MONTANA STATE FUND BOARD OF DIRECTORS MEETING

Transcription

1 855 Front Street P.O. Box 4759 Helena, MT Customer Service: or Fraud Hotline: (888-MT-CRIME) MONTANA STATE FUND BOARD OF DIRECTORS MEETING The (MSF) Board of Directors meeting was held in Montana State Fund s Board Room at 855 Front Street, Helena, Montana Directors Attending Elizabeth Best, Chair by phone Wayne Dykstra, Billings Richard Miltenberger, Helena State Fund Staff Attending Laurence Hubbard, President/CEO Verna Boucher, Special Asst to Pres/CEO Nancy Butler, General Counsel Mark Barry, Corporate Support VP Peter Strauss, Operations Support VP Sandy Levya, Director, Enterprise Applications Others Attending Bruce Hockman, JLT Towers Re Mari Kindberg, CSI Adam Schaffer, CSI Jackie Lenmark, AIA Lea Whitford, Legislative Liaison Pat Murdo, Legislative Services Joe Brenneman, Kalispell Lance Zanto, Helena Bruce Mihelish, Lolo Julie Jenkinson, Operations VP Rick Duane, HR Vice President Mary Boyle, Communications Specialist Patti Grosfield, Internal Auditor Dan Gengler, Internal Actuary Andy Metroka, Director, IT Architecture Bob Biskupiak, IIAM Sheila Hogan, Dept of Administration Greg Dahl, CSI Bruce Spencer, PCIA Webb Brown, Montana Chamber Scot Conrady, Legislative Services I. Meeting Preliminaries A. Call to Order Due to extreme weather conditions, Chair Elizabeth Best and Joe Brenneman opted to participate telephonically. Chair Best asked Wayne Dykstra to act as Chair in her absence. Chair Dykstra called the meeting to order at 8:40 a.m. He welcomed everyone on behalf of the Board and noted that the Board encourages and appreciates comments and input from members of the public. II. Miscellaneous Laurence Hubbard, President/CEO A. Miscellaneous President Hubbard thanked Board members and members of the public for attending and noted that a quorum of the Board of Directors was present should there be the need for any Board actions. He noted that this meeting was requested by the Board to discuss the various meetings and discussions that have been held regarding House Joint Resolution 25 (HJ25). HJ 25 is the study of various aspect of the workers compensation system; including the structure of the workers compensation court, subrogation, and most importantly to this Board, a review of Montana State Fund s (MSF) structure. This resolution calls for a review of the State Compensation Insurance Fund as a state agency, the implications of independence on the Montana workers Montana s insurance carrier of choice and industry leader in service.

2 compensation insurance system, and the requirements for separating the State Compensation Insurance Fund from state government. This study has been assigned to the Economic Affairs Interim Committee (EAIC) and there have been several meetings to date at which varying degrees of MSF s separation from state government have been discussed. Mr. Hubbard took a moment to welcome Pat Murdo, Research Analyst for the EAIC, and Rep. Lea Whitford, an EAIC member and one of the Legislative Liaisons to the MSF Board of Directors. He also acknowledged and welcomed Adam Schaffer, Deputy State Auditor and Greg Dahl, Deputy Insurance Commissioner from the Commissioner of Securities and Insurance (CSI) office. President Hubbard said this study was not initiated or requested by MSF but rather is a part of the discussions that evolved from Senate Bill 173 (SB173) which proposed the transfer of liabilities from the Old Fund to MSF during the 2013 Legislative Session. The committee is tasked with reviewing MSF s structure as an organization and MSF is committed to supporting the process. Prior to this meeting, MSF s Board provided guidance to management that MSF s participation should ensure that the results are what is best for MSF customers; the policyholders, injured workers of the state of Montana and MSF employees. In that spirit, MSF management has engaged in various discussions with stakeholders including private insurers representatives, CSI staff and the EAIC. This meeting is to provide the Board an overview of those discussions to date. He said there have been, at times, references to privatization which have made some people nervous because that implies a significant amount of structural change to MSF, but there have also been discussions about points in between. He noted that there has been no meaningful discussion about Montana becoming a monopolistic system like North Dakota or Washington. Discussions have concentrated on the degree to which MSF s current structure should be changed and how MSF should function in Montana as an insurance carrier. He stated that MSF is not advocating privatization and privatization will not be a recommendation from the management team. Early instructions from the EAIC indicated that privatization was not a consideration, though that position appears to have changed. President Hubbard said there seem to be two dimensions to the current discussion; how should MSF be regulated, and to what extent should MSF be connected to state government. He said that as an insurance organization, the political process s influence on the current operations of MSF presents considerable risk to the long term financial health and solvency of MSF. By law, MSF s rates must not be inadequate, excessive or unfairly discriminatory, but ill-advised decisions made in the political process as opposed to the processes of a traditional insurance company put those requirements at risk. He said that the majority of state funds across the country are regulated by that state s insurance department and play by the various rules that the insurance departments promulgate as members of the National Association of Insurance Commissioners (NAIC). Mr. Hubbard thanked the staff of CSI for being open to the consideration of regulatory oversight and noted that MSF is discovering the implications of what that oversight would mean. CSI is learning about MSF s role and public purpose, which creates some issues regarding the scope of regulatory oversight. One question raised by the EAIC and the Administration was, if it s not broken why fix it, why restructure? President Hubbard said MSF is working well, it is financially strong and healthy and serving the needs of its customers very well. He said the question should not be what is broken but rather how can the workers compensation system and MSF be improved to assure a stronger more secure future for the people of Montana for the next 100 years. Page 2 of 31

3 He said that at various times throughout his tenure, his position on this issue has not been to seek regulation under the department of insurance because the Legislature was very supportive of MSF needing to operate like an insurance organization and not a state agency. However, term limits and the loss of institutional knowledge regarding how the Old Fund came about are creating more risk to the long term health of MSF as an insurance organization. The term being used to describe these changes is restructure but the intent is to actually change regulatory oversight from a political process to a regulatory process. President Hubbard stated that he firmly believes that MSF should continue to serve as the guaranteed market for small business in Montana and remain a competitive insurance organization and sees absolutely no reason to change that to a different kind of residual market mechanism. To build the Board s understanding of the issues, alternatives, and consequences of several of the options being discussed, much of today s discussion will focus on oversight and regulation under the insurance code. Input from the Administration will also be provided. He noted that he had hoped that more progress in building consensus would have been made although he remained optimistic that continued discussions and clearer Board direction after this meeting could assist in achieving consensus regarding a number of the issues; oversight, exceptions to oversight and appropriateness of state agency services as requirements. He also noted that he believes that members of the legislature are looking for the Board s position and comments on various issues. Chair Dykstra called for questions and though there were none he said he appreciated President Hubbard s comments in setting the context of this meeting and offering this opportunity for the Board to better understand the issues and the directions being proposed. III. Montana s Workers Compensation Market Bruce Hockman Executive Vice President Specialty Client Development Manager JLT Re (North America) Inc. A. Montana s Workers Compensation Market Mr. Hubbard introduced Mr. Bruce Hockman, Executive Vice President, Specialty Client Development Manager with JLT Re (formerly Towers Watson) and noted that Russell Greig from Towers Watson, is still MSF s consulting actuary - only the reinsurance arm was merged from Towers Watson to JLT Re. He explained that Mr. Hockman s specialty practice has, for many years, been workers compensation. He has consulted with both private and state fund insurance organizations and has particular knowledge of the state fund system and regulatory background in the United States. The United States Workers Compensation Market Mr. Hockman thanked Mr. Hubbard for the introduction. He explained that his intention was to help the Board generally understand the backdrop of the workers compensation market. He said that Montana is not the first organization or state fund to face questions regarding these types of changes and said he would be sharing the experiences of other states to aid in hopefully making the Board a bit more comfortable with this opportunity for change. Trends Mr. Hockman shared a graph that showed the top 20 workers compensation insurance writers in the U.S. market and explained that it is difficult to gather workers compensation information timely and comparisons of data collected nationally do not provide an accurate depiction of the marketplace. For example, the workers compensation marketplace for California is $7 billion, Page 3 of 31

