Tuesday, February 21, 2012

MD's IWIF - Proposed Raid Wrong, Prompts Privatization Effort Again

An interesting development is going on in Maryland with that state's carrier of last resort.

For the second time in two years the Injured Workers' Insurance Fund (IWIF) is seeking privatization, but it is not full privatization in the traditional sense, and the reason is not to expand operations, like what is being sought by Pinnacol Assurance in Colorado.

IWIF seeks protection from governmental raids to its surplus.

Gov. Martin O'Malley's proposed Budget Reconciliation and Financing Act of 2012 would transfer $50 million from IWIF to the Maryland General Fund.

A bill converting IWIF to a different entity cleared the Maryland Senate in 2010 but died in the state House. That year the House also rejected O'Malley's bid to transfer $20 million of IWIF's money to Maryland's general fund.

Lawmakers allied with the carrier filed bills earlier this month in both the Maryland House and Senate to create a new entity named the Chesapeake Employer's' Insurance Co., effective March 1, 2013.

House Bill 1017 and its companion, Senate Bill 745, were filed by Maryland Delegate Dereck E. Davis, D-Baltimore, and Senate Finance Committee Chairman Thomas "Mac" Middleton, D-Waldorf.

Under the legislation, the Towson, Md.-based workers' compensation carrier would continue to serve as the state's carrier of last resort and would be run by a board composed of nine members appointed by Maryland's governor – as it is now.

But, for the first time the new company would be subject to rate-making by the Maryland Insurance Administration and would be required to join the National Council on Compensation Insurance (NCCI), which recommends loss costs in Maryland. The carrier now sets its own rates and does not report its loss and premium data to NCCI.

This is significant because IWIF currently writes about 21% of the market.

According to its 2010 annual report, IWIF reported reserves for unpaid loss and loss adjustment expenses of $1.31 billion and net earned premium of $168.9 million for the year.

But the issue of who owns the "excess profits" of IWIF is going to be a battle and points to state government's general lack of regard for the protections a well funded and stable insurance company, state fund or not, provide to the business market place.

Maryland Attorney General Douglas Gansler concluded in a letter to IWIF last March 14 that all funds in excess of the surplus and reserves required by state insurance law would be the property of the state.

He said state law already empowers the General Assembly to take control of IWIF funds in the event of a termination, which I assume includes privatization.

"IWIF was not created as a mutual insurance company. Nor is there any indication in its enabling law that its assets belong to its current policyholders," Gansler said.

"To the extent that IWIF has assets in excess of the reserves and surplus required by the Insurance Article, upon IWIF’s termination, those assets would belong to the State, which created IWIF," he concluded.

So I take it that if IWIF does privatize there will be a big fight in the state of that $168.9 million.

And despite the state's budget woes, any raid on an insurance company assets is wrong. Even if the money legally belongs to the state, taking from surplus may inhibit the good performance of IWIF in the future - we have all seen the consequences of short sighted budgetary mismanagement by state legislators over the long term way too often.

My advise to Maryland - leave IWIF alone if you want business in your state to continue in a stabilized, economically advantageous manner. Remove that money if you want to jeopardize all of the small businesses that make the economy run.

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