Beacon Mutual – Back to the Brink

April 30th, 2006 by

Public sector institutions, created in response to crisis, often outlive their usefulness. A case in point seems to be Beacon Mutual Insurance Company of Rhode Island.
Most Insider readers are probably aware of the currently escalating catastrophe triggered by the audit report delivered April 14th by the committee headed by former Governor Lincoln Almond. Since I’ve observed the saga from the beginning and have intimate knowledge of the politics involved in how it came to be, I’d like to offer a personal perspective.
The saga begins in 1990.
Those who have been in the workers’ compensation arena since at least Ronald Reagan’s last term will recall the national crisis of the late 80s and early 90s. By way of example, in my home state of Massachusetts, 1992 total workers’ compensation insurance premiums were nearly $2 billion; now, premiums total around $800 million. Rates are where they were in 1981. Quite a turnaround.
Starting in the late 1980s, Lynch Ryan had done a lot of consulting business in our neighboring state, Rhode Island, because workers’ compensation problems were no different there. For a tiny state, costs were on a rocket ride to the moon. Of course, for insurers, as in most states, the problem manifested itself in the Residual Market, or assigned risk pool. Not enough premium going in, coupled with ever increasing losses, meant that the pools had insufficient money to pay the incurred value of claims, resulting in huge residual market deficit charges to insurers. Something had to give, and what gave is what usually gives in these situations. Insurers voted with their feet and stopped writing business in many industrial states, including Massachusetts, Rhode Island, Maine, Texas, California…the list is long. All of which caused the already flaming assigned risk pools to blaze even higher, like a bonfire with fresh gas.
Different states, different approaches to the problem
Different states reacted differently. In Massachusetts, a bi-partisan reform of the law, combined with the creation of the Qualified Loss Management Program, slowed, stopped and, by 1994, started to reverse the run-away train. Rhode Island, Maine, Texas and California approached the crisis from other angles.
For example, Texas decided to amend its law to allow employers to “opt out” of the workers’ compensation system altogether (I can remember flying to Texas to be interviewed for the McNeil Lehrer Hour on PBS and opining that “The Texas Legislature should be ashamed of itself.” National TV exposure can get one to spew hyperbole).
In addition to statute reforms, giant California, Down East Maine and little Rhode Island created state funds to take over their assigned risk pools.
California’s difficulties are long-standing and well-documented. Maine hired away from Travelers the exceptionally competent John Leonard. Regardless of whether one liked the idea of the creation of these state funds, which I didn’t, John made the thing work, and work well in Maine (Young and foolish, I can also remember saying in an interview that the states were “sweeping their problems under the carpet so posterity could trip over them.” Sorry, John, one lives and learns).
In any event, by the mid to late 90s, and putting aside some noteworthy state exceptions, the national crisis was becoming a national memory as costs dropped, insurers re-entered the marketplace and management, especially at NCCI, began to breath again. NCCI’s then president, Bill Hager, gave his famous “Back From The Brink” speech at the council’s 1995 annual meeting, during which the attendees heard Bill loudly proclaim, “We’re back from the brink!” 27 times.
I thought then, and still think now, that when the tide turned and costs fell, the great state of Rhode Island, taking a page from its native son, Major General Nathaniel Green, should have declared victory, folded its tents and, with trumpets blaring, left the field in triumph. But that did not happen.
Beacon Mutual, the company created with $5 million of state taxpayer money, the company that, to this day, has never paid taxes or contributed to the Guarantee Fund, got the Rhode Island legislature to approve its writing business in the voluntary market, eventually becoming Beacon Mutual, yet retaining its “special status” as a state fund. And, despite the good work done by many of its employees, Beacon Mutual, precariously straddling the razor-thin fence that sometimes separates the public from the private sector in Rhode Island, inevitably became a candidate for political and economic corruption. Beacon was allowed to set it own rates and could underbid any other insurer that had the temerity to want to write business in the state. It did “most favored nation deals” with certain agents and employers, some of whom, until last week, sat on its Board of Directors. Competition became non-existent. Although 60 carriers are licensed to write workers’ compensation in Rhode Island, Beacon Mutual insures 76% of the state’s premiums ($160 million) and 90% of its employers and wanted more by expanding to other states.
But along the way to becoming Goliath, Beacon Mutual picked a fight with someone armed with more than a sling shot, Governor Don Carcieri, who, given the Almond Report, seems committed to making the company bend to his will.
It will certainly be interesting to see how this whole thing plays out. Sort of like watching Rome burn. But for me, the bottom line is this: states should not set up insurance companies. And if they do, they should get out of the business as soon as is humanly possible.