Friday, May 2, 2014

Long Tail Whips IL Pool

Workers' compensation claims are often described as having a "long tail," meaning that they take some time to close out in general.

About 200 Illinois school districts that are part of a self-insurance trust are finding that out.

Because of claims from 2008 and 2009, the Illinois Workers’ Compensation Self-Insurance Trust has a negative fund balance.

So on April 1 it sent member school districts a letter stating that it would soon be assessing them to cover the negative fund balance.

According to a June 30, 2012, financial statement, WCSIT’s net assets fell from $473,235 on June 30, 2010, to negative $1.27 million a year later, and to negative $4.27 million on June 30, 2012. 

The Chicago Tribune reported that the deficit ballooned to $7.24 million in 2013. 

The decrease in net assets was $1.10 million in 2010, $1.75 million in 2011 and $3.00 million in 2012, and just under $3 million in 2013. 

Part of the negative financial picture is likely due to decreasing membership.

According to the Tribune, WCSIT’s membership had dropped from 365 districts in 2003 to 193 districts in 2013.

We know that workers' compensation is a cash flow system. Despite reserves, any workers' compensation mechanism must have fresh cash coming in to make investments for the future because reserves tie up capital.

Less members means less money.

WCSIT is administered by the Sandner Group, a for-profit claims manager in Chicago. The Tribune reported that James Woodard, who manages the pool, said the pending assessment would amount to about $9 million. 

Districts will pay an average of about $36,000, depending on their size. Districts that were members during 2008 and 2009 may be required to contribute even if they have since left the pool.

On the flip side, according to the story, WCSIT has paid out about over $29 million in surplus distributions and royalties, in addition to distributing about $175 million in claims, in the past.

Meanwhile, regulators at the Illinois Department of Insurance have sought to investigate the finances of the pool and its administrator, the Sandner Group, the newspaper reported.

Pool officials have refused to turn over requested documents because they don't feel the state has a right to examine the books, prompting an Insurance Department lawyer to write a letter that said the refusal “has created a high level of concern” about the business conduct of the pool’s managing company, according to The Tribune.

An attorney for the pool says it has done nothing wrong and that they are taking a stand against what they feel is an overreach by regulators, and notes that the pool has to pay for the financial examination - costing the trust even more money it doesn't have.

Many of the pool's participants are small school districts. One district cited in the story has only one building. So the assessment hits these participants particularly hard.

In the meantime, Sen. John Mulroe, D-Chicago, sponsored to passage of SB2339, which went into effect Jan. 1, 2014. That new law clarifies the Insurance Department's authority to monitor self-insurance pools. 

The law mandates annual auditing and permits examination of financial documents, and imposes penalties against governmental entity self-insurance pools for failure to comply. It is not limited to workers' compensation.

Self insurance pools, trusts and other attempts to lower the cost of coverage have their own internal risks. Initially, as membership grows the financial pictures are rosy because the infusion of cash masks the lurking expense of claims.

But those tails are long, and we all know that "adverse developments" get radically more adverse, nearly exponentially, the longer claims remain open. And because the market for such pools is relatively small, they are less able to spread the risk, and thus absorb adverse situations so pool members can end up, as in this case, with retroactive liability.

There's never something for nothing. Risk pools are a neat idea when they work. And they can throw monkey wrenches into budgets when they don't.

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