The long tail of insolvencies: Colorado, New York employers face potential assessments

March 8th, 2005 by Julie Ferguson

Some employers in Colorado and New York are learning that the so-called long tail of workers comp has more than one meaning. In the wake of a multitude of insurer insolvencies in recent years, many state guaranty funds are buckling under the burden, and turning to employers to help pick up the pieces.
Like many other states, Colorado has been suffering the ill effects of insurer insolvencies. In recent years, at least 14 insurers have gone out of business. The 1971 demise of Reliance is the most prominent and most notorious example. The Colorado Insurance Guaranty Association has been paying claims for injured workers of the insolvent insurers, but the Association now faces more than $40 million in unfunded liabilities. To shore up the troubled fund and continue paying claimants, the Association has taken to a new tactic: billing 26 of Colorado’s larger employers more than $2 million.
… recently, employers have been surprised by letters announcing, in some cases, that they owe the association hundreds of thousands of dollars for claims that were paid. The association has had the power to recover money from large employers for more than 10 years, experts say, but few policyholders knew about it.
It has only been recently — within the last 18 months — the association has sought payment.

This comes as an unwelcome surprise to the employers who are being assessed. Employers are already contributing to the guaranty fund by way of a 2% surcharge on their premium.
This is a scenario that may soon be playing out in New York as well in the form of increased employer assessments. We recently posted an item about the dire straights of the Workers’ Compensation Security Fund. The Fund was scheduled for complete exhaustion as of the end of February leaving 7.500 injured workers in the lurch, but a deus ex machina in the form of an unexpected sum of cash from another state fund and from the liquidators of Home Insurance Co. bought a few weeks.
Among the proposals to shore up the Fund:
A doubling of assessments on some employers is part of the Pataki administration’s recommended solution to the impending bankruptcy of the Workers’ Compensation Security Fund, along with borrowing $50 million from another state insurance fund. Both are subject to approval by the state Legislature.
Colorado and New York aren’t alone, simply the two states that are in the headlines this week. Obviously these short-term fixes are band-aids at best, and injured workers and employers alike deserve more security and more protection from our industry.
For those of you interested in a more in-depth treatment of the issue of insurer insolvencies, here are two policy-orientated papers of note:
Managing the Cost of Property-Casualty Insurer Insolvencies in the U.S. (PDF) from the Center for Risk Management and Insurance Research, Georgia State University, December 2002. Note that one of the authors of this report is a fellow blogger, Martin Grace of RiskProf.
Managing Insurer Insolvency 2003 (PDF) prepared for the Foundation for Agency Management Excellence by Stewart Economics, Inc., September 2003.

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