance insolvencies (no surprise here).  It is interesting to note how the loss ratios for workers compensation carriers do not seem to closely coincide to the economic problems of the state but rather more closely follow the workers compensation legislation and vicissitudes of adverse case law.

However, in difficult economic times where the interest rates are low, poor investments may impact the overall profitability of a workers compensation insurance company.

In California, the Insurance Commissioner is responsible for determining if an insurance company is viable and able to meet its obligations.  The insurance commissioner uses triennial audits, IRIS Ratios, and other methods (such as Best ratings) to help determine if the companies are viable.

It should be noted that when the 26 insurance companies in California went under earlier this century, all of them had a Best rating of A- or better within a few months before their insolvencies.  So there can be some distance between a “good” AM Best Rating and the viability of a company.

All of these companies also had actuarial opinions that seemed to indicate that the company was viable.  One should not expect an actuarial opinion to provide evidence of viability.

The California Insurance Guarantee Association provides a financial backstop for admitted insurance carriers (including other lines of

insurance.)  For workers compensation companies, if an insurance company is taken into receivership, the responsibility for the continuation of benefit provision falls to CIGA.

Though some insurance companies have voluntarily taken themselves out of the insurance market, there does not seem to be an effective way for the Department of Insurance to identify and intervene early enough to prevent the insolvencies rather than pick up the pieces after the company has gone under.  This is a problem.

SISF (Self-Insurers’ Security Fund) provides a safety net for private self-insured workers compensation benefits

In contrast, to the insurance companies, the insolvencies for self insureds tend to more closely follow the ups and downs of our economy.

The Office of Self Insured Plans (OSIP) oversees the California Self Insured companies.  If the self insured company declares bankruptcy, OSIP determines if the company will meet its obligations, and if not, then pulls the self insurance certificate, and turns over responsibility for claims handling to the California Self Insurers Security Fund.  Though some companies declare bankruptcy, they continue to provide benefits to its workers while going through a re-organization (as example, United Airlines, and several of the public utilities).  In these circumstances, OSIP monitors the continuation of benefits, makes sure that the security is in place, and has allowed some of the companies to continue as a self insured.

The California Self-Insurers’ Security Fund provides protection to private self insureds as CIGA does for insurance companies.

By law, SISF has to provide continuation of workers compensation benefits within 30 days of a self insured becoming insolvent - defaulting on its obligation to provide benefits to its injured workers. If your company is insured or a self insured company, doing business in California, it pays fees or assessments that support either CIGA or SISF.  SISF and CIGA have different funding mechanisms.

Once a worker’s compensation claim becomes part of the portfolio of the guarantee programs, the focus is on benefit provision and a quick cost effective closure.  Both organizations use TPA’s for their claims handling services and both employ professional claims administrators to provide oversight and direction. Both also have some advantage over their co-defendants (by law) concerning apportionment.

The memo (attached below) from the California Department of Insurance gives a good background on the organization of the Board of Governors for CIGA in California.

 The above opinions are not that of SCIF or of Safeway Inc. or of the California Self Insured Security Fund.

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Insurance Commissioner Poizner Announces Appointments to Insurance Guarantee Association Board of Governors California Insurance Commissioner Steve Poizner today announced the new appointment of Employers Compensation Insurance Company and the reappointments of California Casualty Insurance Company and Lawyers Mutual Insurance Company to the California Insurance Guarantee Association (CIGA) Board of Governors.

"We need a strong and robust guarantee association to handle claims should an insurance company go under," said Commissioner Poizner. "I look forward to working with them during their next term to implement many of the recommendations made during CDI's operational review released earlier this year."

CIGA operates under Sections 1063-1063.77 and Sections 11698.3 of the California Insurance Code, providing a mechanism for the payment of covered property, casualty, and workers' compensation insurance claims of insolvent insurance companies.

The CIGA Board of Governors is comprised of 13 members, consisting of nine insurer members and four members of the public. The insurance commissioner appoints all nine insurer members and at least five members of the board shall be domestic insurers, at least three of the members shall be stock insurers, and at least three shall be non-stock insurers.  Of the four public members, two are appointed by the insurance commissioner; one business member and one labor member.  Additionally, one public member is appointed by the president pro tem of the California Senate and one by the speaker of the California Assembly.