4 whereas the Montana marketplace is $279 million; therefore, California is going to have a greater influence on national statistics than Montana. This table reflects the collective premium of the workers compensation marketplace nationally. There was a six year low point for premium ending in 2010 and the economic downturn during those years is only one of the contributing factors for that. Most businesses operate with the intention of growing their business year after year but workers compensation insurance is not a business that continually grows. It operates in a very mature market and it has been around for 100 years. He also noted that three of the companies in the top 20 list are the state funds in New York, California and Texas and the largest workers compensation markets in the country. Despite the fact that they only write in the state of operation and only write one line of insurance, they are the leading writers in their states. Even the market leaders have different views, from time to time, as to how the business is doing; Liberty Mutual has traditionally been the leading writer of workers compensation but they have begun pulling out of the marketplace in some states and workers compensation only represents 13% of all of its business. Mr. Miltenberger asked what percentage of the overall premium, nationally, is from state fund entities. Mr. Hockman said in 2012 it was about 11.8 percent but said that number can rise five or six points depending on California s share of the market. Before the reforms in 2005, the California market was almost 30 percent of the whole U.S. market which was $17 billion and the California state fund wrote $11 billion of that. Eight years later the California market is about $12 billion and the state fund is writing $1 billion. Mr. Hockman continued with his presentation and noted that the basis of workers compensation is premiums which are generated by business and payroll or employment levels and new business start-ups. A workers compensation insurance policy protects the legal and Page 4 of 31

5 financial responsibilities of the employer and each state establishes their levels of protection in statute. He said we are not starting new businesses in this country; the U.S. economy is extraordinarily mature. He also noted that workers compensation is a North American product and not transferrable to other countries to assist in expansion. He said that at the end of 2007, the U.S. was at a very high water mark for employment but then the recession hit and seven years later, the U.S. is still a million jobs below the 2007 level. Mr. Hockman provided a graph depicting the effects of rates and loss cost changes for the period 1990 to 2013 that illustrated the wide swings for rates and loss costs during that time frame. He said those kinds of up and down shifts create confusion and angst for policyholders because they are so unpredictable, but that is the nature of workers compensation insurance. Market Drivers Workers compensation carriers like MSF are in two distinct and related businesses; they offer insurance and take the risk related to insurance. A Montana employer pays the premium based on their evaluation of risk and experience modifiers and MSF assumes the insurance risk. Any premium that remains after paying out losses on the settlement side is invested to build surplus or equity. Prior to 2007, the majority of workers compensation investments were government secured but due to rate of return being at what was then considered a flat level or rate (4.82 to 5.19), most investments were very conservative and for a short duration, say five years. In 2010 through 2013, when those maturities come due the moneys will have to be reinvested but now the return rate is only 1.44 percent. All of the companies that relied on investment return to provide an additive to underwriting results can no longer rely on positive, growing returns and now must depend on the underwriting side. That means premiums will increase, and in fact, have been increasing for the last two and a half years. Mr. Hockman said this is an incredibly important aspect of the business because many suggest that when the Federal Reserve starts moving completely off their tapering plan, interest rates will rise and there will be incredible fall out in the marketplace. Bond portfolios that were invested at 1.44 or 1.54 percent will be significantly under earned and that will be the next large regulatory and marketplace issue for workers compensation and we are not paying enough attention to it. B. Overview of the State Workers Compensation Insurance Funds History and Purpose Mr. Hockman commented that someone once said among the AASCIF community that if you see one state fund you ve seen one state fund. This sounds silly but it is very true. There is one great scenario between the state funds; they are in it to do business and fulfill a very meaningful position within their state economy. Each state is different, each market is different, legislative mandates are different, the ideas of board management are different and it is important to understand what those differences are. One recent, big change was the advent of state fund s ratings with AM Best which created a brand new pseudo regulator; a financial organization deciding whether or not a state fund s financial operations are sound. In every one of the state fund situations, they are the leading writer of workers compensation in their jurisdiction even though not all state funds have guaranteed market responsibility. Idaho, Minnesota, Missouri, New Mexico and Oregon are the exceptions. Several state funds are rated by AM Best, and four states; Washington, Ohio, Wyoming and North Dakota are monopolistic. Mr. Hockman said that the data will show a couple of companies with extraordinarily high percentage share of the marketplace and offered a comparison of Maine and Montana to illustrate why that situation exists in those two states. He said the correlation between the Maine Employers Mutual in Maine and MSF is very important. These two states share similarities in size of total market; Montana s market is about $270 million and Maine is about $200 million. Geography also plays a pivotal role in establishing growth for a given market and Page 5 of 31

6 both states have limited room for expansion. Both states also experience very cold temperatures and do not boast a large human population as well as being surrounded by monopolistic Canada and other states. As an insurance company considering where to do business, a $200 million or $270 million state would not be that inviting. That strategic business decision is an important distinction, particularly if a company is not just a workers compensation writer but writes personal lines of business as well. Moving into a jurisdiction with a great population increases the ability to sell other insurance products. This illustrates that there are a number of assessment tools that need to be reviewed when determining what a competitive marketplace is. Future Direction and Impetus In addressing the proposed migration of the companies on which he offered comparisons, Mr. Hockman strongly recommended against the use of the term privatization. He said he has read all of the recent legislation involved in altering the state agency status for the various states that are opting for a more competitive market approach and the only real similarity is that nothing in their legislation could possibly be defined as privatization. He said a better definition would be change ; change from the status quo. Mr. Hockman provided some background on Maine s situation and the developments that brought about the current shape of their state fund. Legislative change, particularly in workers compensation, is not for the faint of heart. It is a line of business that affects every employer, every injured employee and their family, the medical community, the legal community, regulators, and legislators, because it is a big program. In Maine, coming out of the 1990s the rates were set and approved by the regulator before the insurance companies could use them. The rates were not increasing as quickly as the costs in the system and the assigned risk pool had a rapidly increasing deficit so insurance companies simply left the state. Remember, it is a small state that does not really make a difference in anybody s income statement or balance sheet so rather than keep losing money, they left. Maine has a mandatory law that an employer must carry workers compensation but no one was willing to provide the coverage so Maine created the Maine Employers Mutual. At that point, they determined a guaranteed market responsibility would be more effective than the assigned risk pool and created a private enterprise that pays taxes and can only write workers compensation and must maintain the guaranteed market responsibility. Maine Employers Mutual is now licensed in 47 states, is the leading writer in Maine and still only does workers compensation. That was the first major legislative initiative in the area of workers compensation and it came out of the failure of the industry and the failure of regulation to allow for a competitive marketplace. Michigan: July 1, 1995 After 80 years of operation as a quasi-state agency, an Attorney General s opinion declared the Michigan Accident Fund a State Agency. Michigan was facing significant budget deficits and Governor Engler put the state fund up for sale. The fund was sold to Blue Cross Blue Shield of Michigan for $265 million. There was a provision that required the new company to maintain the guaranteed market responsibility for a number of years and then a state run assigned risk plan was created. They are now a privately owned for-profit company and operate countrywide. Nevada: July 1, 1999 Nevada was a monopolistic fund that developed a deficit of nearly $2 billion. The state and the fund were having some budget problems so Governor Kenny approved legislation to create a domestic mutual, removing 500 employees from the state payroll. The mutual company transitioned into a for-profit, publicly-traded company and an NCCI Assigned Risk Plan was introduced. They are now operating in 31 states. Page 6 of 31

