Workers' Compensation Group Self-Insurance Study Committee: final report

              WORKERS' COMPENSATION
GROUP SELF-INSURANCE
STUDY COMMITTEE
FINAL REItPORT
December 15,1996
JAN 07 1997 ARIZONA HOUSE OF REPRESENTATIVES
MEMO
DIANA O'DELL, RESEARCH ANALYST, COMMERCE COMMITTEE ... 542-3745
Date: December 15,1996
Re: Workers' Compensation Group Self-Insurance Study Committee
Attached is a copy of the interim committee report for the Workers ' Compensation
Group ~~~~Insurance Study Committee. Copies of the report have been distributed
to the following individuals:
GOVERNOR
Fife Symington
PRESIDENT OF THE SENATE SPEAKER OF THE HOUSE
Senator John Greene Representative Mark W. Killian
COMMITTEE MEMBERS
Senator Brenda Bums, Cochair - Representative Pat Conner, Cochair
Senator David Petersen Representative Paul Mortensen
Senator Manual ("Lito") Pefia Representative Ruben Ortega
Larry Etchechury
Deloris Williamson
Donald A. Johnson
Wayne Wilson
Senate Staff
Wendy Baldo
Chris Thomas
Minority Staff
Gregory Casadei
Michael Allen
Michael Murphy
Bob Newsome
House Staff
Jeff Grant
Minority Staff
TABLE OF CONTENTS
I . Authority and Membership ...............................................................................................1.. .
I1 . Meetings ............................................................................................................................2.. .
I11 . Final Recommendations. ..................................................................................................3.. ..
IV . Attachments ......................................................................................................................4.. .
Attachment A: Laws 1996, Chapter 129, SB 1244
Attachment B: Meeting Notices and Minutes
WORKERS' COMPENSATION GROUP SELF-INSURANCE
STUDY COMMITTEE
FINAL REPORT
I. ESTABLISHMENT
The Workers' Compensation Group Self-Insurance Study Committee was established by
Laws 1996, Chapter 129, SB 1244 and is repealed December 3 1, 1996. (Attachment A)
11. PURPOSE
The purpose of the 14-member committee is to review and make recommendations regarding
the following:
t workers: compensation group self-insurance in other states;
t the authorization of workers' compensation group self-insurance for trade associations and
other groups;
t other alternative options to the current rating bureau system, such as competitive rating, loss
cost rating, pooling or self-rating programs.
111. REPORT
The Workers' Compensation Group Self-Insurance Study Committee must submit a report
of its findings to the Governor, the President of the Senate and the Speaker of the House of
Representatives by December 15, 1996.
IV. MEMBERSHIP
The Committee comprises the following members:
Senator Brenda-Burns, Cochair Representative Pat Comer, Cochair
Senator David Petersen Representative Paul Mortensen
Senator Manuel ("Lito") Pefia Representative Ruben Ortega
Larry Etchechury, Industrial Commission
Gregory Casadei, State Compensation Fund
Michael Murphy, Department of Administration
Deloris Williamson, Department of Insurance
Wayne Wilson, American Insurance Association
Donald A. Johnson, Arizona Contractors Association
Bob Newsome, Continental Homes
Michael Allen, Sureway Properties
Workers Compensation Group Self-Insurance Study Committee
Final Report - Page 2
V. MEETINGS
The Workers' Compensation Group Self-Insurance Study Committee held three public
hearings on September 23, 1996, October 1,1996 and December 12,1996. The Committee received
testimony from interested parties, potential service providers and lobbyists representing various
organizations.
Group self-insurance consists of a group of employers that generally form a non-profit
corporation or trust corporation that operates as an employer-controlled insurer, with each member
within the group bound by a Joint and Several Indemnity Agreement. Generally, groups maintain
a board of directors and hire a third party administrator or service company to assist in providing
necessary insurance functions. Groups are set up to retain profits, and excess revenues are often
returned to the members of the self insurance group.
Testimony at the public hearings consisted of an explanation by Senate staff regarding the
current methods for employers to insure their workers in Arizona, as well as the Industrial
Commission's self-insured requirements for political subdivisions such as school districts, counties
and contractors doing business with the State.
House staff reviewed various other states' requirements, problems encountered and
suggestions regarding group self-insurrince and their common factors, including authorization,
membership, administration and finance.
Further testimony revealed that group self-insurance would allow an additional alternative
to the current system, which would provide competition, motivate loss control and allow a tailored
safety program, as well as provide the same opportunity now afforded some larger public and private
entities. Those opposing the formation of groups cited the fact that the current system allows for
ample competition, with more than 100 insurance carriers and a substantial reduction in rates during
recent years. In addition, they cautioned that formation of groups may adversely affect the State
Compensation Fund and result in increased premiums due to adverse selection.
The Committee elected to draft a questionnaire to obtain community input and reaction
concerning the authorization of group self-insurance, ascertain whether the particular respondent
would participate, and gather any additional suggestions or recommendations. Based on the results
of that questionnaire, the Committee voted to recommend that the Legislature authorize the
formation of groups to self-insure for their workers' compensation coverage.
Meeting notices and minutes of the three public hearings are attached. (Attachment B)
Workers Compensation Group Self-Insurance Study Committee
I.in al Report - Page 3
VI. FINAL RECOMMENDATIONS
The Study Committee made the following final recommendations:
1. That the Legislature pass enabling legislation that authorizes group self-insurance.
2. That the enabling legislation vest responsibility for oversight of self-insured groups with the
Industrial Commission of Arizona, consistent with individual self-insureds and public group
self-insureds.
3. That the enabling legislation establish the following minimum requirements for group self-insureds:
a.) Each member must have been in business for five or more years.
b.) The group must demonstrate $750,000 or more in gross annual workers'
compensation insurance premiums.
c.) The group must have an elected Board of Trustees actively involved in
oversight of the group.
d.) The group must have been formed for a specific purpose prior to engaging in
self-insurance.
4. That theenabling legislation establish that each member of the group be jointly and severally
liable for the liabilities of the group, including after termination of membership for claims
incurred during the period of membership.
5. That the Industrial Commission be directed to exercise its rule making authority to address
all other issues pertaining to group self-insurance.
VII. ATTACHMENTS
A. Copy of Enabling Legislation
B. Meeting Notices and Minutes
Note: All documents submitted to the committee are on file in the Ofice of the Chief Clerk and the
Ofice of the Secretary of the Senate.
Attachment A
WORKERS' COMPENSATION GROUP SELF - INSURANCE STUDY COMMITTE$
(Laws 1996, Chapter 129; SB 1244)
Section 1.
udv committee
A. A workers1 compensation group self-insurance study
committee is established consisting of:
1. Three members of the senate who are appointed by the
president of the senate, not more than two of whom are from the
same political party.
2. Three members of the house of representatives who are
appointed by the speaker of the house of representatives, not more
than two of whom are from the same political party.
3. The director of the department of insurance, or the
director's designee.
4. The director of the state compensation fund, or the
director's designee.
5. The director of the industrial commission, or the
director's designee.
6. An employer or a representative of an employer that
purchases workers1 compensation coverage from an insurance carrier
for its employees who is appointed by the governor.
7. An employer or' a representative of an employer
that provides self-insurance for its employees who is appointed by
the governor.
8. A representative of an insurance carrier that provides
workerst compensation coverage who is appointed by the governor.
9. A representative of an organization of employees who is
appointed by the governor.
10. A representative of a trade association who is
appointed by the governor.
B. The unexcused absence of a member for more than three
consecutive meetings is justification for removal. If the member
is removed, notice shall be given of the removal pursuant to
section 38-292, Arizona Revised Statutes.
C. Vacancies shall be filled by appointment of a qualified
person by the person entitled to make the appointment pursuant to
subsection A of this section.
D. The committee may use the expertise and services of
legislative staff and the staff of the industrial commission.
E. Members of the committee are not eligible to receive
compensation or reimbursement of expenses. . -
F. The committee shall:
1. Review workerst compensation group self-insurance in
other states and make recommendations based on the review.
2. Review and make recommendations regarding the
authorization of workerst compensation group self-insurance in this
state for trade associations.
3. Review and make recommendations regarding the
authorization of workerst compensation group self-insurance in this
state for groups other than trade associations.
4. Review and make recommendations regarding other
alternative options to the current rating bureau system that could
be made available to trade associations and other employer groups,
such as competitive rating, loss cost rating, pooling or self -
rating programs.
5. Submit a report containing the committee's study results
and recommendations to the president of the senate, the speaker of
the house of representatives and the governor by December 15, 1996.
Sec. 2. Qelaved re&
Section 1 of this act is repealed from and after December
31, 1996.
The Committee Terminates: December 31, 1996.
Attachment B
ARIZONA STATE LEGISLATURE
MEETING NOTICE
OPFN TO THE PUBLIC
WORKERS COMPENSATION GROUP
SELF-INSURANCE STUDY COMMITTEE
DATE: Monday, September 23, 1996
TIME: 9:00 a.m. - I t 3 0 a.m. and 12:30 p.m. - 3:30 p.m.
PLACE: Senate Hearing Room 1
AGENDA
1. Call to Order
2. Opening Remarks
3. Overview and Charge of the Committee
4. History and Background of Group Self-Insurance
5. Applicability to Arizona
6. Public Comment
7. Adjourn
COMMllTEE MEMBERS
Senator Brenda Burns, Cochair
Senator David Petersen
Senator Manuel "Lito" Pens
.- , *
-Representalive Pat
Representative
Representative Ruben Ortega
Larry Etchechury, representing Arizona Industrial Commission
Gregory Casadei, representing State Compensation Fund
Deloris Williamson, representing Arizona Department of lnsurance
Michael Allen, representative of Trade Association
Donald A. Johnson, representative of Organization of Employees
Michael Murphy, representative of Employer that Provides Self-insurance
Bob Newsome, representative of Employer that Purchases Workers Compensation
Wayne Wilson, representative of lnsurance Carrier
Tile II of the Americans Wih Disabilities Ad prohibits the Arizona Senate from discriminating on the basis of disability in the provision
of its services and public meetings. Individuals wlh disabilities may request reasonable accommodations, such as interpreters or
alternative formats, by contacting the Senate secretary's Office at (602) 542-4231 (voice) as soon as possible. Please be specific about
the agenda item in which you are interested and for which you are requesting an accommodation. The Senate may not be able to
provide certain accommodations prior to the meeting unless they are requested a reasonable time in advance of the meeting. This
agenda will be made available in an alternative format on request..
ARIZONA STATE LEGISLATURE
WORKERS COMPENSATION GROUP
SELF-INSURANCE STUDY COMMITTEE
Minutes of Meeting
September 23, 1996 - 9:00 a.m.
Senate Hearing Room 1
Leaislative Members Present
Senator Brenda Burns, Cochairman Representative Pat Conner, Cochairman
Senator David Petersen Representative Paul Mortensen
Senator Manual "Lito" Pefia
Non-Leaislative Members Present
Larry Etchechury Gregory Casadei
Deloris Williamson Michael Allen
Donald A. Johnson Michael Murphy
Bob Newsorne Wayne Wilson
Member Absent Staff Present
Representative Ruben Ortega Wendy Baldo, Senate Research Analyst
Diana O'Dell, House Research Analyst
Cochairman Burns called the meeting to order at 9:06 a.m. and roll call was taken. See
attached list for other attendees. She introduced each non-legislative member: Larry
Etchechury, Director, Arizona Industrial Commission; Gregory Casadei, Vice President,
Benefits & Legal Division, State Compensation Fund; Deloris Williamson, Assistant
Director, Rates & Regulation, Arizona Department of Insurance; Michael Allen, Sureway
Properties, representing a trade association; Donald A. Johnson, Arizona Contractors
Association, representing an organization of employees; Michael Murphy, Risk
Management, Arizona Department of Administration, representing an employer that
provides self insurance; Bob Newsome, Continental Homes, representing an employer
that purchases workers' compensation; and Wayne Wilson, American Insurance
Institute, representing an insurance carrier
Thanking all of the non-legislative members for their attendance and assistance in the self-insurance
group endeavor, Cochairman Burns deferred to Cochairman Conner for
additional comments.