The term of appointment for the nine member insurers is three years with staggered terms. The members of the CIGA Board of Governors serve voluntarily and are not compensated for their services.  They are reimbursed solely for expenses incurred, if and when requested.  The CIGA Board of Governors meets quarterly in Los Angeles or San Francisco.

Stephen Festa is the senior vice president and chief claims officer for Employers Insurance Group. He's been with the company since 2004. He has more than 20 years of experience in the insurance industry and has held several executive-level claims positions in his career. He attended the University of Southern California and also completed the Advanced Executive Education Program sponsored by the American Institute for Chartered Property Casualty Underwriters (AICPCU) and the Wharton School of the University of Pennsylvania.

James Sevey is the executive vice president, managing director and general counsel of California Casualty Insurance and has been with the company since 1973. He is serving as CIGA's chair. Jim obtained a Bachelor of Science degree from Santa Clara University in 1971 and his law degree from Lincoln University in 1978. He obtained his Chartered Property & Casualty Underwriter designation in 1988.

Thomas Ault is the president and chief executive officer of Lawyers Mutual Insurance Company and has been with the company since 1981. He's been the company's president and chief executive officer since 2003. Ault is a former president of the San Diego County Bar Association and is a graduate of San Diego State University and the law school at the University of California, San Diego.

Commissioner Poizner released an operational review of the California Insurance Guarantee Association earlier this year that included 83 separate recommendations to make CIGA more efficient. The operational review made 83 specific recommendations, including:

·        CIGA should develop standardized fees and payment schedules along with measurable performance standards and expectations that should be coordinated with CIGA's audit process.

·        CIGA should develop a consistent contract process to include a review of the initial contract with standardized review intervals. The process should also document a standardized method by which a contract would be terminated.

·        CIGA should review and evaluate the basis and process for the consolidation and related costs associated with the transition of cradle to grave contracts.

Please visit the Department of Insurance Web site at

Non media inquiries should be directed  to the Consumer Hotline at

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Report: Six Factors Create Volatility in California Workers' Comp Insurance Market

December 18, 2009

"Since insurance rates were partially deregulated in 1995, the California workers’ compensation insurance market has been very volatile. For reasons that go beyond price deregulation, there have been dramatic swings in insurers’ underwriting profits and the share of coverage written by private insurance carriers, and a substantial number of insurers, including some of the largest market participants, have failed," according to a new report on California's Workers' Compensation Insurance Market. The report, which was approved by The Commission on Health and Safety and Workers’ Compensation, said, "The price paid for workers’ compensation insurance by California’s employers has been volatile since 1995 as well, continuing the considerable variation that occurred in earlier years."

The six factors the report identifies as having contributed to the insurance market volatility and the large number of insolvencies following price deregulation in the past 15 years are:

·        inaccurate projections of claim costs;

·        pricing below expected costs;

·        reinsurance contracts that gave insurers and reinsurers insufficient stake in the profitability of the policies they wrote;

·        managing general agents who had little financial interest in the ultimate profitability of policies;

·        underreserving for claim costs by insurers; and • insurer policyholder surplus that was inadequate to provide a cushion against adverse events.

The report suggests that "the actions of some managing general agents exacerbated the volatile market conditions following open rating and contributed to some insolvencies."

MGAs were active both in the primary California workers’ compensation insurance market following open rating and in the reinsurance markets to which the primary carriers turned, the report said.

The problem, the report notes, is that in many cases, when an MGA is compensated through a flat percentage of the total gross amount of premium that is booked in a given year, that creates a conflict between the MGA’s growth goals and the insurers’ or reinsurers profitability concerns.

MGAs are often given authority to negotiate and bind insurance policies ('given the pen') but are not required to invest in the insurer’s balance sheet. Because losses in workers’ compensation take many years to develop, the profitability of the policies they write is not clear for at least three or four years."

The report suggests several policy changes can reduce the severity of these problems in the future.

To view the report, visit

CHSWC is charged with examining the health and safety and workers’ compensation systems in California and recommending administrative or legislative modifications to improve their operation. The Commission was established to conduct a continuing examination of the workers’ compensation system and of the state’s activities to prevent industrial injuries and occupational illnesses and to examine those programs in other states.