STATE OF CHANGE
Garamendi Calls New Directors at State Workers’ Comp Insurer ‘Good News’
By SHERRI CRUZ
California Insurance Commissioner John Garamendi, a Democrat, calls Gov. Arnold Schwarzenegger’s July appointments of three businesspeople to the State Compensation Insurance Fund “good news.”
For the past year, Garamendi has been at odds with the state fund, the largest workers’ comp policyholder in the state with about 262,000 policies.
The fund, a quasi-public insurer that makes up about 60% of the workers’ comp insurance market here, could be doing more to pass on savings to businesses, he argues.
Garamendi oversees private insurers in the state. The courts are deciding what his oversight of state fund is.
“Management in my view was incapable of managing growth,” Garamendi said of state fund during a visit last month to the Business Journal. “Frankly, the board wasn’t paying attention.”
Garamendi’s argument: If state fund isn’t running properly, the whole industry suffers.
State fund in turn has sued Garamendi, arguing the insurance commissioner doesn’t have the power to regulate the insurer.
The spat caught the attention of Standard & Poor’s, which last month released a report taking Garamendi and state fund to task. The state’s workers’ comp insurance market could go into a tailspin just as insurers are returning to California, S & P; warned.
“The commissioner seems to be inviting the same irresponsible behavior that caused the last crisis,” wrote Steven Dreyer, S & P; managing director, in a report. “Each month the rhetoric gets more acerbic.”
S & P; also took aim at state fund: “No workers’ compensation insurer in California can consider itself immune to the fortunes of SCIF, which remains in highly vulnerable condition,” the report said. “If state fund were to fail, private carriers would have to pick up the pieces of a shattered system.”
Some of Garamendi’s other comments:
– Blame for the high cost of workers’ comp insurance can be spread around, including to business.
– Many executives still don’t understand the workers’ comp system and haven’t been able to lower their costs.
– Regulating workers’ comp isn’t the answer.
– Gov. Schwarzenegger “was curious, engaged” on workers’ comp. But “he was in a hurry.”
– SB 899, the workers’ comp reform package signed by the governor in April, is not “self-executing,” meaning new regulations are needed to enforce provisions of the legislation.
– The reform should result in about $5 billion in savings. When is the question.
– Most insurance companies haven’t passed along savings.
– 1993’s reform was a “horrible mistake.”
– The Workers’ Compensation Insurance Rating Bureau, an actuarial group made up of California insurers, is “my cross to bear.” The bureau sets guideline rates for workers’ comp insurers. The bureau filed for a 3.5% average hike in the advisory pure premium rates for new policies written after Dec. 31 due to the increase in benefits from legislation Davis signed and that takes effect Jan. 1.
The Board
The governor’s appointees now make up a majority of the five-member state fund voting board. They join two appointees of former Gov. Gray Davis: Frank DelRe of Long Beach-based Western Insurance Administrators Inc. and James Santangelo, vice president of the International Brotherhood of Teamsters’ Western region. They were appointed last year.
Schwarzenegger’s appointees are: Kent Dagg, executive director of the Shasta Builders’ Exchange Inc. in Redding; Vincent Mudd, chief executive of San Diego Office Interiors; and Jeanne Cain, senior vice president of the Sacramento-based California Chamber of Commerce. Cain also chairs the board.
At least two members express support for state fund and say a drastic overhaul isn’t in order. Building operating surpluses and reserves are critical, they said. Fighting fraud also is a concern.
Here are comments from Dagg and Mudd, and a look at Cain. Cain was asked to comment but declined. The board has had one orientation meeting and is set to meet again this week.
Kent Dagg
Executive director, Shasta Builders’ Exchange, a 750-member construction contractors trade group
Dagg is going from being a state fund customer to director. Members of Shasta Builders’ Exchange pool their premiums to get a 6% discount on workers’ comp premiums from state fund. Shasta does safety training to keep its members’ accident rate as low as possible, he said.
When Dagg took over at Shasta 18 years ago, the group didn’t have a workers’ comp program in place, he said. So he went to the state fund and asked for help.
