BILL ANALYSIS
AB 1897
Page 1
Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1897 (Jones) - As Introduced: February 16, 2010
And As Proposed To Be Amended
SUBJECT : State Compensation Insurance Fund
SUMMARY : Repeals the authority of the Director of the
Department of Finance to sell the assets of State Compensation
Insurance Fund (SCIF), specifies that the Governor's appointees
to the SCIF Board are subject to Senate confirmation, and
requires SCIF employees who transact workers' compensation
insurance to obtain an appropriate license from the Department
of Insurance. Specifically, this bill :
1)Repeals the authority enacted in the 2009-2010 Budget Act for
the Director of the Department of Finance to investigate and
consummate a sale of the assets of SCIF.
2)Provides that SCIF employees who transact workers'
compensation insurance obtain an appropriate license, at no
cost to the employee, from the Department of Insurance.
3)Requires the Insurance Commissioner, in consultation with
SCIF, to adopt minimum standards of training, experience and
skills that SCIF employees who transact insurance must
possess.
4)Provides that SCIF shall become an approved education provider
for purposes of this training.
5)Specifies that the 9 Governor's appointees to the 11 member
SCIF Board of Directors shall be subject to Senate
confirmation.
6)Requires SCIF to analyze workers' compensation insurance
industry standards and practices regarding adjuster caseload
ratios, and report to the Legislature by June 30, 2011 on its
adjuster caseload ratios. This report would include a plan to
bring SCIF's standards and practices into line with industry
standards.
EXISTING LAW
AB 1897
Page 2
1)Authorizes the Director of the Department of Finance to act as
agent for the state, and in that capacity, to sell or
otherwise obtain value for, the assets and liabilities, or a
portion thereof, of SCIF.
2)Authorizes the Director of the Department of Finance to expend
funds to retain experts in the exercise of due diligence in
evaluating value and issuing an RFP for bids from potential
buyers of SCIF or its assets and liabilities.
3)Requires, subject to limited exceptions, that any person who
"transacts" insurance, including employees of an insurer, be
licensed by the Department of Insurance as an agent or broker.
4)Allows SCIF employees, based on an unchallenged legal theory
but not an express exemption, to provide employers with a
quote for a SCIF policy, and to represent SCIF in the sale of
that policy.
5)Establishes pre-licensing educational requirements and
continuing education requirements, and application and renewal
fees to be paid as a condition of obtaining and maintaining a
license to transact insurance.
FISCAL EFFECT : Undetermined impact on SCIF, which is funded
either by the General Fund or a Special Fund in annual Budget
Act.
COMMENTS :
1)Purpose . According to the author, the idea of selling a
portion of the State Fund should be abandoned because even the
threat of an unlikely action is disruptive to both
policyholders and SCIF employees. Confirmation of Directors,
it is argued, protects against a Governor replacing Directors
in an effort to find compliant Directors who would do his
bidding - such as agree to a sale transaction (which the
current Board has opposed.) The author further argues that
employers who call SCIF seeking information about purchasing a
policy are not aware that the people they are dealing with are
not licensed insurance producers. Finally, the author
believes that SCIF adjuster caseloads should be on par with
private industry standards.
AB 1897
Page 3
2)Sale of SCIF . The "Big 5" agreement on a budget for the
2009-2010 fiscal year called for the Director of the
Department of Finance to investigate the potential of selling
all or a portion of SCIF assets and liabilities. This
potential sale was scored for budget purposes as bringing in
$1 billion. Finance was authorized to expend funds in
exercising due diligence in investigating the prospect of a
sale.
The SCIF Board of Directors adopted a resolution opposing any
such sale, and Insurance Commissioner Steve Poizner filed suit
in court to prevent Finance from moving forward. Without
getting too far into the minutia of the arguments against the
sale, the basic objection is that any funds, assets, or any
other thing of value held by SCIF belong to the policyholders,
and the law makes it clear these funds or assets can be used
only to pay claims on behalf of policyholders or otherwise
benefit policyholders. Thus, it is not the State's asset to
liquidate in the same way the State can sell off property it
owns. In addition to this legal objection, there are policy
reasons, not the least of which is the very stability of the
workers' compensation market in these highly difficult
economic times, why a sale may not be a good idea even if the
legal objections could be overcome.
It is probable that any efforts to implement the Budget Act
language would be on hold in the short term due to the
litigation. AB 1897 would eliminate the need for that
litigation, and put the destabilizing effects of the
uncertainty to rest.
3)Confirmation of SCIF Directors . The SCIF Board of Directors
was recently expanded from a 5-Member Board, all of whom were
required to be SCIF policyholders, or an employee of a SCIF
policyholder, to an 11-Member Board. Of these 11 Members, 2
are Legislative appointees, and 9 are Governor's appointees.