Cochairman Conner expressed appreciation to the private sector for taking time to meet
with the Committee and to provide assistance in drafting legislation, in the event that
legislation is recommended by the Committee. Thanking all members for their attendance,
he expressed hopefulness for the Committee to accomplish its assignment.
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Concluding opening remarks, Cochairman Bums asked Ms. Baldo to present an overview
and charge of the Committee.
Wendy Baldo, Senate Research Analyst, distributed a packet of information to each
Committee member containing the following documents (on file with original minutes):
- House Engrossed Senate Bill 1244 (Chapter 129)
-- Typewritten presentation entitled "Workers' Compensation Group
Self-Insurance Study Committee, Monday, September 23, 1996"
-- The National Council of Self-Insurers (NCSI) 1994 State
Self-Insurance Requirements
-- National Association of lnsurance Commissioners Private Employer
Workers' Compensation Group Self-Insurance Model Act
Referencing the National Association of Insurance Commissioners (NAIC) model act, Ms.
Baldo stated the Committee will use this model act as a guide in drafting a form of enabling
legislation in Arizona, if the Committee makes such a recommendation.
Historically, Ms. Baldo explained that while authorization of self-insurance groups has been
previously proposed in Arizona, the proposals never moved any distance because of
concerns expressed that adequate time had not been given to study the issue in depth.
She stated this Committee was created in the 1996 Legislative Session.
Ms. Baldo explained that large Arizona employers currently have the ability to self insure
and take responsibility for their own losses. She added such law has proven to be
effective in reducing long term workers' compensation costs for large businesses.
Commenting that small Arizona employers are not able to take advantage of this type of
self insurance because they cannot meet the financial requirements presently in statute,
Ms. Baldo stated there are over 30 states in the United States that allow pooling for small
employers.
Referring to current methods for insuring for workers' compensation in Arizona, Ms. Baldo
stated the four principle methods include (a) independent carriers, (b) State Compensation
Fund, (c) Assigned Risk Pool for employers who have been turned down by at least two
insurance carriers as well as the State Compensation Fund, (d) self insurance for large
employers, authorized by the Industrial Commission to self insure their employees, with
group self-insurance pools for political subdivisions such as school districts, counties and
contractors doing business with the State.
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Ms. Baldo explained that group self insurance is a group of employers that generally form
some kind of non-profit corporation or trust organization that operates as an employer
controlled insurance company. Referring to some of the key features of group self
insurance, Ms. Baldo stated that each employer joining the group is bound by a Joint and
Several Indemnity Agreement making the employers liable for any additional amounts
necessary; the liability is spread among the different employers in the group; there is a third
party administrator or service company that is generally hired to work with the organization
to provide claims and other insurance functions, the employers pay premiums to the group
fund which is similarly calculated to present full insurance coverage; the employer's
premiums are paid to the group fund for paying out claims and paying for the cost of
running the program that includes losses, excess insurance protection, claims and loss
prevention services, and administrative services associated with the self-insurance group.
Because group funds are not set up to retain profits, Ms. Baldo added that employer
members earn investment income on the group funds. The excess revenues are often
returned to the members of the self insurance group.
Senator Burns inquired of the degree of liability imposed on the non-profit corporation or
individual member if the self-insurance group becomes defunct and unable to pay its
claims. Because of the Joint and Several lndemnity Agreement, Ms. Baldo stated the
members are responsible for picking up those claims.
With respect to composition of a standard self-insurance group, Ms. Baldo referred
Committee members to the organizational chart contained in the information previously
distributed. She explained the self-insurance group would consist of a group of "like
employers'' who would form a non-profit corporation or trust organization, with a Board of
Directors. Ms. Baldo stated that the emphasis of this Committee will look at employers
who are homogeneous in nature. She added there are some states that do not have the
requirement that the self-insurance groups must be of similar risk factor. Referring to the
organization chart, Ms. Baldo explained that the self-insurance group would have a
program administrator that would oversee the various services performed including risk
management, safety management, claims management and so forth. She added the self-insurance
group would actually do the underwriting and the actuarials in loss prevention.
Referencing the current rules for workers' compensation self-insurance pool applicants,
Ms. Baldo stated the following criteria currently exists in Arizona statute and Industrial
Commission regulation. For a political subdivision, she explained that the applicant must
(a) be engaged in business in Arizona for at least five years, (b) provide an annual Arizona
payroll of at least $2 million, (c) meet total reported assets of at least $50 million or have
a combination of $10 million in net worth and a cash flow ratio of .25, (d) provide copies
of the employer's audited or reviewed financial statements for the most current and prior
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two years, (e) provide the names of all other jurisdictions in which the applicant has been
granted authority to self insure and in which the applicant has been denied, revoked or
suspended, (f) file a completed indemnity agreement signed by a duly authorized agent of
the pool, jointly and severally binding the pool and each of its members to comply with
statute and rules relating to the Workers' Compensation Act, (g) provide the names and
addresses of the members of the Board of Trustees of the pool, (h) provide the agreement
indicating the terms and conditions of coverage within the pool, including any exclusions
from coverage, and (i) provide a copy of the Intergovernmental Agreement.
Senator Bums inquired of the kinds of criteria used in other states who have self-insurance
groups. Ms. Baldo replied that the criteria differs from state to state.
With respect to criteria requirements in considering the formation of a self-insurance group,
Ms. Baldo explained the size of the group should be determined, i.e., two employers or 10
employers; the compatibility of the members of the group, i.e., homogeneous groups,
heterogenous groups or both; the solvency of the group and how to insure solvency for
these types of organizations; each individual member's ability to purchase excess
insurance and meet surety requirements; how to guarantee for payment of losses; and how
to set up, administer and regulate the self-insurance group.
Representative Mortensen asked if the current rules for workers' compensation self-insurance
pool applicants is directed to an individual business or corporation.
Ms. Baldo explained that the requirements are part of the Industrial Commission
regulations for the large employers that currently self insure. She stated that if the
Committee were to recommend moving fo~lardw ith self-insurance pools, different
requirements could be considered.
Representative Mortensen asked Ms. Baldo if she is speaking about single employers. Ms.
Baldo answered yes.
Diana O'Dell, House Research Analyst, stated that at the request of Representative
Conner, she made contact with various organizations to glean information on self-insurance
groups operating in other states. She reported that in her conversation with the
National Council of Self-Insurers (NCSI), she learned that the Grocers Association of
Oklahoma and the State of Oklahoma in general had problems with group self insurance.
The Grocers Association Group Self Insurance Fund in Oklahoma was a homogeneous
group of 24 members that had been self insured for about 11.5 years, became completely
disbanded one year ago, and is currently being audited to determine exactly how many
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dollars the 24 members will still have to pay out because of the joint and several liability
issue.
She added that Jim Hopper of the Grocers Association of Oklahoma reported to her that
because the courts are tied to the Oklahoma workers' compensation system, the self-insurance
group has no control over the large court awards. This was a big problem for
the Grocers Association because they had several catastrophic claims. To insure a
successful group self-insurance program, Ms. O'Dell relayed Mr. Hopper's assessment that
the most important factor is the group's ability to hire a knowledgeable and known
company to oversee the group fund; that it is important to maintain a reserve to cover
unexpected losses, and to refrain from paying out premium dividends at the end of the year
without having enough money in reserve. She also relayed Mr. Hooper's caution that
some group members may be lured out by the private sector. When the premium base
decreases, the cost to the other members in the group will then increase.
Based on the review of self-insurance groups in other states, Ms. O'Dell explained that
states do have some things in common. The regulatory authority tends to be either the
Department of Insurance or the State Industrial Commission. The types of groups are
usually homogeneous, meaning that the employer members are within the same
classification or work field. Ms. O'Dell stated that homogeneous groups are allowed in
Arkansas, California and Connecticut, while Alabama, Florida and Kansas allow either
homogeneous or heterogeneous groups; the management is under a Board of Trustees
consisting of 3-7 members that are either elected or appointed; the Board of Trustees
contract with the service company; the service company may determine premiums,
although most states use the National Council of Compensation Insurers (NCCI)
calculations; and the Board of Trustees invest surplus monies and accept applications for
membership. As previously mentioned, Ms. O'Dell commented that the premium rates are
calculated usually by NCCI, based on experience modifiers, and have to be approved by
the insurance regulator to cover the claims and administrative costs, taking into account
the unexpected losses. She added most states require additional security in the form of
surety bonds, certificates of deposit, aggregate excess insurance, letters of credit, or cash.
In conclusion, Ms. O'Dell stated the annual financial information is filed with the state
regulator and regular audits are performed by the staff or by an independent auditor.
Referring to the Grocers Association incident involving a large deficit, Senator Peiia, asked
if the state fund in Oklahoma will be expected to pick up the losses whenever the
organization or the group is no longer able to do so.
Ms. O'Dell stated that Jim Hopper commented to her that in all probability, several of the
smaller companies would go under as a result of the Oklahoma incident. Without any
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specific details from Mr. Hopper, Ms. O'Dell stated she is of the understanding that in
cases like the Oklahoma incident, the state would probably have to pick up those types of
losses.
Senator Peiia asked if his understanding is correct that Mr. Hopper is saying the big
companies that are already self insured and those who are dealing with insurance
companies are at risk to pick up the slack somewhere down the line.
Ms. O'Dell answered that Mr. Hopper did not specifically state that the companies were at
risk, per se, nor did he specifically say that their state's special fund would have to pick up
the losses. Ms. O'Dell stated she is of the assumption that if the state has workers who
were severely injured, the state's welfare system or some other state entity would have to
pick up the cost if that worker was not able to work in the future.
Senator Peiia characterized Ms. O'Dell's assumption as a good assumption.
Based on Ms. O'Dell's review of the specific states with self-insurance groups,
Representative Conner asked which regulatory agency, most often, was responsible for
overseeing the self-insurance groups.
Absent a breakdown, state by state, Ms. O'Dell explained that states do it differently.
Senator Burns commented that she is interested in learning more about the Oklahoma
incident with respect to the Grocer Association's deficit, how the claims are being satisfied,
and whether a surety bond requirement would have solved the problem. Additionally,
Senator Burns stated she would like to know for a fact which states allow group self
insurance and which of those states have experiences to share.
Ms. O'Dell stated she is of the understanding there are over 30 states that do allow group
self insurance in some manner. Because the states all have different requirements, Ms.
O'Dell stated it is difficult to say one program is better than another. No two programs are
exactly alike. Because the Grocers Association is currently in the auditing process, Ms.
O'Dell stated many of the questions are still unanswered.
Mr. Wilson asked how many of the 30 states allow political subdivisions to self insure on
a group basis, i.e., workers' compensation versus private enterprise. He asked if his
understanding is correct that not all 30 states allow private enterprise and political
subdivisions to self insure. He asked if all 30 states allow both.
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Ms. O'Dell answered she is of the understanding that all 30 states allow both; however, the
exact requirements differ between all of the states.
Senator Burns commented it is important to determine the specific states that allow private
group self insurance so that Committee members can seek input from those states.
Suzanne Gilstrap, Executive Director, Arizona Multihousing Association, expressed
appreciation of the Legislature's support in establishing a study committee to review and
consider private groups having the ability to self fund. She explained that Arizona
Multihousing Association consists of members from a variety of industries including the
construction, housing, hospitality, manufacturing and retail grocery, as well as members
of the Arizona Self Insured Association, a broad-based coalition of interests that would like
to see Arizona adopt legislation that would allow groups to self fund.
Coupled with the Arizona Legislature's history of supporting free enterprise, supporting
competition in the marketplace, economic development, privatization, regulatory reform,
free market solutions to problems, and allowing large employers and public groups to self
fund, Ms. Gilstrap stated the Multihousing Association views the Committee's charge as
the "last piece of the puzzle" to allow trade associations andlor groups the ability to self
fund and to provide Arizona with a more competitive system than currently exists.
