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Report on Self Insurance Groups

refinements in detection technique, such as early-warning ratios, risk-based capital standards, and closer involvement of credit rating agencies.‖ 4

Mr. Stewart’s observations are equally compelling when we insert self insurance group(s) in place of company(ies) in that passage. Examples from New York State show the consequence of allowing a SIG to continue sinking into deficit rather than face the need to levy assessments on members.

A test for California regulators may arise within the next year as groups must come into compliance with new regulations at the same time they deal with a shrinking economy. The reason that compliance with the new regulations may be a challenge is that, through 2007, most groups did not reserve for future unallocated loss adjustment expense (ULAE), and some groups did not believe the 80% confidence level was required for any but the current program year. The new regulations clearly require both funding for ULAE and funding every program year at the 80% confidence level. These regulations are necessary to assure with a high degree of confidence that funding is adequate for all incurred claims and that, in addition to money to pay the claims, there will be money to pay the adjusters to handle those claims. Some groups are already in runoff, paying accrued claims but not currently self-insuring, and their financial status is being examined by OSIP. Thanks in part to the high confidence level already required, most

groups can probably adapt and meet the new standards.

5

California regulators should heed Mr. Stewart’s advice, however, and be prepared to shut down any SIG that is unable to come into compliance with the higher standards. New York began tightening its standards in 2001. Five years later, the state had to begin shutting down failing self

insurance trusts. The first two were the Provider Agency Trust for Human Services and the Manufacturing Industry Workers Compensation Self Insurance Trust, both managed by a Wayne, PA subsidiary of AVI International, Inc. One of the trusts had been in operation since 1996 and had accumulated a deficit of millions of dollars. According to New York State Workers’ Compensation Board spokesman John Sullivan, ―It is not unanticipated that light would be shown on some trusts as a result of these new financial standards. We look at these as

making

the

system

stronger

in

the

long

run.‖6

Later,

three

New

York

trusts

managed

by

4 Stewart, Richard E., ―The Attorney General, the SEC and the Commissioners of Insurance‖ Journal of Insurance Regulation (2007).

5 Generalizations in this report about the condition of SIGs are based on reviews of financial and actuarial reports for 2007. CHSWC has not requested or received any additional financial or actuarial information about any group. No particular groups have been identified as threatened by the regulatory changes. It would be a mistake for the reader to infer that this discussion refers to any particular group. Specifically, CHSWC has no reason to believe that any group that has announced closure or change of administrators is unable to pay fully all of its obligations or to continue as a going concern.

6 As quoted in ―N.Y. Shuts Comp Trusts,‖ Insurance Journal, January 23, 2006, http://www.insurancejournal.com/magazines/east/2006/01/23/newsbriefs

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