7 Texas: July 2, 2001 Texas s story is similar to Maine but in a much bigger state with a mandated regulated rate environment which failed miserably. In 1991, Texas formed the Texas Workers Compensation Insurance Fund by legislation. In 2001 the name was changed to Texas Mutual Insurance Company (TMIC), authorizing it to operate as a domestic mutual insurance company and guaranteed all monies belonged solely to the company, with no access by the state, and with no obligation of the state to any liabilities. In 2013, legislation to further TMIC s rights to expand out of Texas and relinquish the guaranteed market responsibility received no legislative action. West Virginia: July 1, 2005 West Virginia is similar to Nevada; they had a $2 billion deficit and the Governor at the time took personal responsibility to get legislation passed and create a more competitive situation for the state fund. As part of the sweeping benefit reform, a private mutual insurance company, Brickstreet Mutual, was formed with $250 million provided by the government. This market opened to competition in July An NCCI assigned risk plan was introduced and Brickstreet Mutual is currently licensed in 14 states. The impetus for this change was debt, increasing costs to businesses and the push to get government out of the business of workers compensation. Oklahoma: July 1, 2013 Oklahoma is one of those examples that was due to the recent privatization effort in the marketplace. This law passed and is to be effective January 1, 2015 allowing CompSource Oklahoma (CSO) to operate as a domestic mutual insurance company, instructing the insurance commissioner to approve CSO s Certificate of Authority. It is independent of the state of Oklahoma and cannot be dissolved but is otherwise subject to Insurance Department regulation, continues as the guaranteed market, and is still tied to the state pensions for existing employees while new employees will go into a 401K type plan. Maryland: July 1, 2013 Senate Bill 745 authorized the 100 year Injured Workers Insurance Fund (IWIF) to become Chesapeake Employers Insurance Company; a private, non-profit, non-stock corporation under Maryland law. There were efforts by the legislature to take capital out of the injured workers insurance fund; some were successful, some were not, but the threat was there. Other than Montana, IWIF was the only organization in the state fund community that was not fully regulated by the insurance department and even after legislation, they are not fully regulated by the insurance department. They must secure a Certificate of Authority and as an Authorized Insurer, be regulated by the Insurance Department, but not for rates, retain insurer of last resort responsibility, their board members must be appointed by the governor, become a member of the guaranty association, may not be converted to a mutual or stock company, be sold or dissolved, and all assets and liabilities transferred to the new entity with no further access by the legislature of surplus funds. Arizona: January 1, 2014 Arizona is the ultimate example of privatization. A major court case in Arizona concerned who owned the surplus. The state wanted it, but the Arizona State Fund said sorry, it is not yours. Arizona State Fund won, but the legislature said fine, if we can t have your money, we might as well send you on your way and they created a two year by-pass to get that done. A law was passed allowing the 95 year old State Compensation Fund of Arizona to become CopperPoint Mutual Insurance Company; a fully private, for-profit mutual insurance company. SCF never had the guaranteed market responsibility and that did not change; all supervision is provided by the Arizona Insurance Department and they are rated by AM Best. They can write multiple lines of business in multiple states and they are fully privatized. Mr. Hockman said if someone Page 7 of 31

8 were seeking a model piece of legislation that could take any fund and fully privatize it, this legislation is that model. The Montana Workers Compensation Market Historical View Mr. Hockman addressed the guaranteed market responsibility. He noted that he tells MSF management that guaranteed market is not a label; it is a responsibility that the legislature has put on a state fund to provide stabilization in the insurance marketplace. The legislature cannot dictate that responsibility to private insurers because they cannot tell them how to invest or what to write. For virtually all types of employment in the United States, workers compensation coverage is required of all employers unless they are qualified to self-insure their liabilities under the law. To assure market availability there are two major facilities provided: state funds or assigned risk or residual market mechanisms. Currently, 19 state funds meet the guaranteed market responsibility including in the three largest markets; California, New York and Pennsylvania. The remaining states have either their own plans or they are administered by the NCCI. Mr. Hockman explained the differences between an assigned risk/residual market approach and the state fund approach: State funds must: treat each applicant for coverage in the same manner, pricing the policy based on the risk presented The term residual does not apply State fund bears all of the financial responsibility Assigned risk approach Applicant must be rejected by the private market as a voluntary write Rate differentials apply depending on the state of operation The voluntary market writers participate in a reinsurance pool to assign proportional financial responsibility. As the guaranteed market, state funds must write all comers regardless of size, business experience duration or nature of the business. An assigned risk plan requires evidence that the private market has refused to write a policy. He said the private market is not very consistent and leaves and re-enters markets, which has caused the residual market to grow and at times, can brand a business as residual simply because their carrier quit writing in their state; eventually making it difficult for the employer to get out of the risk pool State funds have different rating approaches; some have tiers, some have multiple companies to respond to different pricing variations and they have experience modification factors that help in various size accounts so the risk is priced correctly. In an assigned risk approach, financial reinsurance pools share the financial results, positive or negative, among the participants. Mr. Zanto asked Mr. Hockman if exclusive remedy played as strong a role in other states as it does in Montana. Mr. Hockman said no. He said there are unique limited case situations that arise on an individual claim where an employer does create an egregious act, knew of unsafe conditions, was aware for some time and should have known that that condition would have led to injury or disease for the worker, and the state law will allow an action outside of workers compensation. Page 8 of 31

9 A small number of states allow it but it is only in those egregious situations. For the most part, the remedy is workers compensation. Mr. Mihelish said he was not familiar with assigned risk pools and asked how difficult it is for an employer seeking a policy to go through an assigned risk pool approval process. Mr. Hockman said it is not complicated. There is a carrier or carriers that are selected by the administrator of the pool which behaves like a normal carrier and the carrier issues the policy, collects premium and handles the claims. All that is required is evidence of rejection by a private carrier. Mr. Mihelish asked if the premiums are normally surcharged or weighted against the consumer. Mr. Hockman said they are weighted because different rates are applied to different companies doing the same work because of the history of the company, not necessarily the type of work done. Mr. Miltenberger said he felt the assigned risk pool vs. a guaranteed market was a big consideration in the discussion of how or whether to restructure MSF. He explained that his background is the health insurance world and a similar situation occurred in that industry in the 1980s and 1990s where a number of the large traditional health insurance plans in rural states were cherry picking the cream of the crop risks. In reaction, the NAIC developed model legislation in the early 90s that was adopted by most states including Montana that said if you are going to be an insurance company in the small group health insurance market, you have to guarantee issue and guarantee issue at reasonable rates. Carriers that choose to write in a given market are required to remain in the market for five years. He asked if anything similar had been tried in the workers compensation world. Mr. Hockman said it has not, other than with the state fund community because states, by law, require all employers to have workers compensation coverage President Hubbard also responded to Mr. Miltenberger s point and said the healthcare insurance industry s response sounds similar to an assigned risk plan mechanism. With an assigned risk pool, every company that voluntarily writes business has to take their share of responsibility for the residual market, either by direct assignment where they take all losses and premium and bear the risk or by participation in a pool where they share the losses of the pool. Mr. Miltenberger said he was concerned that if Montana did continue on the path of moving toward an assigned risk pool, it might penalize a lot of the smaller accounts. Montana has a lot of timber and high risk industries that are small family businesses and he was trying to work through the ramifications of an assigned risk pool mechanism versus a state fund mechanism. Mr. Hubbard said he agreed and noted that one material difference between the health industry and workers compensation, is that in workers compensation the primary rate driver is not just experience; it can be that the private market simply doesn t write a particular industry, like logging. Mr. Mihelish asked if Maryland had to offer trade-offs during their conversion to a quasiprivate entity to retain the guaranteed market responsibility. Mr. Hockman said no, the issue of moving to an assigned risk plan was managed well by IWIF and so was never on the table. Page 9 of 31