Ms. Gilstrap explained that the term, "fully competitive" means giving Arizona employers
three options as opposed to the two options in todays market - purchasing insurance from
a private carrier or purchasing insurance from the State Compensation Fund. The third
option of allowing trade associations andlor groups to self fund for purposes of workers'
compensation would fully round out the menu of options available to Arizona employers.
Ms. Gilstrap stressed the importance of understanding that the Multihousing Association
is not advocating to "do away with" an existing system, but rather is advocating
alternatives to the existing system. The Multihousing Association does not want to see the
existing system dismantled.
Referring to her printed information, entitled, "Private Self-Insurance Groups (SIGS)" (on
file with original minutes), Ms. Gilstrap stated her testimony in this Committee meeting
would explore the concept of private self-insurance groups, how they work and how they
would impact the existing system. At the next Committee meeting, Ms. Gilstrap stated her
testimony would focus on the details of private self-insurance groups, including criteria,
liability, safeguards and implementation. She stated that while it is important to talk about
all of the problems that exist with self-insurance groups, such as the Oklahoma incident,
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it is also important to discuss the good things that have occurred as a result of other states
that enacted legislation allowing private employers to self fund.
Mr. Gilstrap briefly described the benefits to be gained by employers who self insure,
including (a) a third option of coverage to round out the menu; (b) the ability to insure at
a lower cost; (c) better performance with their loss prevention and more individual attention
to claims; (d) an ownership feeling of the program; (e) the ability to tailor needs specifically
to that particular industry, resulting in fewer accidents in the workplace, being able to return
employees to work faster, and enjoying a more productive work force; and (9 making the
small employer equal with the large employer who currently has the ability to self fund in
Arizona.
Regarding evidence that private self-insurance groups work, Ms. Gilstrap stated it is her
understanding that no major problems have been experienced with self-insurance groups
in Arizona and that the programs are successful. She added the success in part is
because the Industrial Commission has done an exceedingly good job in laying out
guidelines and criteria that employers have to follow in establishing self-insurance pools
or self-insurance funds. Additionally, she stated the public group has also benefited.
Of the 37 states that have self funding capability for workers' compensation, with very
active state compensation funds as well as very active private carriers, Ms. Gilstrap stated
nearly three-quarters of the states allow group self insurance.
Mr. Casadei inquired of the number of states that had state compensation funds at the time
that they began to allow self-insurance groups.
Ms. Gilstrap replied she did not know the exact number. She added she would research
the matter further and provide Committee members with the information.
Mr. Murphy announced he was in possession of a publication, produced by the U.S.
Chamber of Commerce, that listed the 50 states and identified whether they provided self
insurance or approved self insurance.
Cochairman Burns requested staff to make photocopies of the publication for distribution
to Committee members.
Ms. Gilstrap stated that her research has identified 18 states that have competitive state
compensation funds. Fourteen of the 18 states allow groups to self insure. Referring
Committee members to page 4, she pointed out the listing of those 14 states, including
California, Colorado, Hawaii, Louisiana, Maine, Maryland, Michigan, Minnesota, Montana,
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New York, Oklahoma, Oregon, Pennsylvania and Tennessee. She added she is of the
understanding that California, at the present time, does not have any private employer
groups due to the fact that California is still in the implementation phase of their regulatory
requirements. Ms. Gilstrap commented that even though Texas is included in the 18
states, that state is somewhat different in the sense that workers' compensation coverage
is not compulsory in Texas. She added she recently become aware that Michigan sold
its state compensation fund two years ago and no longer has a state compensation fund.
With regard to the impact of allowing private companies to self insure, Ms. Gilstrap stated
the Multihousing Association believes it will produce a more fully competitive market and
one that is consistent with this Legislature's position on free enterprise and general
competition in the market place. Additionally, Ms. Gilstrap added it will give small
businesses a choice they have not had in the past.
Referencing previously asked questions relative to what would happen to existing
companies in the market place, i.e., the State Compensation Fund or private insurance
carriers, Ms. Gilstrap stated she has not been able to identify any evidence that would
suggest a negative impact on existing providers. By way of example, Ms. Gilstrap cited the
State of New York, with 33 self insurance groups, that has had private insurance groups
for approximately 30 years. She added that 33 groups is not very many groups over an
extended period of time which shows there was no "mass exodus" to a self funding plan
from existing carriers such as the state compensation fund or private carriers.
Commenting that self funding is not for everyone, Ms. Gilstrap stated she believes the self-funding
group has to be sophisticated and has to have a sophisticated membership that
understands the pros and cons of self funding.
Commenting that a shifting in market share was the only happening that occurred in those
states that allowed self funding, Ms. Gilstrap stated she believes competition is good and
everyone benefits from a healthy competition in their state. Citing the market share in the
State of New York, Ms. Gilstrap stated 22% is either individual, private or public groups and
the remaining 78% is split equally between the state compensation fund and private
carriers in New York. Referring to the other states that allow private funding, she pointed
out there are few groups that have participated in self funding. Commenting again that self
funding is not for everyone, Ms. Gilstrap stated she believes it is a viable option that should
be available to employers in the State of Arizona. In conclusion, Ms. Gilstrap stated that
while she has not seen any evidence showing that group self funding has a negative
impact, she has seen evidence that points to the opposite such as improved loss control
programs, improved claims management, and lower costs.
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Representative Mortensen asked Ms.Gilstrap if her reference to a small business includes
independent contractors who may be just one or two persons.
Ms. Gilstrap replied she is of the belief that in any kind of a self-funded pool or group self-funding
mechanism, it would be desirous of having several companies in the pool versus
limiting it to one or two.
Commenting on his assumption that many independent contractors do not insure,
Representative Mortensen asked if his assumption is correct.
Ms. Gilstrap replied she is of the understanding that an independent contractor cannot go
without insurance unless they are a sole proprietor. If a person is a sole proprietor, she
stated that person is not required to be insured and can opt out of workers' compensation;
however if the business has as few as one employee, the employee has to be insured for
workers' compensation.
Mr. Newsome asked Ms. Gilstrap if she is aware of any states that allowed group self
insurance but no longer allow it, or where group self insurance was detrimental to the state
compensation fund. Ms. Gilstrap replied no.
Cochairman Burns asked Mr. Etchechury if he could answer any of the Committee
members' questions.
Commenting on a good source of information that answers many questions surrounding
the group self-insurance issue, Mr. Etchechury referred Committee members to Michigan's
report entitled, "A Study of Group Self insurance in 1995" (on file with original minutes).
With respect to the Oklahoma situation, Mr. Etchechury explained that Oklahoma does
have a guarantee fund. If the Grocers Association is defunct, the individuals will be
covered in some fashion. With respect to surety bonds, he added all self-insurance groups
have surety bonds that provide security in the amount of 25% of the first year premium.
In the Oklahoma case, Mr. Etchechury stated that because the surety bond will not cover
the losses, the guarantee fund will have to make up the deficit. Addressing Representative
Mortensen's question, Mr. Etchechury stated that most of the groups are larger groups
because of the joint and several liability issue; a group has to be large enough to be able
to absorb any of the losses of the particular members.
Knox Kimberly, representing Arizona Association of Industries (AAI) and Arizona
Self Insured Association (ASIA), testifying in support of moving forward with the concept
of allowing groups to self insure, stated the experience of the Arizona large business self
insureds in the ASIA organization has been very positive. Based on concerns expressed
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by Committee members, Mr. Kimberly stated he believes there is a need to "~arefully'~
proceed in crafting legislation that will allow Arizona to have the same positive experience
of many other states and avoid some of the problems that have been experienced by other
states such as the Oklahoma incident.
While not hearing any testimony regarding reinsurance and excess insurance, Mr. Kimberly
stated he is of the understanding that reinsurance and excess insurance is a very
important part in a system that allows for groups.
Regarding the impact on the existing system, Mr. Kimberly reiterated Ms. Gilstrap's
testimony that group self insurance is not an effort to upset the existing system. It is an
effort to provide, within the existing system, the additional option of group self insurance
that will allow other groups to enjoy the same opportunrty that Arizona's large private sector
and public groups already enjoy. Mr. Kimberly stated he agrees that group self insurance
could result in some shifting of market shares. He also referenced the New York example
that has had many years of experience in group self insurance. In terms of existing market
share in Arizona, Mr. Kimberly stated that the State Compensation Fund might be taken
from a position of having the "dominant" market share to "nearly the largest" market share.
He stated he does not believe that kind of market share impact should define what is
harmful to the existing system. In conclusion, Mr. Kimberly thanked the Committee for
studying the group self-insurance issue and volunteered his services to conduct any further
research or provide any further information to Committee members regarding group self
insurance.
Ralph Korn, representing Strategy & Risk Group (SRG), explained that SRG is an
independent risk management consulting firm, headquartered in Phoenix, who has
performed a number of feasibility studies for alternative financing and funding of risks,
including a number of self-insured pools. He distributed a summary sheet listing some of
the reasons that SRG believes pooling or group programs work successfully (on file with
original minutes).
Referencing a prior question posed by a Committee member to identify states that
permitted group self-insurance pools, Mr. Korn stated SRG performed a feasibility study
in Colorado for the formation of a private sector self-insured workers' compensation pool
involving 21 rural electric utility companies. In addition to performing feasibility studies for
self insurance, Mr. Korn stated SRG is the pool administrator of the Valley Schools
Workers' Compensation Pool comprised of three large school districts in Arizona: Paradise
Valley, Deer Valley and Peoria.
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Mr. Korn remarked that SRG believes the key issue in permitting private sector group self
insurance of workers' compensation lies in the equity concept. As the law presently stands
in Arizona, Mr. Korn stated small employers who have very good workers' compensation
experience and who work very diligently in controlling their costs, are not large enough to
be permissibly self insured in the State; they are not able to buy their insurance from the
commercial market nor from the State Compensation Fund. Not to be construed as
criticism of the commercial market or the State Compensation Fund, Mr. Korn stated small
employers are simply not given the same opportunities that larger companies are given
who can qualify as stand-alone self insureds.
Regarding concerns expressed about whether or not the pool or the self-insured group is
going to be economically feasible or financially sound, Mr. Korn stated that proper
structuring of a group is essential, including a very conservative actuarial evaluation of the
exposures and of the funding requirements. He added that good conservative actuarial
evaluation will, generally speaking, set the standards and guidelines. If the standards and
guidelines are followed by the group and if the standards and guidelines are mandated by
statute and regulation, Mr. Korn stated those standards and guidelines will result in the
formation of a group that is going to make sense and is going to be successful. He pointed
out that virtually all groups, in virtually every state with self-insured pools and groups, are
assessable, meaning that in the event additional contributions are required from the group
members in order to keep the group solvent, the assessability provision in the By Laws of
the group or of the pool require that the members contribute additional capital in order to
make certain that the pool can meet its obligations. He emphasized the importance of
including an assessibility requirement in the formation of a pool or group so that members
of the group understand they can be called upon, if necessary, to contribute additional
funds in order to guarantee the solvency of the group.
Adding to Ms. Gilstrap's testimony on the benefits of group self insurance, Mr. Korn added
that the members of the group, whether they are homogeneous or heterogeneous,
understand their industry and their business, they know where their loss exposures are
coming from, they know what their requirements are, they have the best ability to
determine what kind of loss control and safety issues should be addressed, and can go out
and purchase services from companies to develop and design loss control programs that
fit their needs directly and that will be responsive to their needs.
Mr. Korn stated he believes group self insurance of the private sector in Arizona would be
a major step forward because it closes the loop and "fills in" the remaining gap for smaller
employers who today do not have the option of self insurance.
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Regarding Representative Mortensen's question of whether very small independent
contractors can belong to a group self-insurance plan, Mr. Korn stated that technically they
could belong but most likely would not want to because of the exposure to the joint and
several liability feature of a small company. Mr. Korn stated he is of the opinion that a 3-4
person employer probably would not feel comfortable in a self-insured environment.
Representative Conner asked Mr. Korn if he finds that "cherry picking'' takes place with
these pools so that they can keep their rates down, such as "watching people who have
losses." Pointing out that the State of Arizona has a good workers' compensation program
and has benefited over the years of having fairly low rates in Arizona, Representative
Conner explained that the State of Arizona, as a last resort, is going to have to pick up all
employees. He questioned whether there would be some increase in premiums on the
"other side" if one sector is being benefited by group self insurance while the other sector
has to pick up all remaining employees.
