Friday, June 21, 2013

A Lesson In Facing Reality

"We really haven't changed anything. We offered to be a market for them and the school districts are coming in line with the pricing," Jon Stewart, president and chief executive officer of Kentucky Employers' Mutual Insurance (KEMI) said to WorkCompCentral reporter Mike Whiteley. "That market was significantly underpriced, and it's been underpriced for a very long time."

Stewart was reacting to Whiteley's reporting on the nearly defunct Kentucky School Boards Insurance Trust (KSBIT) and regulators grappling with the issue sometime this fall whether to put the trust into run-off or transfer the remaining $60 million in liabilities to a private reinsurer.

Kentucky Department of Insurance, which has scheduled a public hearing for Sept. 25-26 on the trust deficit.

The League of Cities took over the failing trust in January 2010 and hired outside auditors Dean Dotton Allen Ford and consultant Practical Actuarial Solutions to reassess the liabilities of the trust's Workers' Compensation Self-Insurance Pool and the Property and Liability Self-Insurance Pool. Prior estimates put workers' compensation liabilities at $4.5 million and unpaid property and liability claims at $933,000.

Auditors reported last January that liabilities from unpaid workers' claims had reached $28.1 million and liabilities from the Property and Liability pool had totaled nearly $5.4 million.

Practical Actuarial Solutions this month posted a list of proposed assessments to the state's school districts ranging from a "best estimate" of $34 million to a high estimate of $42.6 million.

Jonathan Steiner, executive director of the Kentucky League of Cities, said a $55 million bond issue proposed by the Kentucky School Boards Association will help school districts pay off the assessments over a 20-year period.

But first the total debts of the member districts must be resolved.

Steiner said the total debt will range between $50 million and $60 million and depends on some pending variables such as reinsurance and potential third party administration of claims.

The KBSIT has been facing a two pronged attack over the years - first, it has been underpricing risk for some time in response to budgetary pressures on its member districts; second, as troubles began to arise with the trust member districts started fleeing, putting more financial pressure on the remaining members and the trust itself.

KSBIT stopped accepting new business after January 2013 and will end coverage for existing members on June 30.

Over the past two years, 55 school districts have switched their policies to KEMI during the past two years. Stewart said another 48 districts have been issued KEMI workers' compensation policies effective this July 1.

Worse, according to William Scott, executive director for the School Boards Association, the association unsuccessfully attempted to correct the deficit with surplus notes, which now will have to be repaid.

While the Kentucky Department of Insurance will obtain its own actuarial analysis of the trusts' problems and needs, there are no easy answers and the situation is a reminder that deferment of workers' compensation obligations only exacerbates the underlying problem of inadequate financing.

This is a tough situation for the KBSIT and a good lesson for other trusts created to manage governmental entity workers' compensation obligations - eventually the chickens come home to roost.

Or as Steiner told Whiteley, "It took 20 years for them to get into this mess, so it's only fair to give them 20 years to get out of it" (referring to the proposed bond issuance).

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