State lawmakers will consider legislation that could have a direct impact on 65 percent of employers in Arizona.
The State Compensation Fund, which has 44 percent of the workers compensation market based on premiums, could be sold to a private or nonprofit operator.
Bills by state Sen. Bob Burns, R-Peoria, and Rep. Tom Boone, R-Sun City West, are seeking such a sale to raise money to help cover the massive state budget deficit. Workers compensation is paid when an employee is injured on the job.
“It's a state-run insurance company, and so I figured that it had value and that we might be able to sell it,” Burns said. “If we don't get this budget situation solved, we're going to run out of options, and the only thing left is going to be a huge tax increase. We want to try and stay away from that.”
Boone did not return repeated telephone calls for comment.
Opponents of privatization fear doing so would cost employers more money because premiums would have to be increased in order for the fund to make a profit for stakeholders.
State law requires all employers to have workers compensation insurance. The Compensation Fund, on its own accord, acts as the carrier of last resort, meaning coverage is available to anyone in Arizona who needs a policy.
No laws requires the Compensation Fund to be the carrier of last resort. There is an assigned risk pool for high-risk employers, and rates there are typically 25 percent higher than those of the Compensation Fund.
The Compensation Fund was created in 1925, and the Legislature provided $100,000 to get it up and running. The money was repaid by 1938, and no state funds have since been allocated to the fund. Its board of directors is appointed by the governor.
Burns said the assigned-risk pool is the real carrier of last resort, so the Compensation Fund is not needed in that role. Employers with heavy losses should be required to sign up for insurance in the assigned-risk pool, he said.
“If you are a high-risk employer, you probably ought to be paying a little bit more to give you the incentive to clean up your operation,” he said.
“And the way it's been working, as I understand it, that's not happening. You get on the (Compensation Fund) list, and they cover you.”
Burns also argues that employers insured by the Compensation Fund receive a subsidy in that the fund has been losing money on premiums while making money on investments, so it is using investment returns to subsidize premiums and pay policyholder dividends.
According to the Compensation Fund's 2001 annual report, employers paid $227 million in premiums, while about $207 million in claims was paid out. A $34 million underwriting loss occurred because of administrative and other
expenses, but the fund ended the year with $84 million in net income because of investments.
While the Compensation Fund paid policyholders a $50 million dividend in 2001, not every employer received a check, said Jon Allen, the Compensation Fund's vice president of corporate relations and insurance operations.
“It's all based on your premium and then your losses,” he said. “If you had a $50,000 premium during the year and had $40,000 in losses, then we would take that into consideration when we calculated your dividend. If you paid us $50,000 in premium and had $60,000 in losses, you would have had a 110 percent loss ratio, and you wouldn't have received any dividend at all.”
Burns is also concerned that the Compensation Fund is becoming too large and is crowding out private insurers.
“Maybe we're creating a monopoly situation here,” he said. “There are a number of issues floating around this whole situation, and by going the route of thinking about possibly selling it has brought a bunch of these up. A lot of these things have come to the surface that we didn't know about.”
According to the Arizona Department of Insurance, many workers compensation insurance carriers have left the state in recent years. Ten insurers on its 2000 list of the 25 top insurers in Arizona were not on its 2001 list. Don Smith, the fund's president and CEO, said his biggest concern is that the Legislature would create a privatized fund that would be the sole guarantor of available insurance, but with no governmental controls or guarantee that its leadership is competent.
“We could have anybody who could be appointed to that board, we could have anybody who could be hired to run that organization,” he said. “That's scary to me because that is not the way you want to have an organization run that the business community is going to depend on.”
The Compensation Fund is not subsidizing high-risk companies or pushing private insurers out of Arizona, Smith said.
“The private sector does not want to write a $900 insurance policy for workers compensation,” he said. “Also, the vast majority of our policyholders are with us, not because they've had a lot of losses, but because they're small. The capacity of the whole industry to write those small businesses does not exist in Arizona.”
The Compensation Fund does serve an important role as the carrier of last resort, Smith said. If it were seeking only policyholders from which it could make a profit, a lot of small businesses would be “left out in the cold,” he said.
More companies, despite having good safety records, would be forced to go to the assigned risk pool, where premiums run as high as 30 percent to 40 percent above those of the Compensation Fund, he said.
“Small business is the engine of any economy in any state,” he said. “We've given these people breathing room. The (Compensation Fund) does that and has done that for 77 years.”
The Compensation Fund is the market of last resort by “practice and by board resolution,” Smith said. Most of the applications last year to the assigned-risk pool were from interstate trucking companies, and the Compensation Fund cannot write out-of-state risks because its coverage is limited to Arizona, he said.
Still at issue is whether the state has ownership of the fund's assets, said Michelle Bolton, Arizona director of the National Federation of Independent Business. In the late 1990s, then-Gov. Fife Symington was unsuccessful when he tried to do a “money grab” from the fund, she said.
“There was court action and what was interpreted from the litigation was, ‘Wait a minute, we don't think the state has ownership of the (fund),’ ” she said. “However, it is in question whether or not the policyholders have ownership.”
If lawmakers were to sell the Compensation Fund and dissolve its powers, “it is said that the Legislature shall distribute those assets accordingly to the stakeholders,” Bolton said.
“Well, the stakeholders are, of course, the policyholders,” she said.
A lot of private workers compensation carriers are leaving Arizona because it is not profitable for them, she said. The Compensation Fund, however, cannot leave the market, so no employers are left without insurance, she said.
“They're here, they only service Arizona businesses and they're here as that safety net for the business community,” Bolton said.