Mr. Korn replied there is always the possibility that the "cream" is all going to move off into
the self-insured program, leaving the less desirable businesses and high loss ratio
businesses for the insurance carriers and the State Compensation Fund. While "cherry
picking" is a possibility, Mr. Korn stated he believes "cherry picking" is an unjustified
conclusion.
Commenting on his desire to hear more about specific experiences of other states who are
allowing group self insurance, Representative Conner emphasized the importance of
hearing about the good things and the bad things for purposes of weighing both sides if
the Committee recommends drafting legislation. Expressing his desire to learn what
happens to the "bad apple" and where that person goes, and how the state funds have
been impacted with group self insurance, Representative Conner stated he believes there
must be statistics available that answer those kind of questions.
Mr. Korn commented that if the pool is properly structured, it has built into its underwriting
methods a means of assessing a surcharge to those pool members who are developing
bad experience; they would have to pay a higher surcharge premium rate and greater
premium into the pool, in order to compensate the other pool members for the adverse
experience created by the "bad apple." He also added he is of the opinion that a pool that
does not provide that kind of surcharge methodology is a pool that has not been well
thought out. He discussed the California experience of self-insured members leaving the
pooling arena, or their self-insurance status, and returning to the commercial insurance
market because of the dollars they believed they would save. Mr. Korn emphasized the
importance of structuring a pool in such a manner that the members continue to be liable
in the future until all of their outstanding obligations, incurred in the course of the pool's
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operation, have been taken care of. He added that these are all issues that need to be
written into the regulation.
Discussion followed between Representative Conner and Mr. Korn. Representative
Conner asked if there is any history available that can be beneficial to the Committee with
respect to the effect that group self insurance has had on any state funds, as pools have
been moving around and different experiences have been seen regarding loss ratio.
Mr. Korn answered that he did not know the answer. He added SRG has not been
involved in any kind of an analysis or study of the success or failure, or the general
trending of self-insurance groups, state by state.
Mr. Murphy asked Mr. Korn to describe the benefits gained by the three school districts
administered by SRG in terms of controlling workers' compensation costs and providing
a safe work place for the employees.
Mr. Korn replied that the pool has been in existence for 14 months. Two of the school
districts had been insured with the State Compensation Fund and one had been insured
with a private carrier of workers' compensation. Due to the fact that losses are quite new,
Mr. Korn stated it is not possible to quantify the benefits at this point in time. He added that
the school districts feel they have accomplished and benefited from such things as (a)
adding to their internal staff two loss prevention people with many years of expertise who
have experience with school exposures, (b) participating in the normal bidding process to
select a third party administrator, and (c) selecting the attorneys they feel are best qualified
to defend their claims. Mr. Korn stated he believes the three school districts are pleased
with their decision. Because of the short time in existence of the school district pool, Mr.
Korn stated that while it is too early to say that their self-insurance pool is successful, it is
believed it will be successful.
With respect to Mr. Korn's suggestion to include a provision for assessing different
companies in the event the Committee recommends proposing legislation, Mr. Newsome
asked Mr. Korn for his thoughts on how groups could be insured for one catastrophic loss
within a group, or some type of aggregate loss where there were several catastrophic
losses within the group, so that the whole group would not be penalized.
Mr. Korn answered that the group could purchase stop loss insurance or they could
purchase excess self-insured workers' compensation insurance, either on an aggregate
basis or on a specific basis. If it was on a specific basis, each individual loss that the pool
had to pay would be limited to a stated figure. By way of example, Mr. Korn stated that the
self-insured retention on a per-loss-basis is $250,000 for the Valley School Workers'
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Compensation Pool; the pool buys stop loss insurance to protect them for any losses
above that $250,000 on a per case basis rather than on an aggregate basis. He explained
that aggregate stop loss insurance says once the overall pool's self-retained loss has hit
a certain amount, i.e., $1 million or $2 million, the insurance policy then kicks in on top of
that and picks up everything over that figure. In this manner, Mr. Korn stated the
individual members of the group would be protected against stop loss.
Alternatively, Mr. Korn stated the pool, if it is going to structure a surcharging system within
itself so that the premiums of each pool member are dependent to a certain extent upon
their loss experience, it can build things into the plan, similar to what the insurance industry
does such as an experience modification formula or calculation where losses are limited
so that a particular member, who may be small and who may have had the misfortune of
having a huge loss which was not his or her fault, could be relieved of a tremendous impact
in the surcharge formula. He added there are ways to structure the computation of
premium contribution to recognize good experience versus bad experience and to limit the
impact of the bad loss experience against the unfortunate member in a fashion that could
be drawn out over a number of years where they are reimbursing the pool.
In conclusion, Mr. Korn stated SRG feels that if legislation is written, regulations should
specifically state that pools must purchase specific andlor aggregate insurance; that there
has to be an assessability feature in the pool's By Laws, and that there has to be a
provision whereby the individual members are charged a "premiumn contribution that is
commensurate with their loss experience. He added these elements shoul'd be
demonstrated before the pool is given the authority by the regulating entity to go into
business.
In the event the Committee moves forward with drafting legislation, Mr. Korn stated he
believes a specific study commission should be established consisting of persons familiar
with the operation of setting up a pool that can work with the regulating entity to assess the
items that make sense, what should be in the regulations, and how to best insure that
group self insurance for the small businesses is not going to turn into some kind of
disaster. At the conclusion of the study, the commission would then report back to the
State with its recommendations. He briefly described Hawaii's successful group self-insurance
pool involving captive insurance companies that are ultimately licensed by the
State of Hawaii. Mr. Korn strongly suggested the State of Arizona consider establishing
a specific study commission, or retaining an independent firm, to review the applications
for participation in group self-insurance pools.
Referring to Mr. Korn's testimony that SRG was involved in putting together a rural electric
utilities self-insurance group in Colorado, Mr. Wilson asked Mr. Korn if any underwriting
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criteria was used in terms of the risks the group would accept, or whether the group would
take "all comers" into the pool. He explained the reason for his question is to determine
if there is an indication of what risks are left for the state fund or other markets of assigned
risk plans and so forth.
Mr. Korn explained that the association ended up with 21 rural electric utilities. He added
that all of the Rural Electric Authorities (REAS), with the exception of three, decided to
move forward with group self insurance, fund the feasibility study, and put the pool
together. Mr. Korn stated that while he did not know the specific reasons why the three
REAs opted out, he believed it was because local issues were involved and not because
the three pools had very bad loss experience. Mr. Korn explained that SRG constructed
into the feasibility study an actuarially sound method whereby those member companies
who did incur bad loss experience would make a greater contribution over a period of time
to make the pool whole and to pay their share. For those companies, it was a loss
sensitive contribution formula. He added that the concept is "if you had good experience,
your annual contribution was reduced; if you had bad experience, it was increased."
Referring to the Arizona school district self-insurance pool, Mr. Wilson asked if "any" school
district is eligible to participate in the pool or if there is some specific underwriting criteria
that relates to participation in the pool.
Mr. Korn answered that the Arizona school district pool does have underwriting criteria.
The school districts are eligible to participate, by invitation of the three members of the
pool. Commenting that he knows of several school districts that are desirous of joining the
pool, Mr. Korn stated it is his understanding the three existing school districts do not want
anyone else in the pool at the moment; they are satisfied with the plan they have and do
not want to get any larger. By having a limited number of members, the pool believes they
can better control the loss issues, claims management issues, and so forth from the onset.
As the pool administrator who attends the Board of Trustees meetings, Mr. Korn stated that
SRG does not know whether other school districts will be invited by the Valley Schools
Workers' Compensation Pool to join that pool at some point in the future.
Referencing third party administrators who perform underwriting functions, make claims
adjustments, collect monies and so forth, Ms. Wiliamson asked Mr. Korn if he has
knowledge of whether third party administrators involved with self-insurance groups, in any
of the 30 states, are regulated by the Industrial Commission, Department of Insurance, or
any other regulatory body.
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Mr. Korn replied he did not know the answer to Ms. Williamson's question. He added it is
his assumption that third party administrators would have to be licensed because they are
"funds adjusters."
Regarding actuarial determination of rates that could be accomplished by a third party
administrator, Ms. Williamson asked Mr. Korn if he has knowledge of how this function is
performed.
Referring to the Valley Schools Workers' Compensation Pool, Mr. Korn explained that the
pool retains an independent actuarial firm to do actuarial evaluations. Referring to other
pools that SRG has been involved with, either as a claims audit firm or in some other
capacity, Mr. Korn stated he cannot recall of any instance where the pool administrator
also did the actuarial work. Again referring to the Valley Schools Workers' Compensation
Pool, Mr. Korn named the independent service providers who perform the overall
administrative functions of the pool: (a) one actuarial, (b) one pool administrator (SRG), (c)
one third party claims administrator (Frank Gates Service Company), (d) three law firms
who handle claims, (e) one law firm that is general counsel, (9 one accounting firm that
does the monthly accounting, independent of the fiscal agent who writes the checks, and
(g) another independent accounting firm who is retained as an auditor who monitors the
other accounting firm and fiscal agent. From an internal control perspective, Mr. Korn
stated he believes it makes good sense to generously disburse the activities of the pool.
Mark Minter, Executive Director, Arizona Builders' Alliance, testifying on behalf of
approximately 300 Arizona members of a trade association comprised of commercial and
industrial contractors, stated the Alliance supports the concept of self-insurance groups.
He added it was the consensus of the Alliance that group self insurance would allow more
competition and more choice, that it would not have a damaging effect on the existing
system of workers' compensation in Arizona, and that some changes could be made that
would encourage competition. Of most importance, Mr. Minter stated the Alliance believes
the individual worker, who works for an employer that is part of a self-insurance group, is
going to be better off.
Prefacing that "self-insurance groups" equates to "ownership," Mr. Minter stated that with
group self insurance, an employer will no longer be able to shuffle the risk off onto the
insurance company and will have to be prepared to deal with some of the risk themselves
and with their fellow members of that group. With ownership, there is a need to pay
greater attention to risk. Mr. Minter stated that paying greater attention to safety means
improvements in safety, as evidenced by many large self-insured employers in Arizona
who are enjoying greater safety in the work place. He briefly described a general
contractor's success story involving a significant decrease in loss time accidents during an
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entire building project in Chandler -- only 6 loss time accidents during the entire project.
In conclusion, Mr. Minter stated that while the current system is not "broken," the Alliance
believes the system can be improved.
Regarding Mr. Conner's question about whether "cherry picking" would take place, Mr.
Minter stated that the construction industry's experience has been that those contractors
who are not paying attention to safety, get "adversely selected outn by going broke. He
added that the combination of exposure modifications, safety incentive plans and the
aggressiveness in Arizona with respect to Occupational Safety and Health Administration
(OSHA) laws contribute to those contractors' demise. Mr. Minter stated he does not
believe adverse selection, i.e., "cherry picking" is taking place, other than the adverse
selection of contractors themselves who go broke.
In the event the Committee recommends to move forward with group self-insurance
legislation, Senator Burns asked Mr. Minter to explain how he foresees the construction
industry moving forward in that direction, and if the industry assumes that directed care
will be part of group insurance.
Mr. Minter answered that because he did not know enough about directed care, he could
not answer the question.
Mr. Casadei asked Mr. Minter if it is correct to say that if certain construction industry
employers in a self-insurance group go broke, the losses that were generated by those
employers while in the group would then fall back on the rest of the group that survived.
Mr. Minter replied that those companies who have a track record of not paying attention
to safety would not be able to join a self-insurance group. He added that a very good
feature of a self-insurance group is that members have to initially be allowed when the
group is formed; subsequently, new members have to be allowed to join the group by the
existing member participants.
Mr. Casadei asked Mr. Minter if the description just given was in fact "adverse selection."
Replying that he believed it would be, Mr. Minter emphasized that in the construction
industry, an employer that is not paying attention to safety is not going to be around.
