New York’s workers’ compensation system would undergo a sweeping overhaul under a blueprint outlined in Gov. Andrew Cuomo’s proposed budget.
The critical change would charge the State Insurance Fund (SIF) the same premium-based assessment to the state that all private insurers must pay.
The proposal is likely to be approved by the state Legislature because it is part of the comprehensive state budget Cuomo has proposed, according to David Dickson, past president of the Professional Insurance Agents of New York Inc.
But he cautions it is likely to have unintended consequences down the road.
Dickson, who is a public member of the New York Compensation Insurance Rating Board’s underwriting committee, says the proposed reforms would raise the assessments paid by the 160,000 to 170,000 employers insured by SIF by 10 percent.
He says employers impacted by the change would include most large property-management and real-estate companies and most large social-service agencies, both private and public, as many of them are insured by SIF.
Moreover, because the proposal is designed to provide for increased state spending without a tax increase, the proposed budget also calls for reducing SIF’s surplus by $1.75 billion over three years.
The budget proposal calls for transferring $250 million to the general fund and $500 million to a new “transformative capital fund” this year from the SIF surplus, and $1 billion to the state general fund for the 2014-2015 budget years.
Under the proposal, in addition to using the premium basis for SIF assessments, two separate funds now financed through workers’ compensation premiums would be closed to new claims.
One is the reopened-case fund, to which every employer contributes, and the second is the Aggregate Trust Fund (ATF), which was created as part of 2007 reforms to the state workers’-compensation program.
Changing the SIF-assessment methodology is projected to save employers $500 million annually, while closing off the two funds to new claims will save $400 million annually, the state projects, according to Alphonso David, deputy secretary for the governor.
According to David, the ATF was created in 2007 as an incentive to both injured workers and insurers to close cases.
Shutting down the ATF, says PIANY's Dickson, has support from carriers. "Carriers have been complaining that if they assign a specific claim to the trust fund with a specific value to that claim, [the difference is not refunded] if that claim is settled for less," Dickson says.
As for the reopened case fund, Dickson indicates there is broad support from all interested parties for closing it. “Pretty much everyone says that if sustained, this is a road that is going to get out of hand,” he states.
If enacted as outlined by the governor in his budget, according to a state budget official, the workers’-comp proposal could allay longstanding criticism by the private-insurance market that the State Insurance Fund has a competitive advantage.
The New York Insurance Association, which represents the private market, says it would support the proposed changes for that reason.
“If the structure is changed so SIF would pay the same assessment as private insurers, it would be a major step in leveling the playing field,” Ellen Melchionni, NYIA president, says.
However, she says, “Further action is still necessary to remove SIF’s exemption from regulatory oversight.”
Currently, SIF has 36 percent of the New York worker’s-compensation market, according to SNL Financial, with $1.49 billion in premiums in a total market of $4.2 billion.
“The problem the state’s private insurers have with SIF is that it was created as the market of last resort, but in actuality it is not,” Melchionni says.
She adds, “The intention was for SIF to provide insurance for businesses that were not able to find coverage elsewhere. Instead SIF has become a major writer with a serious competitive advantage over private insurers.”
David says SIF “exists to provide coverage to people who cannot afford the private marketplace.”
Dickson, though, disputes that contention, noting that SIF was never designed to be an assigned-risk plan, but rather a competitive insurance fund that cannot turn down risks unless they have an outstanding balance with the fund.
At the end of the 2011 calendar year, the SIF had a total surplus of $2.796 billion, according to its annual report.
It also has claims reserves of approximately $8 billion and cash assets of $12 billion. The total balance sheet reflects changes imposed in 2007 to deal with serious solvency issues that required assessments from private insurers to repair, David acknowledges.
The largest private player in New York, according to 2011 data, is AIG, with 14.3 percent of the market. Liberty Mutual has 7.8 percent of the market, the Hartford has 7.5 percent of the market, and Travelers has 5.6 percent of the market.