10 The Public Policy Question Mr. Hockman said the public policy question is, from a cost, service consistency and employee safety and relations perspective, what is best for the employer population in Montana. It doesn t have to be any more complicated than that. Mr. Hockman shared data on the workers compensation residual market premium history and percentage of total market. He said he does not believe the markets will ever hit the high percentages that were seen in 1991 again because many states addressed this issue with state funds and guaranteed markets. Mr. Hockman shared a data comparison from NCCI covering the residual markets that showed an increase in the size of the residual market from 2011 to Premium rates increased rather dramatically, and with that kind of increase one would expect the private carriers to be writing more business voluntarily. To further explain the reason that does not happen he used the adage that it is not an issue of whether rates are high or low, it s an issue of whether rates are adequate to make a profit. The accounts really affected are those under $10,000; the small businesses that are the foundation of every city and county across the country. Those are the people who cannot afford to wake up one day and find a 30 percent surcharge on their premium because they receive a non-renewal notice because their carrier is leaving the state. Data for 2013 versus 2012 shows continued residual market premium increases across every market segment and there is still no investment income to rely on so underwriting will have to bear the risk. There are also jurisdictions and companies, like Liberty Mutual, who are taking a different approach to workers compensation than they have been historically and reducing their exposure to the workers compensation line. C. s Role in the Workers Compensation System Mr. Hockman said when developing MSF, the legislature sought to: a) Allow an option for employers to ensure their liability under the Montana Workers Compensation Law b) To do so voluntarily for all Montana employers who have met their financial obligations to the Fund in a self-supporting manner, develop classifications and premium rates consistent with the Montana marketplace based on sound financial and actuarial principles, allow for business to be developed directly with the MSF or through insurance agents, to belong to a licensed advisory organization sharing data and where appropriate utilizing established classification, and to pay dividends when fiscally sound to further encourage safe practices. Mr. Hockman shared data that represented the top company s market share of Montana s $280 million-market from 2008 to He noted that Western National, a Minnesota based company has made an investment in Montana. Though not huge at $1.2 million, it is the first time that we have seen any brand new capital in virtually any market in the US in workers compensation due to the cost of start-up being expensive. Why? National premium has been going up for the past five years but Montana s has decreased due to the major benefit-reform legislation passed in Everything is headed in the right way. Montana is a very highly concentrated market, though not uncompetitive. Geographically, Montana is in a place where pouring capital into this marketplace from an insurance standpoint is a very difficult thing to do. Mr. Hockman said he believed a slide showing personalized automobile or homeowners top insurers would show five or six carriers with a significantly large share of the marketplace due to geography and market scope. Page 10 of 31

11 Mr. Zanto asked Mr. Hubbard if the changes that Liberty made in 2013 would further change the market share reports. Mr. Hubbard noted that Liberty Mutual had consolidated and expanded an assertion of more management responsibility over Liberty Northwest, a subsidiary. Liberty Mutual has been very public about their purposeful entrenchment from workers compensation. Their new CEO, when appointed, began publically commenting that they are reducing their exposure in workers compensation because the combined ratios have been extremely high so it is not a profitable line, nationally, they are reducing the workers compensation business in some states. This reflects Mr. Hockman s point about what drives market decisions - nothing in Montana is driving anything that Liberty Mutual is deciding to do on a national basis. He said there was a company writing in Montana in the 90s and into 2000 that experienced failure in California, causing them to shut down in this state but that decision had nothing to do with the quality of the business that was being written in Montana. Mr. Mihelish asked what percentage of the market is in the association pools or self-funded plans that are not represented by private carriers. Mr. Hockman said due to Towers Watson being called on to analyze a specific market, they do have an assessment on a claim side that self-insurers in mature markets represent as much as 28 to 30 percent of the loss dollars on an annual basis. Mr. Hubbard said that internal analytics done by MSF based on the payroll levels reported in Montana determined self-insured programs and pools to carry about that same range of the entire market. Mr. Hockman noted that an expansion of Boeing is being built by the Helena airport which is good for Montana payroll and good for the economy, but it doesn t benefit the workers compensation market because Boeing is self-insured. Positioning in future markets Montana is really doing well in the area of employment and much better than a lot of jurisdictions. The total non-farm employment reached the highest level in ten years in December Construction employment is at the lowest level in ten years but manufacturing had a small bounce though still below the 2006 peak. Professional services, health, education, and leisure and hospitality are all at a ten year high. The only classifications of business nationally, and proven out in Montana, that survived the economic downturn and continued to grow uninterrupted through that period of time are education and health care. MSF is into its sixth year without any loss cost increases but we are still waiting to see how the major reforms play out. The courts will have views on that over the years as challenges are presented. There is certainly no indication that anything is too terribly broken although 85 percent of MSF s policyholders pay less than $10,000 in premium. This begs the question as to why all of the other states chose to transform from state funds to something other than that. The one decision that they made from the onset of their transformation from a monopolistic state fund into a forprofit enterprise, was to no longer take guaranteed market responsibility. Responding to Market Availability Issues Mr. Hockman said the other contributing factor impacting the economy and the policy level costs is what is happening on the claim side. What safety programs are being offered to eliminate claims in the first place and if an injury does happen, what is being done to help get the injured claimant healthy and back to work. Page 11 of 31

12 Mr. Hockman noted that the percentage of indemnity claims to payroll is decreasing responsibly in Montana and some of that is driven by MSF s largest partner, the state agencies, led by Board member Lance Zanto, increased attention to safety education, and incident prevention. The key to success is to increase efforts to lower the cost of doing business in Montana through whatever mechanism is utilized - a state fund business or a private company. If your policyholder s cost of doing business can be controlled and stabilized, you are going to have that policyholder for a long time and you will be profitable right along with them. Chair Dykstra called for questions from the Board and the public; there were none. Chair Dykstra thanked Mr. Hockman for his comments and insight. IV. Break Chair Dykstra called for a 15 minute break. Chair Dykstra called the meeting to order at 10:44 am and noted that in addition to Elizabeth Best, Board member Joe Brenneman had joined the meeting telephonically. V. Structure Review (HJR 25) Proposed Changes Nancy Butler, General Counsel and Mark Barry, VP Corporate Support President Hubbard addressed the members of the Board and the public and thanked Mr. Hockman for his presentation describing the national market, the dynamics that drive markets and a good overview of assigned risk mechanisms. He said he thought it was a good pre curser to the discussion that the Board would now undertake regarding MSF s role in the Montana workers compensation market. Mr. Hubbard said management firmly believes the role we have traditionally occupied for the last 100 years as the guaranteed market is the appropriate mechanism for serving the employers and injured workers in Montana. He said management does not see a public policy reason why that should change to any other kind of residual market mechanism. He asked Nancy Butler, General Counsel, MSF and Mark Barry, Vice President, Finance, MSF to discuss, (based on the assumption that MSF will continue in the guaranteed market role) some of the regulatory oversight considerations, including what management considers as appropriate exceptions to standard regulatory oversight offered by CSI. He Page 12 of 31

13 also asked them to discuss the state agency issues that have been raised during EAIC work group and committee meetings. He introduced Nancy Butler. A. MSF Role Ms. Butler explained that MSF s structure review is one of MSF s Annual Business Plan Initiatives. There is a project team, Executive Sponsors are Nancy and Mark, and there is a large group of MSF staff doing the core work and gathering information. Ms. Butler shared the map above and explained that the states depicted in blue are the state funds with the guaranteed market responsibility. The yellow states are monopolies. The green states are state funds that do not have the expressed guaranteed market responsibility; they have some type of an assigned risk function. South Carolina is a bit unique, they only insure state agencies and they are not the guaranteed market. And the purple states are the state funds that have been privatized and in essence have become like private companies. And the one red state is Michigan which has been sold. She said the project team has focused on what the role of MSF is and has determined that fulfilling the guaranteed market function is MSF s role and should continue to be so. MSF has filled that role since 1915 effectively and efficiently. MSF concentrated its review by looking at oversight and regulation; however, the EAIC suggested also studying the state agency services and requirements at the same time. During this study, the team has kept mindful of the impacts of any changes on MSF s stakeholders. MSF is structured as a non-profit independent public corporation, established in 1989 when the legislature put the entity under the insurance commissioner s authority. In 1990, MSF was taken from the commissioner s oversight and the current structure was set up. MSF s Board is appointed by the Governor, and in order to remain exempt from Federal taxes, that is one of the requirements that would have to be kept. MSF would like to remain exempt from Federal taxes. There is an IRS law just for state funds and was passed after a number of mutuals entered the market in the 1990s. Exemption requirements are: must be the guaranteed market, must write workers compensation and related coverages, the majority of the board has to be appointed by the Governor or some governmental entity, and the entity cannot be dissolved or the assets must revert back to the state upon dissolution or any kind of repeal of the state fund. Page 13 of 31