Because workers' compensation premiums for the construction industry is one of the very
highest cost factors of doing business, Mr. Minter stated that a construction company with
a bad safety record eventually becomes non-competitive and no longer gets new business.
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Representative Conner remarked that his question is not who is left, what the premiums
are and what has happened to those workers that were with those bad companies. He
restated his questions. He asked what happens to the premium rates for the employers
that do not get into the "low rate pooling deals" and what happens to the remaining
employers' rates for workers' compensation insurance.
Referring to Mr. Minter's testimony regarding those companies that fall out of the pool,
leaving other pool members to pick up the losses for their bad experiences, Mr. Allen
asked Mr. Minter if he has any knowledge of how other states make that allocation to the
remaining members of the pool; if it is on a member basis or premium basis.
Mr. Minter replied that while he did not have the knowledge of other state's processes, he
stated he is aware of people having joint and several liability that are participating in these
pools.
Having listened to testimony provided to Committee members regarding the various levels
of administrative oversight, the joint and several liability issue, the suggestion for some
accessibility requirement, the suggestion of purchasing other insurance for excess loss,
Senator Burns commented that if she were a company, she might not want to spend a lot
of time looking into group self insurance because of her first reaction that the opportunity
may not be profitable and that the headaches and potential liability to her company could
be devastating.
Mr. Minter commented that for some of those reasons mentioned by Senator Burns, the
State of New York, allowing group self insurance for 30 years, has only 22% of the insured
in self-insurance groups. He reiterated previous testimony that group self insurance is not
for everyone.
Senator Burns asked Mr. Minter if he believes there will be enough members in the
Alliance who will want to participate in group self insurance. Mr. Minter replied the Alliance
would like to have the option of participating.
Jim Klinker, Director of Public Affairs, Arizona Farm Bureau, stated that the Farm
Bureau is a volunteer association of farmers and ranchers involved in production and
agriculture, controlled by a Board of Directors. Prior to 1973, he explained that agriculture
was exempt from workers' compensation in Arizona; in 1973, Arizona's agriculture workers
were included in the workers' compensation law. At that time, Mr. Klinker explained that
the Farm Bureau members were insured with a private carrier who was insuring about 300
Farm Bureau members. The private carrier canceled the group because of the risk
involved in agriculture and the size of the group. Mr. Klinker stated the Farm Bureau, with
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2,500-3,000 agricultural employers at that point in time who were going to be covered by
a new law, had to determine what they could do. Mr. Klinker stated the Farm Bureau
approached the State Compensation Fund with the idea of developing "dividend safety
groups" within the State Compensation Fund. Speaking with 22 years of experience with
a partnership between the agricultural employers and the State Compensation Fund, Mr.
Klinker stated the Farm Bureau is very satisfied with the workers1 compensation system
administered by the State Compensation Fund - a system that has worked well for the
agricultural industry. He added he believes the State owes some measure of discussion
about that system that is in place and working for the Farm Bureau's association of small
employers.
At the present time, Mr. Klinker stated there are approximately 1,200 Farm Bureau member
policy holders with the State Compensation Fund. He added that the vast majority of
those policy holders, between $2,000-7,000, are small employers, with great diversity.
Commenting that while most people think of agriculture as being a homogeneous group;
Mr. Klinker stated agriculture is not homogeneous. Agriculture includes dairy, livestock
cow-calf operations, ranchers, farmers, field workers, heavy machinery operators, airplane
pilots, aerial applicators and so forth who may also own the gas station in town, operate
a transport business in the off season, use their grain truck to transport rebar to a mine and
so forth. To the agricultural industry, Mr. Klinker stated the homogeneous issue is very
important. With the implementation of group self insurance for small businesses, he added
the Farm Bureau is very concerned about the impact such a program will have on the
existing State Compensation Fund. Additionally, the Farm Bureau is concerned about
where the small employer will go if group self insurance is implemented and where the
"bad risk" will go. Mr. Klinker stated the Farm Bureau sees group self insurance benefiting
the medium size to large employer but not the small employer.
Regarding the homogeneous issue, Mr. Klinker stated insurance is either a small group of
large premium payors or a large group of small premium payors. He stated the Farm
Bureau believes the current workers' compensation program in Arizona allows for the
"melting" of those two kinds of insurance payors to come together and make a workers'
compensation insurance program work.
Referencing Mr. Minter's testimony regarding safety protection in the work place, Mr.
Klinker stated agriculture is a dangerous occupation and generally ranks in the top two or
three industries in the country in terms of worker injuries and family member injuries
because of such activities as handling machinery, handling livestock and so forth.
In the event the Committee recommends to proceed with group self insurance, Mr. Klinker
stated the Farm Bureau has two concerns. If the pool of small employers gets too high
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and the rate gets too high for a smaller employer, the employers will go uninsured; a
situation that is not good for the employees of that employer nor for the agricultural
industry. He added it is important to have a workers' compensation system that does not
encourage businesses to go uninsured. Regarding protection of the workers, Mr. Klinker
stated that if group self insurance does not have a "rock solid solvency provision," all
employers will be paying more which will ultimately drive the smaller employers to even
higher premiums resulting in a choice to not insure.
With respect to handling claims, Mr. Klinker stated the Farm Bureau is satisfied with the
manner in which claims are handled through the State Compensation Fund. If the
Committee proceeds with drafting legislation for group self insurance, Mr. Klinker stated
the Farm Bureau is hopeful good medical diagnosis of injured workers and good claims
management will not be overlooked in the pursuit of saving money by getting workers back
to work faster.
In conclusion, Mr. Klinker stated he believes Arizona has a good competitive workers'
compensation system in place in Arizona that offers several options for employers. Absent
answers to many of the questions presented in this Committee meeting, Mr. Klinker stated
he is not confident that the group self-insurance proposal for small businesses will actually
benefit small employers in Arizona.
Mr. Allen asked Mr. Klinker if he is aware of any examples of states that have self-insurance
groups in place that have adversely affected their state funds.
Mr. Klinker replied the Farm Bureau, like many of the persons who previously testified, is
in the process of checking with other states that have self-insurance groups. He added
that in his communication with the New York Farm Bureau, that organization has some
concerns with the program in New York. Mr. Klinker stated it was reported to him that
subsequent to the formation of a small agricultural association self-insurance group, the
state fund in New York found themselves absorbing some of the higher risk employers that
were originally in that self-insurance group. He added that the New York Farm Bureau has
some concern that the participants in the self-insurance groups are the "cream of the crop"
in terms of safety records, with higher premiums falling back on the remaining insurers
such as the state fund or private carriers because of the "sick" employers that are the
smaller premium payors. While having talked with three other states in depth about their
group self-insurance programs, Mr. Klinker stated the Farm Bureau does not yet have a
good perception of the impact on state funds in general.
Lee Shrader, Southwest Regional Sales manager, Frank Gates Service Company,
described Frank Gates Service Company (Frank Gates) as the company that invented the
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third party administrative industry in the early 1900s. Based in Columbus, Ohio, Mr.
Shrader stated Frank Gates has an ofice in Phoenix and has been doing business in
Arizona for more than 20 years. Mr. Shrader named some of Frank Gates' clients: the
Mesa School District that is individually self insured, Washington Elementary School that
is individually self insured, the Phoenix Transit System that is individually self insured, and
two school district pools in Arizona. He added there are three pools in Arizona, two school
district pools and one accounting pool.
Regarding the Valley Schools Workers' Compensation Pool, consisting of the Paradise
Valley, Deer Valley and Peoria School Districts, Mr. Shrader echoed Mr. Korn's comment
that the pool does not want additional members in their group at this time. Because of that
pool's decision, Mr. Shrader stated another pool was formed and named the Arizona
School Alliance for Workers' Compensation, Inc., currently consisting of nine members,
including the Bullhead City School District and the Kyrene School District. He added that
the pool administrator for the Arizona School Alliance is Greg Jacobs who works for their
Board of Trustees.
Naming many of the Frank Gates' accomplishments in dealing with various insurance
groups in various states throughout the United States, including Washington and Ohio, Mr.
Shrader stated Frank Gates is responsible for passing legislation in Ohio for group self
insurance that was modeled after Washington State's law. He added Frank Gates strongly
believes in the concept of group self insurance and believes that self-insurance groups are
beneficial. Mr. Shrader stated he tells perspective employers who are considering group
self insurance that they should not base their decision on the savings of money but rather
for the control the employer will receive - additional control over claims, loss control and
savings. He reiterated that group self insurance is not replacing an existing system but
merely offering another option to the employer.
Mr. Shrader discussed his research findings of other states with respect to self insurance
legislation, groups and pools, including the States of California, Pennsylvania, Nevada,
Utah, Colorado, New Mexico and Michigan. He added that New York has 51 self-insurance
groups up and running. Referring to a printed chart that describes workers'
compensation requirements and penalties for failure to insure in all 50 states (on file with
original minutes), Mr. Shrader stated there are 32 states that allow group self insurance
and 6 states that allow "some grouping." He pointed out that Arizona is one of the 36
states because it allows public groups.
Under group self insurance, Mr. Shrader stated that more control can be gained, including
independent medical examination determinations and directed care. He added that
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September 23, 1 996
Arizona School Alliance has a directed care program that was established with
CommuniCare Network (CCN) covering the metropolitan areas of Arizona.
As a good resource of information on insurance plans, Mr. Shrader recommended and
described a publication listing all Arizona providers and their networks, characterized by
counties, cities and specialities.
Mr. Allen asked Mr. Shrader if he had any knowledge of any state funds that have been
adversely affected by group self-insurance programs. Mr. Shrader replied he has not come
across any states where their state funds have been adversely affected by self-insurance
groups.
Representative Mortensen asked if his understanding is correct that New York did not get
involved with group self insurance. Mr. Shrader replied that New York has the largest
number of self-insurance groups of any state with 51 groups.
A lengthy discussion followed between Representative Mortensen and Mr. Shrader with
respect to reasons why some employers choose to self insure while other employers
ultimately choose not to self insure in view of established criteria, liability issues and so
forth.
Mr. Casadei asked Mr. Shrader to name a minimum premium threshold under which
someone should be excluded from a self-insurance group.
Because Frank Gates is a claims administrator and does not get involved in self-insurance
criteria requirements, Mr. Shrader stated he cannot answer the question. However, based
on his experience working with group self insurance, Mr. Shrader stated he has seen or
heard mentioned a $7,000-$10,000 premium. He added it is his understanding that a
minimum premium threshold is established through legislation, by the self-insurance group,
or by the excess carrier.
Mr. Murphy asked Mr. Shrader if he had knowledge of what effect self-insurance groups
would have on excess insurance carriers and whether excess insurance carriers would
support this legislation.
Mr. Shrader replied he is of the understanding the excess insurance carriers would support
group self insurance in Arizona and feel that small and medium size employers would be
good risks to write coverage for in Arizona.
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September 23, 1996
MINUTES OF MEETING OF
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Cochairman Burns announced that the following persons were in attendance and in
support of group self insurance:
Michelle Ahlmer, representing Arizona Retailers Association
Leland Robinson, representing Midwest Employer Casualty Company
Dwayne Richard, representing Arizona Food Marketing Alliance
Patti Harrington, representing Arizona Plumbing, Heating & Cooling Contractors Assn.
Cochairman Burns suggested the Committee conclude its business with the review of the
kinds of issues that need to be addressed in a future meeting. If the Committee believes
Arizona is a good place to initiate self-insurance groups and provide another option for
workers' compensation coverage, Cochairman Burns identified some of the following
issues that would require further discussion and consideration prior to drafting legislation:
reinsurance, excess insurance, surety bonding, joint and several liability, accessability, the
administration, and directed care. Additionally, Cochairman Burns posed the following
questions for consideration by Committee members:
Who has oversight -- the Department of Insurance, the lndustrial Commission or
some separate entity that the Committee would want to set up?
Is the stability of the State Compensation Fund a concern?
Would self insurance group legislation really help the small employer? How would
they be helped? Is that the group that needs helping or needs this other option?
