Report on Self Insurance Groups
regulating the arrangement. In 16 states, group self insurance is under the jurisdiction of the insurance agency. In 5 of those states, stand-alone self insurance is also under insurance agency jurisdiction, while in 11 of them, stand-alone self insurance is separately regulated by the workers’ compensation agency. California is among the 13 states that have both group self insurance and stand-alone self insurance regulated by the workers’ compensation agency.3 There is no reason that either agency, given the necessary resources, could not appropriately regulate group self insurance. Group self insurance in California is regulated by the Director of the Department of Industrial Relations (DIR) through the Office of Self Insurance Plans (SIP, commonly called ―OSIP‖). The Commission on Health and Safety and Workers’ Compensation (CHSWC) does not find a compelling reason to shift group self insurance to the jurisdiction of the Department of Insurance.
For DIR to successfully oversee group self insurance, however, the regulator of the program must approach it with the same concerns as an insurance regulator. Richard E. Stewart, former New York Insurance Superintendent (1967-1970) and former President of National Association of Insurance Commissioners (NAIC), described essential challenges to the insurance regulator as follows:
[Insurance and banking] share a characteristic that makes them unstable. They take a
customer’s money first and, in return, give only a promise of money and services some time in the future.
Government’s role is to help ensure that the promise of the insurer or banker is kept. ***
For purposes of solvency regulation, loss reserves are the crucial entry on a property- casualty insurer’s book. They can extend over long periods of time — ten years or more
and can be highly imprecise. Yet loss reserves are what a regulator has to act on. The
regulator cannot wait until the cash runs out, which will usually be years after the balance sheet should have shown insolvency. In the meantime, the failing insurance company [or self insurance group] will in desperation have done a lot of damage to itself and others.
Regulators do not like to shut down failed companies. The process is disagreeable and regulators see a company failure on their watch as a black mark. Their natural impulse is to put it off, which means delaying recognition of insolvency. The wide latitude for loss- reserve estimates, plus the long period of reserve uncertainty, makes delay even easier than it used to be. Such delay is an old problem, and it has withstood successive
3 Self-Insurance Regulators’ Handbook, 2005, IAIABC, Madison, WI, Table 1-2, citing Self-Insurance Institute of America, August 2003 data. .