“I didn’t know anything,” he told them. “They took me under their wings.”
Count Dagg as a fan: “I have found them to be extremely competent. They have gone, in my book, the extra mile.”
For rank and file workers at state fund, talk of possible insolvency and inefficiency has been “sort of demoralizing,” he said.
The workers’ compensation system’s problems began with the open rating system of the early 1990s, Dagg said. Insurance carriers poured into the market, undercutting each other and the state fund, eventually pricing themselves out of business, he said.
“I don’t think it was a good idea,” Dagg said.
“State fund historically has always taken a conservative approach to their business,” he said. “Imagine what would’ve happened if they went bankrupt. They deserve recognition for running a good business.”
Of Garamendi’s criticisms of state fund, Dagg said: “You cannot go through that kind of growth and not have an impact on the rest of the business.”
Dagg said he wanted to be a board member so that he could help the construction industry lower its premiums, and to help injured workers get better care.
Before Dagg came to Shasta, he was an administrative assistant to former Republican assemblyman Stan Statham, now president of the California Broadcasters Association. (Statham moderated the recall candidates’ debate in February.)
“He was a very, very good legislator so I learned a lot from him,” Dagg said of Statham.
Dagg’s goals for the state fund: to increase surplus and reserves.
“The main thing I want to do is to continue to make state fund a solid business,” he said, “and encourage other carriers to come back into the market.”
The board also needs to focus on eliminating fraud, which is rampant in the construction industry, Dagg said.
“Reforms were a good start,” he said.
Vincent Mudd
Chief executive, San Diego Office Interiors
Mudd said he doesn’t see any reason to overhaul state fund’s management.
“They’ve done well with the workload,” he said. “There’s nothing that I’ve seen that there should be a wholesale cleanout of anybody.”
About a year ago, state fund hired consultants to do a review of the operation, he said. State fund got the results six months ago and has been applying the recommendations, he said. Providing better customer service is one of the problems state fund is addressing, Mudd said.
It’s too easy to blame state fund for all of California’s workers’ comp woes, Mudd said.
“It appeared the state fund was the problem because they held so many policies,” he said.
Other insurers have been cherry-picking California customers, Mudd said, leaving state fund with the tougher lot,those with higher rates of accidents and more complex policies.
“Reforms are good,” he said. “They make some incredibly good distinctions.”
Now someone can’t go back to the workers’ comp system for the same injury, Mudd said. The major chiropractic abuse has been taken care of with caps, he argues.
Fraud still is an issue, according to Mudd. State fund will hire more investigators, he said.
“You may never have enough to satisfy everybody,” Mudd said.
Mudd’s goals: improving customer service and expanding reserves and surpluses. He’d like to see the fund get back to being the insurer of last resort, instead of the market’s dominant player.
Businesses shouldn’t expect savings until the effects of the reforms can be measured, Mudd said.
“We can’t pass savings along today for something we won’t see for three years,” he said.
The first thing state fund has to get through is its lawsuit against Garamendi, which has taken up a lot of energy, he said. The court is expected to rule this month on how much oversight Garamendi has over state fund operations.
Garamendi is trying to compare the state fund to a private insurance company, Mudd said.
“You can’t use 100% free market logic,” he said.
“I don’t think there was any malice involved on either side,” Mudd said. “Our missions are not that separated.”
Jeanne Cain
Senior vice president, California Chamber of Commerce
Cain returned to the California Chamber in January after serving as vice president of the American Insurance Association, heading up regional operations for the Washington, D.C.-based trade group.
Before that, Cain spent four years heading up government relations for the chamber. She also was a legislative secretary and deputy chief of staff for former Gov. Pete Wilson.
“Workers’ compensation costs are a significant issue to California’s economic recovery,” Cain said in a statement upon her appointment. “I look forward to helping provide the best product for California employers and workers.”
A year ago, Cain butted heads with Garamendi as part of an insurance industry lawsuit against a regulation covering homeowners’ insurance.
The regulation, struck down in court, showed “a recurring pattern by the insurance commissioner to promulgate excessive and unauthorized regulations,” Cain said in a statement.