14 She said it is also important to MSF that its ability to participate in collective bargaining remain in place for MSF employees. Continuing as a governmental entity serving a public purpose would allow MSF to still fit within that requirement. As a governmental entity, MSF would still be subject to open meeting laws. The biggest difference would be oversight and regulation by the insurance commissioner under Title 33 rather than the current oversight by the legislature. Currently, the Board approves the rates and all things that go into setting a premium for an individual policyholder. That would continue, but the responsibility under Title 33 to file those with the insurance commissioner would be put in place. Montana is a file and use state and as long as any rate we have is not less than the filed loss cost by NCCI, it would be usable. If it were less there may be a review process by the insurance commissioner. There would also be quarterly financial reporting and solvency regulation under the National Association of Insurance Carriers (NAIC) guidelines and an annual report that that would have to be filed. A market conduct and financial examination specific to insurers would be required not less than every five years under Title 33. Because of the guaranteed market component, MSF would need some exceptions from Title 33. Under Title 33 an insurance company may eventually be liquidated because of its financial condition but because MSF would remain the guaranteed market, the possibility of dissolution is not allowable; however, there would have to be a mechanism for the insurance commissioner to have oversight and the ability to call for corrective action if necessary. MSF also believes there should be a non-revocable certificate of authority. A private insurer must apply for a certification of authority to write insurance in Montana and the insurance commissioner can revoke or suspend that certificate if necessary. As the guaranteed market, it is imperative that MSF still exist and there be no uncertainty regarding the revocation of its certificate of authority. MSF also advocates not being a member of the guarantee association. The guarantee association steps in to take care of outstanding liabilities if a private company is liquidated; however, as the guaranteed market, MSF would not be dissolvable. The commissioner s staff expressed concerns that there would be no recourse if MSF s financial position were to deteriorate; however, there are a couple of options being looked at, such as additional reinsurance or a trigger set at an earlier level than would be applied to a private insurer. We have also researched expressly providing in law that the state of Montana is not responsible for the state fund debts and obligations. Although in 1990 the legislature stepped in for the Old Fund and has taken additional steps through the years, there is nothing in law that expressly requires the state to step in should the state fund have an insolvency issue. An additional issue that would require an exception are MSF investments. Under Title 33 there are rules regarding how the Board handles those but MSF s investments under the Montana constitution must be made through the Board of Investments. Changing that would require a constitutional amendment. In summary, the exceptions would be: Not subject to dissolution o Subject to supervision and rehabilitation provision Non revocable Certificate of Authority Not a member of the Guaranty Association o MSF to provide additional financial assurances o Adverse development cover ( insurance protection) and/or o Earlier RBC trigger for CSI intervention Page 14 of 31

15 The insurance department approves tiers for other insurance companies though it is not expressly allowed by law. MSF has enabling statutes for tiered ratings approved by the Board and would like to either make it clear that MSF will still retain the ability to file tiers or it could be put in the insurance code for use by all insurance companies. There are also MSF class code or practice differences from the NCCI class codes, such as one code for agriculture and special codes for state agencies, and MSF would like to be able to continue to utilize those. MSF s experience mod thresholds are set higher than NCCI s program for private carriers in Montana and MSF would like to continue using the higher standard. There would have to be changes to current law, particularly where oversight and regulation are involved, which is currently under the legislature but to avoid duplicative and conflicting oversight that would have to be changed to the department of insurance. The insurance department currently does a rate review but that could be eliminated because they would now have statutory responsibility. MSF does report to the EAIC as a governmental entity and that may or may not be retained. One critical issue is that state entities utilize governmental accounting standards which call for reporting on a fiscal basis but Title 33 calls for statutory accounting and reporting on a calendar year basis. MSF is considered a component unit for the state of Montana and shows up on their financial statements as a component unit with fiscal reporting. A review of being a related organization to state agencies would allow MSF to basically be a note disclosure in those same financial statements and therefore, using a calendar year basis would not create any conflict. Discussions with the Department of Administration indicate they believe MSF could go to a calendar year reporting basis even as a component unit. There are quite a few steps in the accounting and requirements for becoming a related organization. Related organizations basically have a government function but are independent in a number of ways, statutorily. One way is the ability to buy, sell, or lease mortgage property that is a characteristic of an independent entity with a governmental function. Related organization status could be clarified in the law as well. Additionally, the ability to have an assumed business name, approved by the Board, would offer an opportunity for rebranding of the state fund. Chair Dykstra called for questions from the Board and the audience. Mr. Miltenberger asked if MSF were not in the guarantee association and the state was expressly released from MSF s responsibilities, what would happen to the claims of the injured workers if for some reason the fund failed. Ms. Butler said assuming that all the assets would be gone and there were still claims and liabilities, she believed that the legislature, even though not obligated to, might step in. Mr. Miltenberger asked if there was an explicit assumption of liability by the state today or is it kind of vague like it was with the Old Fund. Ms. Butler said there is nothing in the law that would require a specific legislative action. Current law calls for MSF to be self-supporting which is a clear indication that MSF is to collect premium and pay expenses, taking care of itself while still making sure that rates are appropriate. Mr. Barry continued the presentation and discussed the available options that could be used to provide assurance to the regulator as well as the State of Montana that MSF would remain financially solvent. Within insurance regulation, there is a key measure of the capital and Page 15 of 31

16 surplus needs of an insurer based on various risks associated with its operations and that is the risk based capital (RBC) measure. All insurance companies under the department of insurance calculate their financial risk and report that to the department. The risks that are reviewed are: underwriting (reserves and premium), invested assets (valuation, diversification, and allocation), reinsurance, and balance sheets, (contingencies and guarantees.) The RBC has a number of triggers: Company Action Level (CAL) which is two times the Authorized Control Level (ACL) and the insurer submits a plan for corrective action, Regulatory Action Level (RAL) which is 1.5 times the ACL and the insurer is subject to examination, analysis and specific corrective action, Authorized Control Level (ACL) in which the regulator may place the insurer under regulatory control and Mandatory Control Level (MAL) which is.7 times the ACL and the regulator will place the insurer under control. Mr. Barry highlighted the ACL because all the other measures are based off of that but he told the Board that he would be highlighting discussion with regard to the CAL. In 2012, the results in the property casualty industry for about 2600 companies saw no action for about 97 percent of the companies. There was action required for about 2.6 percent of the companies across the nation which indicates that there is not much threat of insolvency in the insurance industry as of To further discussions with CSI and assure that MSF would remain financially solvent while not participating in the guarantee association, MSF offered two different options. The first was to offer an RBC CAL level that would be twice the level of any other insurer that they regulate. That measure is currently 200 percent of the ACL; MSF proposed the level be 400 percent of the ACL. If MSF surplus were to hit that 400 percent level, a report showing the corrective action to be taken by MSF would be required. The other proposed option was to have an adverse development reinsurance cover and based on current reserves would mean an adverse development cover of $66 million. When presented with those two options, CSI said they liked them both because they want to assure that MSF will remain financially solvent under their watch. Mr. Barry provided the depiction below to illustrate that MSF s surplus already meets those measurement levels. He noted that that does not mean MSF has too much surplus; it means that MSF has worked hard to make sure the bills can be paid in the long run. This graph on the next page from the Towers Watson report presented to the Board on the adequacy of MSF surplus during the dividend consideration illustrates in the comparison to private companies that MSF still has a ways to go. Page 16 of 31

17 Mr. Barry explained that for MSF to drop to a level that would require the actions proposed to the CSI would mean loss development for MSF of $233 million or 26 percent. President Hubbard pointed out that there have been periods when MSF has had significant economic adverse development but that 26 percent development is more than MSF has ever experienced and is substantial. Mr. Barry said that discussions with CSI are ongoing and their chief concern is to assure the solvency of MSF; however, financial indications show that MSF is in a very strong position. Mr. Mihelish asked Mr. Barry how much the reinsurance would cost if MSF were allowed to not participate in the guarantee association. Mr. Barry said the estimated calculations of that would cost about $400 thousand per year which is strictly in lost investment income. Mr. Miltenberger expressed concern that if the development were adverse enough the cost for reinsurance could be quite hefty. Mr. Barry explained that the reinsurance he proposed is a one- time purchase, not an annual purchase, but could be adjusted depending on where the losses and development move. He continued his presentation and provided the total estimated additional costs to MSF under Title 33 at about $761,150. Additionally, estimated annual average cost increase spread over five years would be about $700 thousand per year. Mr. Miltenberger asked Mr. Barry what percentage of that $700 thousand represented MSF s budget. Page 17 of 31

