Self Insured Groups, Certain PEO’s, and the greed that causes insolvency
Here’s an article from the Workers’ Comp Executive News Digest that helps to explain why it is so very important to investigate self-funded plans before buying into one.
There are many self-insured groups active in California (some have already failed), including many Professional Employment Organizations (PEO’s) that self-fund or manage a large deductible plan for groups of employers. I would hope that this report will give business owners pause when they are offered to buy into any self-funded or partially self funded group workers’ comp policy.
“New York Comp Fund’s Meltdown A Financial Fukushima”
By DANIEL FISHER
The near-total collapse of a collection of New York workers’ compensation funds has left thousands of small employers wondering how they’ll pay an estimated $500 million tab — and why the state didn’t warn them earlier.
It’s a little-noticed financial meltdown that has nothing to do with the credit crisis, but a lot to do with lax regulation. Fifteen trusts set up to allow groups of employers to self-insure against worker’s comp claims were found to be insolvent starting in late 2007, some of them stunningly so. In a replay of the great Lloyd’s of London scandal, only with building contractors and store owners instead of relatively sophisticated Lloyd’s “names” in the role of victims, the employers discovered they were on the hook for all the losses despite having paid more hundreds of millions of dollars in premiums into the trusts.
“The state says they have strict liability,” said John Giardino, an attorney representing the employers in litigation against the insolvent trust administrators. “They’re saying `This is meltdown and you’re in the hot zone.’”
It doesn’t help matters that the principal regulator in charge of overseeing the funds at the New York State Workers’ Comensation Board quit a couple of years before the insolvency was discovered and went to work for the company that racked up the biggest losses.
Before we go any further some explanation is needed. In the 1990s, New York, like a lot of other states, started allowing employers to group together and form trusts to administer their workers’ comp claims instead of buying coverage from commercial insurers. It seemed like a money-saving idea, the equivalent of the insurance coops proposed under Obamacare.
But there was a catch: In exchange for lowering the deposits employers had to make to insure claims would be paid, the state made each member of a trust jointly and severally liable for any deficits. That made every employer hostage to the claims record of every other, a dangerous situation when a few small demolition companies, say, can rack up millions of dollars worth of worker injuries and deaths in a short period of time.
The trusts operated like any self-insurance plan, with an independent administrator processing claims and purchasing excess insurance to cover losses beyond what the members had agreed to cover themselves. The biggest administrator was an outfit called CRM, now owned by Majestic Capital of Bermuda.
According to a forensic report completed for the New York Workers’ Comp Board in December, CRM managed eight of about 45 self-insurance trusts but accounted for at least 75% of the $500 million in losses that have been identified so far. Officials at Majestic, which has delayed the release of financial statements in anticipation of being declared insolvent by California authorities, declined comment.
A detailed look at one of the CRM trusts, the Elite Contractors Trust, shows how CRM collected lucrative fees and allowed losses to spiral without much oversight by trustees or state officials. The trust was formed in 1999 by Ralph J. Vanner & Associates, an insurance agency, and a painting contractor client. It later expanded to 1,400 members. From 1999 to 2007 CRM collected about $168 million in contributions from members and paid itself $35 million in administrative fees. But that’s not the only way CRM made money: According to the state’s forensic report, CRM also bought excess insurance from its parent Majestic at a “considerably higher” cost than what other trusts paid, and it paid $5 million to $6 million a year to an affiliate to conduct independent medical exams.
The real problem was the lax approach CRM and trustees took toward charging appropriate rates and firing members with poor loss records. As Elite skidded toward an $82 million deficit, just 12 members caused $20 million of the losses. The report says CRM might have been motivated to allow riskier contractors to stay in the fund because it was paid administrative fees based on the number of members. It collected $1.2 million in fees from nine demolition contractors that ultimately generated a $6 million deficiency beyond what they paid in as premiums.
There’s nothing new about small employers racking up big insurance and tax bills and then skipping town. One of my first big-city newspaper stories involved a bankrupt employee-leasing firm — almost certainly Mob-connected — that even set up its own offshore insurance company to collect workers’ comp premiums that somehow never made it back to the States. So it’s easy to be skeptical about contractors who claim that had no idea they were racking up comp claims far in excess of what they were paying in premiums.
The state’s investigator said it wasn’t able to talk with a single one of the six trustees who supposedly oversaw Elite. The investigator “questions the financial acumen of the Trustees as a result of what appears to have been a disinterested attitude towards ELITE’s financial results.” They weren’t entirely ignorant of finance: The report says two of the trustees participated in Majestic’s $68 million IPO in 2005.
But New York bears some blame here, too. The forensic reports suggest the deficits started as early as 2000 and were $60 million by 2005. But the state only discovered the problem in 2007. The biggest loser, a healthcare trust, went from being supposedly 101% funded in 2002 to 29% funded in 2006, a stunning collapse that suggests the earlier figure was too high.
And even as the CRM-administered trusts were skidding toward insolvency in 2003, the chairman of the Workers’ Comp Commission, Robert Snashall, quit and went to work as a consultant and lobbyist for none other than CRM. Snashall, still a consultant, didn’t respond to a request for comment.
Giardino said his clients “were assured year to year by third-party adminstrators and the state of New York that the trusts were properly funded.”
“If I joined a trust when its already underfunded, who would do that?” he said. “If it’s insolvent, the trust should stop operating. The failure of oversight is what allowed this to happen.”
He’s suing the administrators for damages and trying to have the underlying contracts rescinded.
So far the state is sticking to its guns and demanding the 5,000 employers who participated in insolvent trusts pay for the deficits. Giardino says some of his clients theoretically owe millions. Collections aren’t going so well: The state has only gotten $34 million of the $500 million it says it is owed. Perhaps in recognition of the problems it is having, Gov. Andrew Cuomo’s latest state budget provides $200 million in “assessment relief” for the self-insured. Against that, the state warns the $500 million figure could go higher. With only seven of 15 forensic reviews completed at year end, it had observed a roughly 100% increase between estimates and actual deficits every time it took a closer look.”
CRM is the same CRM that is named in my previous posts, along with Majestic Capital and Majestic Insurance Company.
The words “Ponzi Scheme” comes to mind. (see http://en.wikipedia.org/wiki/Ponzi_scheme and substitute the words “Insured Clients” for “Investors”). It would be wise to always look for the term “Joint And Several” in any group plan or PEO contract.