Does the Committee believe the Legislature should wriie criteria into law? Does the
Committee and industry actually want it written in statute? Would some of the
criteria be written in statute and some be given to the regulating or oversight agency
to authorize? Would the regulating agency be the lndustrial Commission, the
Department of Insurance or a new group?
Cochairman Burns stated she is hopeful her questions will have answers that can be
addressed at the next Committee meeting, followed with a recommendation by the
Committee to the Legislature for or against initiating self-insurance groups in Arizona. She
added that if the Committee believes it is a good idea, the recommendation should contain
the various components of self insurance groups including what language should be
included in statute, what regulating agency would be given the authority to oversee the
plan and so forth.
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Page 25
September 23, 1996
Senator Petersen asked if his understanding is correct that there was no testimony given
regarding the specific effects self-insurance groups have had on state funds in other states
that allow self insurance groups.
Senator Burns commented that her understanding of Mr. Klinker's testimony is that the
small agricultural employers, who are members of the Farm Bureau, are concerned about
the effect; they are not sure of the effect, and they want to make sure that the State
Compensation Fund remains a viable option for small employers.
Commenting that she did not believe the Committee members were provided with specific
testimony with regard to the effect self insurance groups have had on state funds, Senator
Bums asked Mr. Shrader if she understood him to say there was one state that allows self-insurance
groups that no longer has a state fund.
Mr. Shrader replied that Michigan sold their state fund to a private company. He added
that his research of the various states has indicated that while market shares may have
been reduced because of self-insurance groups, state funds have not been adversely
affected because of self-insurance groups.
Senator Petersen asked Mr. Shrader to provide Committee members with a copy of his
research documents that show how the state funds were or were not affected by self-insurance
groups. Mr. Shrader stated he would provide the written information to all
Committee members.
Regarding the printed information previously distributed by Ms. Gilstrap, discussion
followed between Mr. Wilson and Mr. Shrader regarding the state fund in Montana and the
state fundlmutual insurance companies in Maine and Hawaii.
Commenting that the Committee will meet again if it is the desire of the Committee to
continue discussion of self-insurance groups in Arizona, Cochairman Burns asked if any
Committee member wants to propose that the Committee should not move fonnrard with
the self-insurance group endeavor.
Senator Petia commented he has not heard enough testimony on how "well" the claims are
handled in self-insurance group plans. He added he would like to hear from some injured
workers of their experience in resolving their claims under self-insurance group plans.
Because Arizona presently allows pooling and captive insurance companies, Senator Petia
stated he is of the belief there is no need to change the current workers' compensation
system in Arizona. Unless he can be convinced that claims handling is not going to be a
problem for the seriously injured workers and their dependents, Senator Petia stated he
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MINUTES OF MEETING OF
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does not believe Arizona needs another option. He concluded by stating he has not heard
enough testimony in that regard.
Senator Burns expressed an interest in seeing the publication referenced by Mr. Shrader
that is being used by some self-insurance groups that identifies choices the injured worker
has, choices the employer has, and the number and kinds of providers available.
Cochairman Burns invited further comments and questions. There were none.
Cochairman Burns announced the next meeting:
October 1, 1996
9:00 a.m.
House Hearing Room 2
The meeting adjourned at 1 1 :15 a.m.
Respectfully submitted,
n [/L@&;%
NancyBoyd, mmitteeS cre
(Tapes and attachments on file in the Office of the Secretary of the Senate.)
MEETING OF COMMITTEE ON
w ORUEU'~ C V M P ~ ~ ~ A TGI OR QM~ P
SEU'INJURAN~E STu b y 0 M M , T T EE TIME ~ : O ...kO
-NAME REPRESENTING BILL NO.
Please Print
. ..
ARIZONA STATE LEGISLATURE
Meeting Notice
Open to the Public
WORKERS COMPENSATION GROUP
SELF-INSURANCE STUDY COMMITTEE
DATE: Tuesday, October 1, 1996
TIME: 9:00 am - 12:OO pm
PLACE: HHR2
AGENDA
1. Opening Remarks.
2. Staff Presentation.
3. Public Comments.
4. Panel Discussion.
5. Recommendations.
MEMBERS:
Representative Pat Conner, Cochair
Representative Paul Mortensen
Representative Ruben Ortega
Senator Brenda Bums, Cochair
Senator Manuel "Lito" Pefia
Senator David Petersen
Michael Allen, Trade Association
Gregory Casadei, State Compensation Fund
Lany Etchechury, Arizona Industrial Commission
Donald A. Johnson, Organization of Employees
Michael Murphy, Employer-provides self-insurance
Bob Newsome, Employer-purchases workers compensation
Deloris Williamson, Arizona Department of Insurance
Wayne Wilson, lnsurance Camer
+ People with disabilities may request reasonable accommodations such as interpreten, alternative formats, or assistance with physical
accessibility. If you require accommodations, please contad the Chief Clerk's Omce at (602) 542-3032. +
ARIZONA STATE LEGISLATURE
WORKERS' COMPENSATION GROUP
SELF-INSURANCE STUDY COMMllTEE
Minutes of Meeting
October 1, 1996 - 9:00 a.m.
House Hearing Room 2
Members Present
Senator Brenda Burns, Cochairman Representative Pat Conner, Cochairman
Senator David Petersen Representative Paul Mortensen
Senator Manual "Liton Peiia Bob Newsome
Larry Etchechury Gregory Casadei
Deloris Williamson Michael Allen
Donald A. Johnson Michael Murphy
Members Excused Staff Present
Representative Ruben Ortega Wendy Baldo, Senate Research Analyst
Wayne Wilson Diana OIDell, House Research Analyst
Cochairman Conner called the meeting to order at 9:02 a.m. and attendance was noted.
Cochairman Conner announced that Committee members would review the key issues of
private group self insurance, review and discuss a proposed Questionnaire, hear Mr.
Etchechury's overview of his research findings on the effects of group self insurance on
state compensation funds, hear public comment, and possibly make recommendations of
where the Committee is headed with private workers1 compensation group self-insurance
plans.
Diana O'Dell, House Research Analyst, summarized the various questions posed by
Cochairman Burns in the September 23, 1996 meeting, as contained in the printed
information entitled, "Key Issues" (on file with original minutes) . Based on the assumption
that the Committee makes a recommendation to move forward with the concept of a
private workers' compensation group self-insurance program for the State of Arizona, Ms.
O'Deli stated there are certain key issues that need to be addressed. She identified the
key issue categories: authorization, membership, administration and finance.
With respect to membership, Ms. O'Dell stated answers are needed for the minimum
number of employees, the financial condition of each member and number of years in
business, whether the group should be "completely open" or whether it should be
homogeneous or heterogeneous.
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With respect to administration, Ms. O'Dell commented answers are needed on whether the
regulation should be through statute or administrative rules, or a combination of both.
Whether the oversight should be through the Department of Insurance, the Industrial
Commission or a newly-created entity, and what the requirements would be for the
composition of a Board of Trustees and a third party administrator.
With respect to financing, Ms. O'Dell questioned what form of financing would be the
required security, including the types and amounts; if there would be a special guarantee
fund for self insured; if there would be excess insurance coverage and a joint and several
liability clause; and what the frequency would be in determining the accuracy of loss
reports and financial reports and how often those reports should be filed.
With respect to authorization, Ms. O'Dell stated an answer is needed for the question of
what kind of an affect private self-insurance groups would have on the current system,
specifically the State Compensation Fund, and the affect on small business.
While commenting on the importance of directed care and safety program issues, Ms.
O'Dell stated those items are not specifically addressed in the Questionnaire.
Referencing the Questionnaire (on file with original minutes), Ms. O'Dell explained that the
opening paragraph is directed to the persons who will receive the Questionnaire, including
each Committee member and members of the trade association, asking for input and
feedback in order to assess the way in which private self-insurance groups would occur.
Ms. O'Dell stated the opening question, dealing with authorization, asks whether or not the
public believes there should be legislation that would allow private group self insurance.
Representative Conner stated he believes the Questionnaire follows many of the concerns
and key issues expressed by Senator Burns at the previous meeting. He added he
believes the Questionnaire will be beneficial to the Committee in terms of recommending
or not recommending legislation. Representative Conner stated the Questionnaire will not
be necessary if Committee members believe they are in a position today to make any type
of recommendation to move forward with drafting legislation. He added it is necessary to
have the forms completed as soon as possible, allowing enough time for staff to prepare
a summary of the answers that can be presented at the next Committee meeting during
the second week in November.
If the Committee recommends the Questionnaire be mailed out, Ms. O'Dell requested that
it be completed and returned to staff by November 1, 1996.
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Page 3
October 1, 1996
Cochairman Burns asked Cochairman Conner for his thoughts on allowing the Committee
to offer input and suggestions on the Questionnaire form, such as including a question that
may not be on the form, or rewording a particular question that is not clear. inquiring of the
composition of the mailing list for the Questionnaire, Cochairman Burns stated it is
important to make sure everyone who has an interest in private self-insurance groups be
asked to complete the Questionnaire. In conclusion, she stated she would like to see one
question on the form that asks the participants if they would participate in the group self-insurance
program if private group self insurance is allowed in Arizona.
Explaining his reasoning for adding an "Additional Comments" section, Cochairman Conner
stated the Additional Comments section is a "catch all" for any questions or comments not
addressed in the Questionnaire.
With respect to the mailing list of persons and trade associations, Cochairman Conner
stated the database will be comprised of persons who have shown an interest in wanting
to participate in group pooling by attending joint legislative meetings over the past three
years. He added it is his desire to put the Questionnaire into the hands of as many
persons as possible that can provide Committee members with additional input.
Representative Mortensen inquired of the process used to mail out the Questionnaire.
Referring to the Questionnaire form in the physical possession of each Committee
members, Cochairman Conner asked that it be completed and given to staff before
November 1. He stated the mailing process would be handled by staff with respect to
industry persons. Cochairman Conner encouraged Committee members to make known
their thoughts relative to making additions to the Questionnaire or suggestions on how the
Questionnaire form can be more beneficial in collecting necessary information.
Having taken a few minutes to silently read the Questionnaire, Cochairman Conner asked
for comments and questions of Committee members.
As one of the requirements of self-insurance groups, Representative Mortensen asked
Committee members if it would be wise to have an underwriter who underwrites the
insurance for the self-insured program.
Referring to question #9 of the Questionnaire, Ms. O'Dell stated she believes
Representative Mortensen's concern is addressed in question #9. Cochairman Conner
asked Committee members if they were of the opinion that the wording of question #9
addresses Representative Mortensen's concern.
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Ms. Williamson explained that an underwriter is normally considered to be an insurance
company because they are underwriting the risk. In a self-insurance situation, she added
it is a misnomer because there is no insurance company at risk. In self insurance, it is
generally handled through a third party administrator. Ms. Williamson explained that if, at
some point in time, an insurance company might act as a third party administrator, it would
collect the premiums and pay the claims but would not assume the risk.
Senator Peiia asked if it is necessary to complete the Questionnaire if the participant
answers, "no" to the first question of whether or not they believe the Arizona Legislature
should authorize private group self insurance within the workers' compensation system.
If the answer is "no," Representative Conner stated he is hopeful those persons will
respond to the remaining questions and add suggestions of what things could be beneficial
in making group self insurance a good program.
In light of Mr. Klinker's previous testimony on behalf of Farm Bureau members, and
referring to question #3, Mr. Casadei questioned whether the members of the group should
be homogeneous to include all employees from the same general business. Referring to
Mr. Klinker's testimony that Farm Bureau members are in the same general business but
are not homogeneous from a risk standpoint, Mr. Casadei stated he believes the
Committee is looking for similar risks within a self-insurance group.
Representative Conner asked Mr. Casadei to suggest how question #3 could be clarified.
While suggesting that the word "general" could be stricken to make the membership more
specific, Mr. Casadei stated he did not know if that change would be "too limiting."
Expressing caution, Senator Burns stated she believes question #3 is difficult to reword.
