S&P: Calif. Comp Fund Sliding To Oblivion

In particular, the ratings agency criticized Governor Schwarzenegger's recent effort regarding the SCIF. The governor's office, S&P said, has reportedly been conducting negotiations with state legislators to lower the fund's capitalization standards, to try to reduce premium rates in the state.

But unfortunately, the governor's move, S&P commented, is wrong-headed. "Reducing capitalization requirements would make sense only if the state was willing to ensure its solvency," according to credit analyst Steven Ader. But he observed that the state has been unwilling to take such steps so far.

By cutting capitalization levels and letting the state fund run down its already inadequate reserves, S&P said, the governor may see the desired short-term effect of bringing about lower premium rates, but it could also strip away "the last vestige of stability in an already precarious market."

Furthermore, for other workers' comp insurers in California, there could be a downward drag on pricing just when premium rates are nearing healthy levels, and, in a worst-case scenario, the state fund could collapse under the governor's initiative.

Asked for comment, the governor's office said they could not immediately respond, but might have comment later.

Should SCIF become insolvent, it would create burdens for remaining workers' comp writers in the state by requiring a levy on premiums, the strain of which would be felt by the employers in California, according to S&P.

The SCIF remains in a precarious financial condition and, in fact, it appears to be "in worse shape than when we left it," noted another analyst Michael Gross. At the end of 2001, S&P's financial strength rating on the fund had skidded to "double-B-plus" from "A" earlier in the year, and the rating was withdrawn at the fund's request.

If the fund's capitalization standards are lowered and its premium rates are impacted, those could have serious repercussions in California's workers' comp marketplace, and the influence on pricing could become even more pronounced, according to Mr. Ader, if other insurers are called on to match the fund's future rate cuts or have price caps imposed on them, as some legislators are suggesting.

"These outcomes would be disastrous for availability of coverage," Mr. Ader said.

S&P pointed out that California workers' comp writers are already living with substantial intervention on their rates. Currently, they must certify that their 2004 prices include a 13.3 percent reduction to account for savings attributed to legislative reforms enacted in 2003. Additionally, carriers must enact an additional 5.4 percent rate cut, as mandated by California's insurance commissioner John Garamendi.

And yesterday in Sacramento, the state's Senate Labor and Industrial Relations Committee passed SB 16, a rate-regulation bill sponsored by Sen. Richard Alarcon, D-Van Nuys. In the bill, one provision calls for creating a specially appointed commission to determine an excessive workers' comp rate.

However, S&P said that it is concerned whether legislators will tackle underlying costs with the "same zeal as they are now targeting price alone."

"From the point of view of insurer solvency, a floor imposed beneath pricing would be a more appropriate measure than a ceiling above it," according to S&P.