(AB 1874 (Coto) of 2008; Statutes 2008, chapter 322.) Each
Director serves a 4-year term (subject to a staggered phase-in
for the initial appointees.) According to the Assembly
analysis of AB 1874, the purpose of changing the Board's
composition was to professionalize the operations of a $20
billion company by acquiring the type of talent typical of
Directors of other large companies. Because SCIF
policyholders are virtually all small businesses, the
availability of Directors from those ranks with skills running
AB 1897
Page 4
$20 billion companies was viewed as too limited.
The 2008 legislation sought to insulate the Directors from
political pressure by providing a term of years for all of the
newly created slots. SCIF Directors do not serve at the
pleasure of the Governor, and are thus independent from
political pressures during their terms. Concern has been
expressed that the confirmation process would politicize the
Board in a manner that is the opposite of what the goals of AB
1874 were.
4)Adjuster Caseloads . Currently, SCIF has a market share of
approximately 20% of the market, maybe less. Just 5 years
ago, it had over 50% of the market. This wide swing is not
unheard of, as SCIF is obligated to step in to provide
coverage for employers when private carriers abandon the
market. But this natural cycle - though somewhat extreme in
recent years - has implications for adjusters. As SCIF raced
up toward a 50% market share in the late 90s and early 2000s,
adjuster caseloads were high because market share rose faster
than staffing levels. Currently, however, staffing levels are
relatively high because staffing has not been reduced as
rapidly as market share has fallen. Thus, recent data shows
that SCIF's current loss adjustment expense (LAE) ratio is
46%. This indicates a fairly high percentage of the premium
dollar being applied to the activities that adjusters perform,
which suggests caseloads may be too small.
A second factor connected to a rapidly falling market share is
that many older cases that require relatively small amounts of
work to maintain are still on SCIF's books. Thus, SCIF needs
to employ a somewhat larger workforce to manage this volume of
legacy cases in comparison to its current market share than a
private insurer - which would not be expected to have major
market share swings like SCIF does - would be expected to
employ. Thus, it is not clear that private sector staffing
comparisons are an appropriate criteria by which to measure
whether or not SCIF's staffing levels are optimal.
5)Author's amendments . The author will be proposing amendments
in Committee that change the effect of the licensing
requirement that is in the bill as introduced. As introduced,
the bill would require SCIF to pay for all of its employees
who transact insurance to become licensed as broker-agents by
the Department of Insurance. Concerns were expressed by
AB 1897
Page 5
Members of the Committee at the April 7 hearing that this
provision would lead to SCIF expending funds to train its
employees to quit and obtain a private sector job with the
newly acquired skills and license. The new language would
require an "appropriate" license, based on training standards
adopted by the Insurance Commissioner. Work still needs to be
done to identify what an "appropriate" license is, but the
language is designed to address the concern noted above.
6)Support . SEIU Local 1000 writes in support that selling off
parts of SCIF would destabilize the market, potentially
leaving only high-risk employers in the pool, causing economic
disruptions in such crucial sectors of the California economy
as the construction industry. SEIU also argues that in the
current highly competitive workers' compensation market, it is
important that its marketing staff be as trained and
professional as the competition. With respect to adjusters,
SEIU argues that the law already requires them to be certified
by the Department of Insurance the same as private sector
adjusters, and this bill only furthers this policy. Finally,
SEIU argues that the confirmation process provides an
important element of public participation in an entity that is
so crucial to the California economy.
7)Opposition . Despite the SCIF Board's resolution opposing the
potential sale of its assets, SCIF is opposed to the bill.
Its objections focus on the remaining components of the bill.
SCIF points out that it sells only one product, unlike a
private broker, who must be able to analyze a potential
client's global needs, and its employees are trained
extensively in that product - far more than the training
required to obtain a property-casualty broker-agent license.
SCIF also points out that only 10% of the pre-licensing
education for a property-casualty broker-agent license focuses
on workers' compensation, with the remainder relating to
issues a SCIF employee never works with. SCIF points out that
the considerable pre-licensing education and continuing
education training costs, and application and renewal fees,
would be passed on the policyholders, yet add little value to
the services its employees would be providing to
policyholders.
With respect to adjusters, SCIF argues that its staff is
certified by the Department of Insurance, complies with
caseload regulations of the Division of Workers' Compensation,
AB 1897
Page 6
and, as noted above, face challenges unique to SCIF's role in
the marketplace. For these reasons, SCIF does not believe it
should be required to operate under mandates that other
private carriers do not have to comply with. SCIF also argues
that it should retain the managerial flexibility to meet its
unique challenges in the best way it can.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Employees International Union, Local 1000
Opposition
State Compensation Insurance Fund
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086