By way of example, she mentioned that a homogeneous group could have within each like
group warehouse persons using forklifts as well as receptionists performing duties in an
office, i.e., a very diverse group within companies made up of the same type of employees
considered to be homogeneous.
Discussion followed between Mr. Casadei, Senator Burns and Representative Conner
regarding the need to better identify the business. Representative Conner suggested
identtfying a business by "belonging to a trade association." Further discussion followed.
By making the point in the question that there are homogeneous and heterogeneous
considerations with regard to types of businesses or risk factors, Senator Bums suggested
posing a broader question that would result in the information desired.
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October 1, 1996
Representative Conner posed for the Committee's consideration whether the pools should
be narrowly defined or widely defined and what the better benefit would be to the business
and employees. As previously mentioned by Senator Burns, Representative Conner
questioned what type of restrictions are being sought and what benefits could be gained.
Referring to the construction industry, Mr. Johnson questioned whether the group should
be narrowly defined, such as just concrete layers only, or whether a contractor in a trade
association should include everyone from sheet rockers to tapers that wanted to join the
pool. In summary, Mr. Johnson questioned whether it is the intent of this Committee to
narrowly define the participants in the pools or to open the pools up to the trade
associations. In either situation, Mr. Johnson questioned what restrictions should apply,
if any.
Representative Mortensen stated he did not believe restrictions should be placed on the
group. Concurring with Mr. Casadei, Representative Mortensen stated he does not believe
question #3 is clearly worded. He suggested rewording the question, absent restrictions,
and to open the pool to the entire industry at this point in time.
Senator Burns suggested that staff reword question #3 for review by Mr. Casadei,
Representatives Mortensen and Conner and herself prior to mailing out the Questionnaire.
Representative Conner concurred with the suggestion.
Cochairman Conner asked Representative Mortensen and Mr. Casadei to work with staff
to make question #3 more acceptable.
Senator Burns stated she is hopeful the Questionnaire will produce a great deal of input
and perhaps items which the Committee has not yet considered. She added she believes
the questions will draw out some really thoughtful comments from the participants that can
be helpful and useful to the Committee in making its decision.
Mr. Newsome expressed concern for the amount of time an employer or participant of a
self-insurance group would be required to participate. He questioned whether the
participant should be required to participate three to five years or whether they should be
allowed to "jump in and out" of the plan on an annual basis.
Recognizing Mr. Newsome's question as a good question, Cochairman Conner asked that
the question be included under the membership heading in the Questionnaire form.
Ms. Williamson expressed the Department of Insurance's concern that insurers are not
impacted negatively by any kind of self-insured situation. Commenting that while she
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recognizes the Questionnaire speaks of a special guarantee fund for self-insured groups,
Ms. Williamson suggested it would be useful to send the Questionnaire to the independent
insurance agents who often act for the self insured, as well as some of the independent
agents' insurance company associations. She suggested that a question be included that
would specifically address the issue of whether insurance companies should or should not
be in the same solvency pool as self insureds.
Recognizing Ms. Williamson's comment as a good comment, Cochairman Conner asked
that Ms. Williamson's question be included in the Questionnaire under the proper heading.
Cochairman Conner asked Ms. Williamson if his understanding is correct that she is
suggesting the Questionnaire be mailed to all independent insurance agencies.
Ms. Williamson suggested the Questionnaire be mailed to the lndependent lnsurance
Agents Association.
Cochairman Conner asked Ms. Williamson if she mentioned one or two organizations. Ms.
Williamson replied, "two organizations." She added she believes the lndependent
lnsurance Agents Association is the largest of the two trade associations and will include
most of the independent insurance agents. She volunteered to provide staff with the
names and addresses of contact persons for both organizations.
Cochairman Conner asked Mr. Etchechury to present his findings from conversations with
other states that allow private self-insurance groups.
Because of concerns expressed by Committee members at the September 23, 1996
meeting regarding the impact of group self insurance on existing state funds, Mr.
Etchechury stated he called several states, attempting to quantify the impact of self-insurance
groups on state funds. He referred Committee members to his written summary
of the conversations he had with representatives of the States of Louisiana, Maryland,
Michigan, Minnesota, Montana, New York, Oregon, and Pennsylvania (on file with original
minutes). He explained that with the exception of Michigan and Montana, during the years
1991 through 1993, states had a proliferation of self-insurance groups. Mr. Etchechury
commented that initially, there was an impact on the state funds because the self-insurance
groups were pulling membership from the state funds; most of the self-insurance
groups were political subdivisions that were heavily insured by the state funds. Shortly
thereafter as a result of some reform legislation throughout the states, Mr. Etchechury
stated premium rates increased. He added it was reform legislation that increased the
competitiveness in the industry resulting in competitive rating laws and other reform
legislation. Citing Pennsylvania and Maryland, he stated the competitiveness
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Page 7
October 1, 1996
tremendously overshadowed any impact that the self-insurance groups had on the state
funds.
Mr. Etchechury remarked that the ability to survive with the ability to compete was
proportional in terms of how much flexibility the individual state funds had; the more
flexibility the state funds had, the more they were able to lessen the impacts created from
the self-insurance group and the competitive environment they were in. He added that
those state funds that were not as competitive were hurt significantly such as the State of
Pennsylvania that went from annual premiums of about $490 million to $1 90 million during
that period of time. The State of Pennsylvania is now in the process of building up their
state fund. Mr. Etchechury commented that other states, such as Oregon, that had
significant rate decreases as well as a very competitive state fund, were able to "weather
the storm" and stay competitive.
In terms of regulation of the fund, Mr. Etchechury stated there is no consistency. He added
that the State of Montana has absolutely no financial threshold criteria whatsoever.
Commenting that regulation deals primarily with three or, four areas, Mr. Etchechury
explained that the minimum pool has to have 100 employees; the pool has to be created
for other purposes of self insurance which means it predominantly has to be an
association; and consideration of individual members in significantly based on their
financial background and status with no minimum financial criteria. He added that other
states such as Minnesota have two different types of funds, one for larger companies and
one for smaller companies. He pointed out that the smaller funds have a larger threshold
than the larger funds.
Regarding membership, Mr. Etchechury stated some states allow homogeneous groups,
some allow heterogenous, some have had problems with heterogenous, some have not
had problems with heterogenous.
In summary, Mr. Etchechury stated that his findings determined that each state is little
different with respect to allowing group self insurance.
Senator Burns expressed appreciation to Mr. Etchechury for his research. Referring to Mr.
Etchechury's testimony regarding the importance of state funds' flexibility, Senator Burns
asked if the state funds were treated exactly like private carriers in those states where
group self insurance was working.
Mr. Etchechury replied yes. He added that those state funds were using outside agents
and cited the State of Oregon with 50% of their business coming from outside agents. He
added Oregon paid commissions to outside agents; had the ability to discount claims
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tremendously; and provided a lengthy list of discounts such as a discount for policies in
excess of $1 00,000, a discount for a managed care program and so forth. Mr. Etchechury
stated those state funds that had ability to pick and choose, create plans, retro rating plans
and so forth, did not have a problem such as the States of Michigan and Kentucky.
Senator Burns asked Mr. Etchechury if he knew of the state fund's tax liability in the states
that he conversed with. She added it is her recollection that the Arizona State
Compensation Fund is at a competitive advantage to private carriers with regard to their
tax liability in the State.
Mr. Etchechury replied he did not know.
Mr. Murphy asked Mr. Etchechury if he was able to determine what affect self insurance
groups has on workers' compensation rates.
Mr. Etchechury replied no. Commenting that while most states believed group self
insurance was a good element to put into the mix because they were able to deal with it,
Mr. Etchechury restated that almost each state was independent of itself in terms of the
criteria that gave rise to the self-insurance group. He added he does not believe
conclusions can be drawn in terms of other states' criteria applying to the State of Arizona.
Representative Conner asked Mr. Etchechury whether the Industrial Commission or
Department of Insurance was the regulatory agency for the self-insurance groups in the
states that he interviewed.
Mr. Etchechury replied that some states named the Industrial Commission, others named
the Department of Insurance, and others named the Department of Commerce. He added
that some states had guarantee funds and other did not. Referring to Mr. Newsome's
previous question about group self-insurance participants opting in and out of the program,
Mr. Etchechury stated that as states became more competitive and as the prices went
down, the insurance companies were competing with the self-insurance groups.
Consequently, self-insurance groups were becoming private; the transition from group to
private became a major issue. He added that the larger an employer is, greater is the
likelihood that the larger employer will have people opting out of self-insurance groups and
going into private insurance if the rates are there.
Dwayne Richard, President, Arizona Food Marketing Alliance (formerly known as the
Retail Grocers Association of Arizona), stated he visited with Jim Hopper of the Grocers
Association of Oklahoma (Grocers Association) and wanted to clear up some facts that
were testified to at the September 23, 1996 meeting. Referencing testimony that there are
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24 members in the Grocers Association pool, Mr. Richard stated there are 24 "active
claims" still operating in the pool. He added there were over 200 members in the pool at
the time that it closed down one year ago.
Mr. Richard stated he believes the Grocers Association pool is a prime example of greed -
an organization that put together a pool because they wanted to save money and money
savings was the only thing they looked at. He added that as the pool continued to operate
through the good and bad years, the group failed to take into account what would happen
down the road when all the claims had to be paid, and distributed the leftover monies
among its members. The association came to the point where their debt was greater than
the premiums they were receiving. If a workers' compensation self-insurance pool is going
to take place in Arizona, Mr. Richard cautioned Committee members to make sure there
are mandates on those pools that provide for the financial stability needed for those
members and their employees.
He added that the Grocers Association of Oklahoma is going back to members who have
not been part of the pool since 1989 and assessing them to pay for the outstanding claims.
As an association executive, Mr. Richard stated he would not want to have to do what
Oklahoma is doing. He characterized that scenario as the worst public relations tool. At
the conclusion of going through the court process of assessing all members and suing
them for the money, Mr. Richard stated that if there is still not enough money left over, the
employees or persons not receiving their benefits, have the right to sue "any member" of
that organization, not just "members of that pool."
Aside from the Grocers Association difficulties, Mr. Richard stated there are some good
self-insurance groups operating in Oklahoma including the Restaurant Association. He
added that he believes the Retailers Association is in the process of going private.
As an organization, Mr. Richard stated he is personally excited about the prospect of group
self insurance in Arizona. He added that his organization's decision to participate will not
be when legislation is passed, but rather when the timing is right for the membership and
when the membership believes the organization can be protected by group self insurance.
Mr. Richard described his involvement and experience with a retailers group self-insurance
fund in the State of Missouri. Because Missouri's laws were so strict with respect to
membership and because the laws were so narrowly defined by statute and regulation, Mr.
Richard stated his organization took some poor risks in reaching the premium level
required by law. He commented that retailers were lumped into the same category as
garbage collectors under the strict guidelines of the State. During the first year of
operation, Mr. Richard added there was a death, the organization could not get
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reinsurance, and the fund went broke. He stressed the importance of determining who will
and who will not be allowed to participate in a pool. Mr. Richard cited the State of
Arkansas as another example where the retailers and grocers are combined together into
one organization, however Arkansas law does not allow all of them to pool together for
workers' compensation because of the mixed risks. He stated he is of the understanding
that there is a pool for the grocers in that organization and that the organization is in the
process of establishing another pool for the rest of the membership.
Based on conversations with retailers and grocers in Oklahoma, Mr. Richard stated he has
been told that self insurance has not been a major impad on the state fund, but that the
market place has been a major impact on the state fund; when things get tough and when
there is no competition, the state funds and self insurance both benefit. When the market
becomes highly competitive, such as what is presently occurring in Arizona, state funds
and self insurance groups both suffer. Referring to his communications with Oklahoma,
Mr. Richard stated he has been told it is not a matter of one organization dragging down
the other but rather a matter of competition dragging down both of them.
Senator Petersen asked Mr. Etchechury and Mr. Richard if either of them were able to
ascertain the length of time a group had to stay in the self-insurance arena and whether
the groups were allowed to "jump in and out" of the plan.