18 Mr. Barry said the rate impact for incurring that kind of cost is slightly less than half a point or more specifically point four. Though not a huge impact, the project team has been extremely conservative in its estimates to make sure that projections will cover the impacts. Mr. Hubbard added that he felt this approach provided more regulatory oversight than is currently provided by the legislative process and though there are start-up costs, he saw it as more of a long term investment in the stability of MSF and an assurance to the public that MSF is operating soundly. Though there would be an initial investment he felt it is a small price to pay to have the regulatory aspect of MSF moved to the insurance department where there are rate adequacy requirements and removed from the political arena. Mr. Mihelish asked if this would create a rate increase for policyholders. President Hubbard said the cost would be embedded but for every operational penny that is spent MSF will look for efficiencies and opportunities to reduce costs. He said that he thought the question for the Board was is this an investment in the future or a cost? He said he believed it should be viewed as an investment in the long-term protection of MSF s customers. Mr. Miltenberger asked Mr. Hubbard to provide a brief synopsis of why the Board would want to endorse moving forward with these proposals. Mr. Hubbard said that Montanans do not want another Old Fund and that decades after it appeared to be resolved it is still a thorn in the proverbial side of the public. Chair Dykstra called for additional questions or comments; there were none. Chair Dykstra added that he appreciated the information that was being provided so that he could better understand the compelling issue of the importance of MSF, as an insurance provider, being regulated by insurance experts rather than legislators. He said he was surprised to discover when appointed to the Board that MSF, notwithstanding the Board s participation is really run by the state legislature. He surmised that the legislators, elected under term limits, come to Helena for a short time period and are expected to master very complex issues. He said that he sees this as an opportunity to move MSF in a direction that, as a business man, only makes sense to him. He said he felt the nominal start-up costs are easily balanced by the assurance that MSF will be administered and monitored by insurance experts with career knowledge and expertise and the resources of their peer groups throughout the other 50 states. He said that the presentations today had convinced him that MSF s proposals to move under CSI regulation were sound and appropriate but felt that privatization was beyond what was currently needed for this company. Chair Dykstra asked if there was someone from the Governor s office that would be presenting their position on the current proposals and offered to allow their presentation be moved to that time. Sheila Hogan, Director of the Department of Administration addressed the Board and introduced Sonia Powell, the Budget Analyst for the Department of Administration. She said that currently, the Department of Administration offers MSF financial, risk management and tort defense, healthcare and benefits, print and mail services and state information technology services. She estimated MSF s departure from state government would cost $621,541 in 2014 and $620,983 for FY2015. She said from the administrations standpoint we like you as part of the state family. Chair Dykstra asked for a more specific indication and Ms. Hogan clarified that the Administration wants to keep MSF in the state government family. Page 18 of 31

19 President Hubbard offered his perspective on this development and said that he was hearing that the administration supports MSF s work with CSI to work on regulatory issues and that further work can be done on the Old Fund liabilities but that the administration does not support full privatization. Ms. Hogan said that was correct. Chair Dykstra asked the Board members to chime in on their positions regarding the issues being presented at this meeting. Ms. Best applauded Chair Dykstra for doing a fine job chairing the meeting and said that she thought it was a good idea to remain part of state government and be regulated by the insurance commissioner. Mr. Brenneman said he was still weighing the implications. Mr. Miltenberger said he thought some varying degree of privatization felt cleaner than continuing to be a quasi-governmental entity. He said he thought it might be better to make a more dramatic move and work incrementally over the years to become a private mutual. He was concerned that once this is handed to the legislature, they can do whatever they want with it. He noted that after watching the legislature pass funding for the roads and police in eastern Montana that was then vetoed by the Governor and not overridden by the legislature, he questioned Ms. Hogan about the Administration s support of these efforts to change the regulation oversight of MSF. Ms. Hogan said she has not had that conversation with the Governor; it is his call, so she was not prepared to answer for him. President Hubbard said Ms. Hogan s report that the Administration is interested in keeping MFS in the state family is the first preference indication he has received from the Administration one way or the other. He said he thought that was a good signal to the Board that the Administration thinks it is important to continue on with that relationship with MSF. It also illustrates that there are still a lot of moving parts and considerations of impacts. He said that ultimately, Mr. Miltenberger was correct. The legislature does have the power but he said he thought that there is a bona fide desire of the legislature to get out of the regulation business of MSF. He said there are a number of items that need to be considered in the decision to break away from the services of the state of Montana. MSF policyholders do get benefits from those services. MSF does not pay Federal Income Tax but if the company privatizes MSF would be subject to that and the cost would be covered through increased rates. If the Board directs MSF to pursue privatization, MSF would become subject to Federal Income Taxes, 2.75 percent premium tax and we would be pursuing, perhaps, an assigned risk pool mechanism so the implications of that one decision are very broad. He said in his experience big decisions can have unintended consequences and that in workers compensation, particularly when it comes to MSF, incremental approaches are often well advised. Regulatory oversight is significant in terms of change and significant in terms of what it can do to mitigate the political part of the oversight piece so he encouraged the Board to save the public versus private discussion for another time. Mr. Brenneman said he agreed with Mr. Miltenberger s concerns about the legislature making this decision for MSF. He said watching the legislators in action, there were two things that impressed him, not positively; one was the motives that seem to spark some legislators and Page 19 of 31

20 second, unfortunately, was the astonishing lack of knowledge they have about MSF operations. In light of that, he said his opinion is that it would be far more likely to make things worse than better and he thought we should proceed very, very carefully about bringing any proposals to the present legislature. Ms. Best said she agreed with Mr. Brenneman and said we should all keep in mind that one of the reasons this is a public entity is because workers gave up significant constitutional rights in a supposed quid pro quo in order to have their injuries compensated. She said she thought there were going to be some problems if this agency were taken completely private in that regard. Chair Dykstra thanked the Board for their comments and called for additional input. He then called for comments from the public. Mr. Zanto said privatization is off the table for him simply because the cost to do so, financially and morale wise for the state fund, is enormous. He added that historically, there has been a push for many years from the private insurers that the state fund has an unfair advantage by not being under the commissioner of securities and insurance so he sees this move towards leveling the playing field as positive. He also expressed concern that CSI seems to be questioning the legitimacy of the state agency class codes and he would like the opportunity to further discuss that with the CSI staff. Mr. Mihelish said he supports the direction that Mr. Hubbard and his staff have been pursuing. He said he believes MSF should remain the guaranteed market and that he did not like assigned risk pools. He also said he liked the idea that the legislature would still, in a quasigovernmental situation, be tied to this organization. He said he thinks that keeps them engaged in tort and benefit reforms and that is a good thing. He said he thinks regulation under the insurance department would provide the level playing field that the private carriers want and provide regulatory relief for the legislature. He said he likes the quasi-government model and thinks it is the best of both worlds. Chair Dykstra called for other comments from the Board. Ms. Best said she would repeat her usual refrain that there are many different stakeholders here and she believed the most important are the people who have been injured. Chair Dykstra called for questions or comments from the audience. There were none. VI. VII. Lunch Structure Review (HJ25) Proposed Changes Nancy Butler, General Counsel and Mark Barry, VP Corporate Support Continued Chair Dykstra called the Board meeting back to order. He noted that Ms. Butler and Mr. Barry would be completing their presentation. Mr. Barry clarified that the first part of the presentation covered the change to regulation under the insurance department and this portion would address the services that MSF receives from the state agencies, and the price comparisons and analysis that MSF staff have prepared. The state agency services that MSF currently receives are: o Pension plan o Health care and benefits o Payroll processing o Treasury functions/accounting/banking/warrant writing payroll, Page 20 of 31

