BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: July 6, 2011 2011-2012 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: AB 228
Author: Fuentes
Version: June 27, 2011
SUBJECT
State Compensation Insurance Fund: out-of-state risks.
KEY ISSUE
Should the Legislature allow the State Compensation Insurance
Fund (SCIF) to sell workers' compensation coverage for
out-of-state employees under certain circumstances?
PURPOSE
Authorizes the State Compensation Insurance Fund (SCIF) to
partner with another workers' compensation insurer to sell
workers' compensation coverage for a California employer's
out-of-state employees.
ANALYSIS
The California Constitution calls for the establishment of a
state insurance compensation fund as part of the Legislature's
authority to regulate workers' compensation insurance coverage.
(Article XIV, � 4)
Existing law provides for the State Compensation Insurance Fund
(SCIF), governed by an 11 member board, to serve as quasi-public
insurer for the purposes of workers' compensation insurance.
Existing law declares the intent of the Legislature that SCIF
become neither more nor less than self-supporting. (Insurance
Code �� 11770, 11773, and 11775)
Existing law forbids any liability for the State of California
for the operation of SCIF, beyond the assets of SCIF itself.
(Insurance Code � 11771)
Existing law provides that SCIF may also insure a California
employer against his liability for workers' compensation
benefits, under the law of any other state, for California
employees temporarily working outside of California on a
specific assignment if the fund insures the employer's other
employees who work within California.
This bill authorizes the State Compensation Insurance Fund
(SCIF) to insure an employer whose principal place of business
is in California, provided that the majority of the employer's
employees are located within California, against his or her
liability for workers' compensation benefits under the law of
any other state, if the fund insures the employer's employees
who work within California.
This bill provides that SCIF is only authorized to transact
insurance by contract with an insurer that has responded to a
request for proposal from SCIF and is admitted to transact
workers' compensation insurance in California and in the
out-of-state jurisdiction where the non-California employees are
located.
The contracted insurer must meet all of the following criteria:
a) The insurer has an A minus (A-) rating or better from
A.M. Best Company.
b) The insurer has substantial prior experience in
transacting workers' compensation business on another
insurer's behalf in a fronting arrangement.
c) The insurer has a minimum surplus of one hundred million
dollars ($100,000,000).
This bill prohibits SCIF from initiating paid advertising or
soliciting sponsorship of advertising campaigns to market or
promote the ability to insure qualified employers under the law
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Senate Committee on Labor and Industrial Relations
of any other state.
This bill requires that, on or before March 1, 2015, the
Department of Insurance shall provide to the Assembly Committee
on Insurance and the Senate Committee on Insurance a report
assessing the experience of SCIF selling workers' compensation
coverage in other states. The report must make recommendations
concerning its continuation, limitation, or expansion of SCIF's
ability to sell insurance out-of-state. The costs incurred by
the Department of Insurance in the assessment, writing, and
publication of this report shall be provided by the fund.
This bill requires that the provisions listed above must sunset
on December 31, 2016.
COMMENTS
1. Need for this bill?
Established by the California Legislature in 1914, State
Compensation Insurance Fund (SCIF) is a self-supporting,
non-profit enterprise that provides workers' compensation
insurance to California employers at cost, with no statutory
liability for the State of California. Operating as a
competitor with private insurers and as the insurer of last
resort for employers who cannot affordably purchase workers'
compensation coverage from the private market, SCIF serves as
a vital role in the health and vitality of California's
workers' compensation system.
Currently, employers can purchase coverage directly from the
insurer or through independent brokers, but only for employees
in California, unless the employee resides in California and
is temporarily working outside of the state. This creates a
situation where a small employer would start a relationship
with SCIF as their workers' compensation insurer, but could
then outgrow the relationship as they seek business outside of
California. AB 228 would allow SCIF to continue to insurer
these businesses through a fronting arrangement with another
insurer, assuming that insurer meets the requirements set
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Senate Committee on Labor and Industrial Relations
forth in this bill.
2. Recent History of the State Compensation Insurance Fund:
While the history of the State Compensation Insurance Fund
(SCIF) is a nearly-century long history of adaptation and
resilience as the workers' compensation market has evolved and
grown, SCIF has recently encountered some challenges that they
continue to address.
Most notably, the workers' compensation crisis of 1999 to 2003
had a significant impact on SCIF. During that period,
workers' compensation premiums tripled, growing to 6% of
payroll, a move that was unprecedented in any other state.
These cost increases were a direct result of the underpricing
of workers' compensation policies in the recently deregulated
workers' compensation market by insurers who believed they
could make up the difference through the stock market. In the
wake of the Dot Com collapse and rising medical costs, this
business model was revealed to be a chimera.