Mr. Etchechury stated that while he was not able to make that specific determination in
terms of percentage, he knows for a fact that "that experience'' is ongoing now that the
rates are down in a lot of those state. He added those states are seeing participants opting
out of self-insurance groups and going into the private insurance market.
Mr. Richard stated that while "that experience" was not an issue that was raised in his
conversation with Mr. Hopper, he assumes Oklahoma has some protection. Wlth the
groups' ability to go back to the members who participated in 1989 and are still financially
responsible, even if they opted out of the plan, the group would still have the protection
with that financial responsibility of the members. He added he is of the opinion that a self-insurance
group would want the stability of the fund in order to prevent the draining of the
fund or "cherry picking."
Referencing the Grocers Association of Oklahoma incident, Mr. Casadei asked Mr. Richard
if his understanding is correct that the self-insurance group had to sue former members for
claims of prior pools, as far back as 1989.
Mr. Richard answered that the self-insurance group is taking legal action, under court
order, to hold former members responsible for payment of the claims; the court is
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mandating that the group collect those funds from those members that have not made
payment to the group's fund. He stated he was told it is a "a court-mandated assessment."
Mr. Casadei asked if the Grocers Association had a Joint and Several Liability Agreement
in place with their self-insurance pool.
Mr. Richard replied yes. Adding that even though the pool had a "piece of paper," Mr.
Richard stated the pool had to tum to the courts to enforce the agreement. He commented
that the Oklahoma incident is a "public relations nightmare."
Even with the Joint and Several Liability Agreement, Mr. Casadei asked if his
understanding is correct that the group has to take legal action to get the funding for the
claim costs. Mr. Richard replied yes and added even though the group has the legal right,
the matter of collecting is much more difficult in almost all instances.
Referring to Mr. Richard's testimony regarding the self-insurance group that had the
misfortune of one death, could not obtain reinsurance and subsequently went broke, Mr.
Newsome asked if that group had reinsurance prior to formation.
Mr. Richard replied yes. He stated that while the company had reinsurance through Lloyds
of London, after one and possibly two years later, that reinsurance was no longer available
to the group. Mr. Richard stated the group was unable to obtain reinsurance from another
company and subsequently closed the fund because Missouri law requires that self-insurance
groups have reinsurance.
Mr. Newsome asked Mr. Richard if he knew what the starting premium was for self
retention at that point in time. Mr. Richard stated he did not know the specific figure but
believed the cost was approximately $2 million for a fund to be established 15 years ago.
Referring to Missouri laws governing self-insurance groups, Mr. Allen asked Mr. Richard
if there were any guidelines established with respect to requirements for financial stability
of a particular fund that would permit the group, within a set amount of years, to go back
to previous members to acquire monies.
Mr. Richard replied that while the "Missouri incident" occurred in 1984, he cannot recall the
specifics of the incident. He recalled that it took approximately one year to get the program
up and running. Mr. Richard added that the State of Missouri has just recently begun the
process of reestablishing a workers' compensation fund with better control and a better
understanding of what things can and cannot go wrong.
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Johnny Haggard, owner, Haggard Land & Cattle, Buckeye, Arizona, testifying in
support of self-insurance groups, stated he farms approximately 1,000 acres of cotton in
the Gila Bend area and has actively followed the issue of group self insurance. Referring
to testimony heard at the September 23, 1996 Committee meeting, Mr. Haggard stated he
believes the affect private self-insurance groups will have on the State of Arizona will be
determined by (a) the aggressiveness that the private sector uses in soliciting and
organizing new pools and (b) the response of the State's current system to the demands
of competition. With respect to testimony regarding "bad applesn and "good apples" and
"cherry picking," Mr. Haggard stated he does not believe that issue should be a
determining factor in deciding whether private employers should be given the same equal
opportunity as public agencies in forming pools. Mr. Haggard stated that even though
many farmers are satisfied with the current workers' compensation system, he believes
there are many farmers that would choose to join a pool if given that option. Rather than
focusing on whether or not the current system is broken, Mr. Haggard stated he believes
the real issue is whether the current system is allowing public agencies an unfair economic
advantage over private industry.
Jerry LeCompte, President, Arizona State Compensation Fund, stated he wished to
address Committee members because of the concerns expressed at the previous meeting
with respect to the impact that group self insurance would have on the State Compensation
Fund. He commented that Mr. Etchechuryls research is correct that the major impact upon
state funds and self-insurance groups depends dramatically upon the competitive nature
of that state's workers' compensation system and the kinds of reforms that have taken
place over a period of time. While speaking with experience of reforms in other states, Mr.
LeCompte stated he does not believe Arizona needs a major reform.
Because of the Arizona Legislature and the persons and agencies involved in the control
and operation of the workers' compensation system over past decades, Mr. LeCompte
stated the system is working well. However, he remarked that other states have not had
that success with their systems, ultimately choosing many different kinds of corrections
such as creating state funds, primarily competitive state funds; creating self-insurance
groups without state funds; and creating self-insurance groups and state funds. Briefly
describing the workers' compensation system in Louisiana, Mr. LeCompte pointed out that
with 97% of the state's employers in the assigned risk pool and self-insurance group
insurance in place, a state fund was created despite the opposition of self-insurance
groups. He added that today, the Louisiana program is well on its way of having over 100
private carriers competing for that marketplace. Mr. LeCompte described a similar situation
in the State of Maine where virtually the entire state's employers were in the assigned risk
pool. He added it was reform in Maine that dealt with not only how classifications were
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developed, but how premiums were charged, how claims were accepted or denied and
how they were processed.
Referring to the State of Arizona and market share, Mr. LeCompte stated the market place
is always moving and is not going any one direction. He stated that in terms of market
share, the State Compensation Fund writes more market share in percentage terms. At
the beginning of 1995, he stated the State Compensation Fund had 46.8% of the market;
at the end of 1995, it had 48.4% of the market. He pointed out that the market has now
shrunk, prices have gone down, more employers have chosen group self insurance, and
large deductibles are in place. Stressing the fact that the market is continually changing,
Mr. LeCompte pointed out that even though the market share in total dollars goes down,
the market share goes up in percentage terms.
With respect to tax liability, Mr. LeCompte stated the tax liability issue is a "mixed bag"
across the country. He stated most of the funds are being created with specific language
that says the funds are not an instrumentality of the state that is creating the funds to make
sure that the programs being developed are not necessarily guided by governmental
decisions such as freezing rates, changing benefit levels for or against employers or
employees and so forth. Mr. LeCompte noted that the state funds of Minnesota and New
Mexico pay federal income tax. He added that to his knowledge, all state funds pay the
state premium tax - a premium tax on the premium, in the same way the private carrier
pays premium tax on the premium in lieu of paying a state income tax.
With respect to exemption of federal taxation, Mr. LeCompte pointed out that the states of
Utah, Maine and others are seeking verification from the federal government. He added
he personally believes the federal government's determination will be that those states owe
federal income tax. Mr. LeCompte stated that the State Compensation Fund in Arizona
does not pay federal income tax, nor do most of the older funds created five or six years
ago because (a) the funds "came out" of the creation of the workers' compensation industry
and (b) the funds do not deny any coverage to an employer that is seeking coverage.
Referring to those states with exclusive state funds, he named a few including: Ohio,
Washington, Nevada, and West Virginia.
Referring to the State of Oregon, Mr. LeCompte stated Oregon does not pay federal
income tax, is seeking a federal legislative exemption from federal income tax, and is
asking other states to "join in" on their appeal to Congress for the exemption.
Referring to the State of Michigan, Mr. LeCompte stated that Michigan sold their fund to
Blue Cross/Blue Shield who is now paying the federal income taxes. Because Blue
Cross/Blue Shield has non-profit status and because it bought the Michigan Accident Fund
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from the State of Michigan, a profit-making organization, Mr. LeCompte stated a new issue
has arisen with respect to Blue CrossIBlue Shield's corporate umbrella being non-profit or
profit.
Referring to Mr. Etchechury's testimony about self-insurance groups successfully working
in other states because the programs contain flexibility, Representative Conner asked Mr.
LeCompte to name the things that would be needed by Arizona's State Compensation
Fund, in terms of fairness, if private self-insurance groups are initiated in Arizona.
Commenting that competition in Arizona is relatively fierce, Mr. LeCompte stated the State
Compensation Fund has a simplistic outlook to competition, meaning it will charge the
same price to the same customer with the same loss experience. The State Compensation
Fund does not care whether the applicant is a logger or a fisherman, grocery store owner
or farmer, or a large or small employer because the pricing from the State Compensation
Fund is the same, based on loss experience. Mr. LeCompte discussed the Safety
Incentive Plan initiated by the State Compensation Fund approximately three years ago
to benefit the employer. Commenting that he believes underwriting is a good thing in the
insurance industry, Mr. LeCompte remarked that the State Compensation Fund will write
anyone that comes through their door, with very few exceptions. He added the State
Compensation Fund has the authority to refuse coverage in Arizona. He described the Ice
Capades situation where they were denied coverage.
With regard to marketing, Mr. LeCompte commented the State Compensation Fund is one
of the few state funds that markets their products with their own sales personnel. He
added the State Compensation Fund believes it provides a superior product with its own
personnel. While recognizing that the State Compensation Fund may not have the same
relationship with an employer that a private agent may have by writing the rest of the
insurance needs for that employer, he stated the State Compensation Fund believes it has
the kind of program that brings about the best benefit at the least cost.
In summary, Mr. LeCompte stated nothing comes to his mind directly as a necessary
component that the State Compensation Fund would need in order to compete with group
self insurance.
Representative Conner asked if he understands Mr. LeCompte to say that Arizona is
already flexible and that flexibility is already built into the legislation that gives the State
Compensation Fund the power to do what is needed to compete in the group self-insurance
markets. Mr. LeCompte replied yes.
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With this type of competitiveness in the workers' compensation industry, Mr. Allen asked
Mr. LeCompte if he believed a change like this would provide more competitive rates and
more effective claims review and evaluation with quicker turnaround time.
Commenting that he did not believe it was a given, Mr. LeCompte answered that a change
like this may make claims management processing more efficient but it would not be a
given just because it is available through a group self-insurance program. He added it will
require either third party administration or the ability to be built right into the system.
Commenting that workers1 compensation claims are "long tailed," Mr. LeCompte pointed
out that the State Compensation Fund's oldest claim is a 1935 injury resulting in a death
benefit to a widow, and that it has an active medical treatment on a claim that occurred in
the 1950s. With respect to this change providing more competitive rates, Mr. LeCompte
stated there is a certain amount of rate making that deals with current projections of future
costs.
In his conversations with other state's representatives that referred to the term,
"competitive rating laws," Mr. Etchechury asked Mr. LeCompte to define the term.
Mr. LeCompte explained that the competitive rating laws predominantly deal with the ability
to "file" and "use," meaning that an insurance organization can file a rating plan that is
automatically deemed approved as long as the rates are not egregious in some manner.
He stated that typically rates cannot be excessive, cannot be unfairly discriminatory and
cannot be inadequate. It is left up to the insurers to file their own rates; the state may have
a basic rate filing that is advisory in nature; however, carriers are not limited to use the
rates filed in their section. With respect to Arizona, Mr. LeCompte stated there is a rate
filing and while all carriers have to start with that rate, they may move away from that rate
with prior approval.
Having read the following statement from a construction industry publication: "Some
insurance companies, as well as self insured and captive insured companies, have
managed to reduce their expense ratios to 15% or even lower. This stands in direct
contrast to many large insurers who are carrying expense ratios in the neighborhood of
25% - 35% in premiums," Mr. Johnson asked Mr. LeCornpte where the State
Compensation Fund would be in that scenario.
Mr. LeCompte replied the State Compensation Fund currently runs, and has run, on an
operating ratio of approximately 15%.
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If private group self-insurance legislation is passed in Arizona, Mr. Murphy asked Mr.
LeCompte if the State Compensation Fund has an interest in administering group self-insurance
plans.
Mr. LeCompte replied that the State Compensation Fund's Board of Directors has directed
the State Fund to create third party administration capabilities to take advantage of what
the State Fund believes are possible upcoming excess capacities. He added that the State
Fund believ