21 o o o Risk Management and Tort Defense Insurance Coverage IT Services Procurement/Printing This is not an exhaustive list of all the services received but these are the big pieces and MSF incurs costs for participating in those programs. He said the analysis he would be providing would not include the pension plan, because that is a bit of a different issue, or the cost to the Department of Justice for fraud investigation and prosecution. Mr. Barry said that after the analysis and comparison reviewing non-governmental providers to replace these services, the costs would basically be the same in the aggregate. Chair Dykstra called for questions from the Board and the public. Mr. Barry said the biggest issue is the Public Employees Retirement System (PERS) administered by the Public Employees Retirement Division (PERD) and the estimate of the unfunded liability. To move current employees out of this retirement system would be an enormous cost so discussions have focused on grandfathering current employees to remain in PERS until they retire. PERD has said that there is an employer and employee contribution of about eight percent and four percent of that contribution is applied to the unfunded liability that is currently $3 billion. PERD s actuarial estimate shows a shortfall of $200 million and MSF would be expected to pay that. Chair Dykstra called for questions from the Board and the public; there were none. Ms. Butler said that implementation timelines have been discussed and one point of importance from CSI is that there will be an election at the end of 2016 which may create a change in staff for CSI beginning in 2017, which could mean beginning the process over with a staff in The intent is to propose legislation in 2015 calling for oversight and regulation to begin with CSI in January Rates are determined and instituted on a July 1 basis so the first rate filing would be in the spring of Quarterly financial reporting would begin for the first quarter in For state agency services, if there are changes that are part of the proposed legislation, due to the changes falling in the middle of a budget cycle, those could be effective in January 2017 to give the agencies ample time to budget accordingly. There are policy decisions that would need to be addressed: MSF does not pay premium tax but that is part of being an insurer under Title 33. The legislature has looked at this issue in past sessions but has declined to impose this tax on MFS because it would increase costs for the policyholders. Private insurance companies are subject to punitive damages if their behavior is such that a court awards them. As a government entity, MSF is exempt from punitive damages. That could probably be continued by law as long as MSF remains a governmental entity with a public purpose but the legislature would need to address that determination. They could also choose to adopt the position that if MSF is being treated more like other insurers it should be subject to punitive damages. MSF s fraud program began in 1993 when the legislature passed a bill that MSF was to establish a special investigations unit for detection and investigation of fraud. That bill also required the Department of Justice, specifically the Attorney General s Office, to provide an investigator and a prosecutor for state fund fraud in particular. This includes all types of fraud that may be committed against MSF. This program has been very effective for MSF; however, if MSF is subject to Title 33, the department of insurance also has a fraud Page 21 of 31

22 investigation detection and prosecution program for insurers. Discussions with CSI have focused on the fact that the statutes that are currently in place with the Department of Justice are stronger than those of the insurance department and could be clarified on the types of fraud that can be pursued. CSI is very interested in taking that function over from the Department of Justice. Mr. Hubbard has indicated that MSF is open to discussion on this matter but is looking for a program that provides the same efficiency and effectiveness for MSF. Ms. Butler said that Mary Cochenhour, the MSF prosecutor at the Department of Justice was in attendance and was prepared to address the Board if they desired and offered that CSI may want to address this issue as well. Chair Dykstra called for questions from the Board and the audience. There were none. President Hubbard invited Mary Cochenhour to come up and speak to the Board. Chair Dykstra recommended moving the agenda item number IX to follow Ms. Cochenhour s presentation so that the CSI representatives could leave a little early. Mary Cochenhour, the Assistant Attorney General at the Department of Justice, addressed the Board and said she is assigned to prosecute all fraud cases that originate out of MSF. She explained that MSF s fraud investigation unit reviews the claims or policyholders and determines if the fraud rises to the level of potential criminal action. If so, the case is sent to her office. At Justice, there is a specific agent who investigates the cases for potential crimes and upon completion of the investigation sends the case to Ms. Cochenhour for prosecution. The agent has the authority that any peace officer does, carries a gun, has a badge, and can execute searches. She then determines if there is enough evidence to pursue criminal charges. In the last two years, she has secured 16 guilty verdicts and took two of those cases to jury trial. She said she felt it was her responsibility to make the victim, MSF, whole as best as financially possible. Through the verdicts she has secured, she has also collected restitution. The total sum is over $360,000 and that was up-front restitution, not payments over a period of time. She cited the example of a business owner that misrepresented the type of work that was being performed by his employees and was not paying the correct premium amount so was fraudulent. In the end, that man was prosecuted, plead guilty, and he was ordered to pay $200,000 up front to MSF. She said she is very proud of the work that she does and she would like to continue to do this work. She said she thought this particular type of conduct, you can call it whatever you want, you can call it insurance fraud, you can call it employer misconduct, you can call it white-collar crime but the reality is, it s theft. She said the people who engage in this are criminals and criminals should be handled by an agency that deals in prosecution of criminals. She encouraged the Board that regardless of where these services come from in the future, Justice or CSI, the Board should ask the hard questions and work to maintain the same level of services that are currently provided. She told the Board that the Department of Justice is interested in keeping the duties of prosecuting fraud cases from MSF. Chair Dykstra called for questions from the Board; there were none. Chair Dykstra asked Ms. Cochenhour what percentage of the fraud cases involved employers fraud and what percentage involved injured worker fraud. She said she handles both types of cases; employer misconduct, which involves business owners who fraudulently represent their business or skip out on premiums, and claimant fraud with malingering or working while also collecting a wage loss benefit. She estimated that about 60, maybe even 70 percent, are claimant fraud cases and the other 30 or 40 percent are businesses who misrepresented their business for premium benefits. Mr. Mihelish asked if this service could be provided by both CSI and the Department of Justice. Page 22 of 31

23 President Hubbard asked if a response to that question could be delayed until after Adam Schaffer from CSI had a chance to present CSI s position. He said he thought it was important for the Board to understand a) what Ms. Cochenhour was saying in terms of the current service levels that MSF receives from her office and b) the strengths that Mr. Shafer believes they have to offer with regard to fraud prosecution. Mr. Zanto asked if the 30 to 40 percent of business fraud included any cases against medical providers or prescription drug providers. Ms. Cochenhour said she has not seen any of those cases since she has been there. Mr. Dykstra called for additional questions; there being none, he called for an adjustment in the agenda and asked Mr. Shafer to make his presentation. Mr. Hubbard offered clarification for the Board in that Ms. Cochenhour has been prosecuting on the Attorney General s behalf for the last two years and has really advanced the quality of the program. He said MSF had struggled over the years with this program due to numerous turnovers in the position. Chair Dykstra asked how much total fraud restitution has been collected since the program s inception in the early 90s. Curt Larsen, Assistant General Counsel, MSF said the total is approximately $56 to $57 million dollars in savings. Mr. Schafer, the Deputy State Auditor/Chief of Staff from the Insurance Commissioner s Office thanked the Board for the opportunity to address them. He commended the staff of MSF for their professionalism and the candid yet sometimes difficult discussions while working through these issues. He said the Commissioner comes to this task of how CSI views regulation of MSF as the chief enforcement of insurance policy and state insurance law in this state. CSI feels that if they are going to regulate MSF, they should regulate it as much as they regulate the private insurers. He said they realize there may be some necessary exceptions due to the uniqueness of MSF but CSI believes those exceptions or exemptions should be as limited as possible Mr. Schafer said that the Commissioner s position, at the moment, is that the State Fund should be subject to the premium tax and punitive damages like the other workers compensation insurers in the state. And the Commissioner believes, very strongly, that the workers compensation insurance fraud program should fall under the insurance department s office. As the regulator, they think it makes sense to try and get as much of that underneath their office as possible. He said this position is not a reflection of how the job has been done at the Attorney General s Office. In fact, he said Ms. Cochenhour has done a good job. CSI believes that since they are the insurance regulator, they should have that role. He said they do it for other lines of insurance and have their own investigation unit at the Commissioner s office with seven attorneys who also prosecute cases. He said their office prosecutes securities fraud and insurance fraud; actions against both policyholders and insurance companies on a daily basis. He said their officers may not be peace officers but they do have investigative authorities. Mr. Schafer said this is important to the commissioner and CSI has made this very clear to Mr. Hubbard and his staff and CSI really wants the Board s support when they take this issue to the Attorney General and the legislature because they believe it really does make the best sense. He said that meetings regarding tiered rating issues are on-going and CSI has involved Mari Kindberg, Bureau Chief for rates, and discussions will continue while CSI tries to get a better understanding of where there may be some disagreement. Page 23 of 31