By 2003, 28 private insurance carriers had either become
insolvent or exited the workers' compensation market. SCIF's
market share grew to 53%, whereas historically SCIF's market
share had been around 25%. As a draft report from the
Commission on Health, Safety, and Workers' Compensation
(CHSWC) noted in late 2003, SCIF's growth had been a saving
grace to the workers compensation insurance market, but also
stated that SCIF's financial solvency was questionable and its
failure could threaten the stability of the entire workers'
compensation market.
Since that time, SCIF's market share has steadily shrunk. As
of 2010, it was below 20%, which would be more in-line with
the post-deregulation market share SCIF held in 1997 (17%).
To adapt to the shifting market share and also improve the
fundamental financials at SCIF, SCIF's Board and President Tom
Rowe have begun a series of cost-saving measures, including
branch closures and employee relocations throughout
California.
3. Possible Points of Committee Discussion:
Hearing Date: July 6, 2011 AB 228
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations
In allowing the State Compensation Insurance Fund (SCIF) to
offer insurance services outside of California, albeit through
a well-capitalized intermediary, AB 228 would mark a
significant shift in the mission of SCIF. This mission shift
would occur during a time when it is widely believed that, due
to existing pricing practices of workers compensation carriers
in California, there will be some kind of repeat in the market
turbulence that was experienced in 1999-2003.
The Committee may wish to consider the following points when
hearing this bill:
a) Would it serve to stabilize or aggravate the market
if SCIF has a significant number of policies outside of
California?
b) Would it impact the market if a significant amount
of premium dollars were leaving California during such a
crisis?
c) Would a cap on the percentage of premium that SCIF
could write outside of California mitigate these risks,
or simply limit SCIF in their ability to serve
California's businesses?
d) Is the requirement that 50%+ of the employees must
be in California sufficient to ensure that SCIF isn't
being exposed to significant out-of-state risk?
4. Possible Amendments:
AB 228 requires that the Department of Insurance provide the
Assembly Insurance Committee and the Senate Insurance
Committee with a report assessing the experience of SCIF
selling workers' compensation coverage in other states.
Traditionally, these reports are simply sent to the
Legislature as a whole.
Therefore, on page 3, line 8, the Committee may wish to strike
"Assembly Committee on Insurance and the" and strike on page
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Senate Committee on Labor and Industrial Relations
3, line 9, "Senate Committee on Insurance" and insert
"Legislature".
5. Proponent Arguments :
Proponents believe that existing law is currently unclear on
the ability of the State Compensation Insurance Fund (SCIF) to
sell insurance outside of California, and that this bill would
provide clarity as well as create cost savings for
California's employers. The proponents note that requiring
employers to sign-up for two separate policies (one for
employees in California, the other for employees outside of
California) increases employer costs. Proponents believe that
AB 228 will allow employers to streamline their costs and
increase competition in California, both of which will
increase savings for California's employers. Proponents
believe that such savings could be used to create jobs and
spur California's economic recovery.
6. Opponent Arguments :
The Association of California Insurance Companies (ACIC)
states in opposition:
"Allowing SCIF to expand its jurisdiction is a sharp departure
from its original mission, unfair to private carriers because
of the Fund's tax exempt status, and would subject the Fund,
and ultimately its California policy holders, to assessments
and regulations of other states.
SCIF was created as a public enterprise to assure that
California had an "insurer of last resort" for California
employers. In exchange, it was given a federal tax exempt
status, an advantage not enjoyed by any other private workers'
compensation carrier. Allowing SCIF to use its beneficial tax
status that is derived from its mandate in California is
unfair to private carriers and to other state funds."
7. Prior Legislation :
AB 2125 (Vargas), Chapter 740, Statutes of 2006, revises the
statutory provisions governing the authority of the Insurance
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Senate Committee on Labor and Industrial Relations
Commissioner over the State Compensation Insurance Fund, as
well as provides a process for SCIF being declared insolvent.
SUPPORT
State Compensation Insurance Fund (Sponsor)
Allen Lawrence & Associates Insurance Brokers
Arroyo Insurance Services
California Farm Bureau Federation
Dillenback & LoManto Insurance
HUB International
Insurance Brokers & Agents of the West
InterWest Insurance Services
M.D. Manouel Insurance Agency
Thoits Insurance
7 Individuals
OPPOSITION
Association of California Insurance Companies (ACIC)
Hearing Date: July 6, 2011 AB 228
Consultant: Gideon L. Baum Page 7
Senate Committee on Labor and Industrial Relations