24 Mr. Schafer said CSI is also meeting with its Chief Financial Examiner, Steve Matthews, on issues surrounding the certificate of authority. Their position is that the certificate of authority should not just be automatic. He said the information that they gather from the application process is very important to their staff as regulators and provides a better understanding of the company. He said discussions with MSF have identified some options that may address gathering that same information from MSF. He said the Commissioner does support MSF maintaining its federal income tax exemption status. CSI is working with NCCI class codes and experience modifications and doing their due diligence on working through the guarantee fund issues and the backstop issues. He said that CSI is committed to continuing to work with MSF and other stakeholders to work through differences as much as possible. They appreciate how transparent the process has been and said they have been pretty open and up front on their positions, their dealings with the legislature, and with the Governor s office and they expect and hope that those will continue. Their goal is to be able to use their tools as regulators to insure that Montana consumers interests are protected and there is a fair, level playing field for the industry and ultimately, that they do their best for the people of Montana. Mr. Mihelish asked if the 2.75 premium tax funds the guarantee fund. Mr. Schafer said the premium tax, for the most part, goes to the general fund. He offered to get the breakdown for the Board. Upon realizing that the guarantee fund was a separate charge, Mr. Mihelish said that looking at it from the rate-payer s perspective, that 2.75 is just another add on and there needs to be more discussion on this issue. Mr. Schafer said that CSI is approaching this from the standpoint that if they are going to regulate MSF, then they are going to have as fair and competitive a market as they can with the parameters they ultimately end up setting. Currently, they are looking at premium tax as part of making it fair across the line since the other companies do pay it. Mr. Mihelish pointed out that those other carriers are not the guaranteed market. Chair Dykstra called for more questions from the Board. Mr. Miltenberger asked if the Commissioner s office has a position on MSF s participation in the guarantee association or guarantee fund. Mr. Schafer said they believe there needs to be a backstop of some kind. If it doesn t make sense to go into the guarantee fund because MSF could not access it due to not being able to be dissolved then that is not the way to go. They believe the 400 percent RBC level plus the reinsurance is a positive step that they can hopefully come to support. Mr. Miltenberger said he was struggling with the uncertainty of how injured workers would be taken care of if MSF is not subject to dissolution and not part of the guarantee association, particularly ten years down the road when MSF is under different leadership. Mr. Schafer said those are issues they are still dealing with and ultimately, if MSF is still tied to the state somehow, the state legislature would probably going to have to take action if it gets that bad. Mr. Zanto asked about CSI s funding source. Page 24 of 31

25 Mr. Schafer said they are funded through the certificate of authority fees which are $1,900 per year. CSI does not take any general fund money; they actually give money back. Mr. Zanto asked if CSI hires fraud investigators for their cases. Mr. Schafer said their program works similarly to the program that MSF has; the cases are referred by the insurance company, the investigators prepare cases and those are referred to the legal team who determine whether or not it is prosecutable. Mr. Mihelish asked if CSI was adequately staffed to take on the additional cases that would come from MSF. Mr. Schafer said they would have to evaluate what type of staffing might be needed but felt that was something that could be addressed with the legislature if additional staffing was required. He said currently they have thousands of insurance companies operating in the state and they are confident that they are not overwhelmed and feel they do an effective job enforcing the laws of the state. President Hubbard said the fraud responsibility has become a pretty important part of the discussions and he takes both Ms. Cochenhour s and Mr. Schafer s comments and perspectives very seriously. Irrespective of what prosecutorial process exists, workers compensation insurance fraud is a big deal to the policymakers and policyholders, as well as the public. He said MSF does not mean to suggest any lack of quality or sacrifice of quality by which agency is on point; rather, they believe that the quality of fraud prosecutorial support in existence now is at the highest levels ever and the deterrent effect when those crimes are published is immeasurable. He said he understands both agencies feel strongly about this, but he hopes that discussions continue and that a win/win scenario is sought. He said he hoped this did not become a make or break discussion with regard to support because MSF has made a commitment to the stakeholders to try to achieve consensus because the public is best served when stakeholders find agreement and bring solutions to the legislature instead of dumping problems on them. If there cannot be consensus, so be it, but he asked the Board to reinforce that it is important to MSF that those services be continued at a high level regardless of where they are housed. Chair Dykstra called for comments from Mr. Brenneman and Ms. Best. They both thanked the presenters for their time and information. Chair Dykstra asked for clarification on the premium tax and whether it was CSI s intent to impose that condition, which would amount to $4.5 million, on MSF. Mr. Schafer said yes, if they are to treat MSF like they treat other companies. Chair Dykstra asked if that money would go to the general fund. Mr. Schafer said that Scot Conrady from the Legislative Audit Division provided him with the breakdown which is: 67 percent to the general fund and the other 33 percent to the state special revenue supporting the Children s Health Insurance Program (CHIP) and Healthy Montana kids. Chair Dykstra noted that it seemed as if CSI was eager to have MSF under their review and asked why. Mr. Schafer said that CSI did not ask for this, President Hubbard and the legislature approached CSI and said if there is going to be regulation, it made sense for CSI to be the regulator. Chair Dykstra called for questions from the Board and the public; there were none. Page 25 of 31

26 VIII. Old Fund Options Mark Barry, VP Corporate Support Mr. Barry told the Board that the EAIC, especially the Chair of the EAIC, has expressed a desire to remove the remaining Old Fund liabilities away from the general fund. He said that as of the end of December 2013, there were 788 remaining open old fund claims; 328 have total incurred amounts of less than $250,000 making up 12 percent of the remaining case reserves. 426 claims are incurred between $250,000 and $1 million and they make up 55 percent of the outstanding case reserves. There are 29 claims that are incurred for between $1 million and $5 million which represent 20 percent of the outstanding reserves. There are 5 claims that are incurred for greater than $5 million making up 14 percent of the remaining case reserves. Mr. Barry provided additional data on the Old Fund claims with an age breakdown and claims by accident year. Mr. Barry said there are several actuarial evaluations of the Old Fund available: MSF s consulting actuary, Towers Watson, evaluates the Old Fund every year. An organization called Financial Risk Analysts (FRA), a casualty actuarial firm, that CSI contracted with to evaluate the liabilities of MSF also provided an evaluation of the liabilities of the Old Fund. AMI Risk Consultants, the contracted consulting actuary for the Legislative Audit Division, which has a legal requirement to review our rates and reserves, also provided an evaluation of the loss reserves and liabilities of the Old Fund. All three organizations evaluations provided a wide variety of differences, There is a lot of uncertainty that comes into play in the measurements of the Old Fund. Mr. Barry said that Scot Conrady of LAD authored a report that was provided to the EAIC and the Board that discusses four different options for dealing with the Old Fund. One is to continue as is with the Old Fund costs coming from the General Fund. The second option is a loss portfolio transfer (LPT) which means a third party would agree to take over the liabilities at a cost. One issue for the entity agreeing to take this liability would be pricing the liability correctly so that it addresses the existing uncertainties and assures adequate reserves. Option number three is the adverse development cover which would call for reinsurance coverage to the top end of the actuarial range in case of adverse development above the amount set by the parties negotiating the contract for liability of the Old Fund. The fourth option is a premium tax charged to the state fund with a bridge from the General Fund for those amounts over what the premium tax would cover. For example, the premium tax estimate at 2.75 percent would make about $4.5 million but the Old Fund claims are currently paying out at about $9 million per year so the General Fund would have to cover that difference for a period of years until the Page 26 of 31