Reform Retro!

To illustrate how the retro program has impacted the contingency reserve, we will next break down the Contingency Reserve into its to main components. These are the Accident Fund Reserve and the Medical Fund Reserve both shown on the table below:

 

Break down of fund reserves into two components (in Millions $)

(data from Industrial Insurance State Fund Preliminary information, L & I, September 15, 2009)

	Accident Fund Reserve	Medical Fund Reserve	Total Contingency Fund Balance
June 30, 2008	776	826	1,602
June 30, 2009	49	495	544
One Year Loss	727	331	1,058
End Reserve as % of Liabilities	1%	14%	5%

 

Thus, things are looking pretty bad for the Accident Fund Reserve. It is losing money at a rate twice as great as the Medical Fund and is within a month or two of being at zero. By comparison, the Medical Fund could probably survive for another year without a rate increase.

 

Here is how the Medical Fund reserve compares to policy target ranges:

The target for the medical reserve is about 25%. It would take $350 million dollars in additional medical premiums to restore the fund to this target. But note that, if this were a private insurance company, their policy for reserve funds is about 50% of liabilities! It would take $1.3 billion dollars of additional premiums to get our medical reserve fund up to insurance industries standards.

 

The danger in having such a low reserve fund is that, if our State suffered a major catastrophe such as a major earthquake in Seattle, there would not be enough money to cover all the claims.

 

 

But the story is even worse for the Accident Fund:

The target for the Accident Fund is 16%. It would take $1.2 billion in additional premiums to reach this target. And to reach the private industry standard of 50% would take over $4 billion dollars in additional premiums.

 

For the combined Contingency Fund reserve, our State Fund Reserve has plunged to only 5%:

Here is how our reserve fund ratio compares with other States:

 

Even a rate of 10.5% (where we were at the end of 2008) put us at the greatest risk of any State in America. Allowing the rate to drop down to 5%, which is where we are at right now, places our Workers Comp program near insolvency.

 

On June 30, 2007, our Contingency Reserve was 2.1 billion. This represented more than 22% of the Basic Plan liabilities. But it was only 10% of the total Discounted liabilities and only 6% of our actual liabilities.

 

Claims Payable (Discounted) versus fund reserves June 30^th balances 2007-2009

June 30 Annual Statement	Accident Fund	Medical Fund	Pension Fund	Total Basic Plan	Basic Plan Assets	Conting Fund * Reserve	Suppleme Pension Fund	Total Discounted Liabilities
2007 Claims	3.4 B	3.2 B	2.6 B	9.2 B	11.3 B	2.1 B	10.5 B	19.7 B
2008 Claims	3.7 B	3.3 B	2.9 B	9.9 B	11.5 B	1.6 B	12.0 B	21.9 B
2009 Claims	4.0 B	3.2 B	3.1 B	10.3 B	10.8 B	0.5 B	13.5 B	24.3 B

* The Contingency Fund Reserve is the difference between the total Workers Comp assets/investments minus the discounted long term “Basic Plan” Claims Payable.  (including only the three “Basic Plan” fund liabilities).

 

Thus, in just the past two years, our Contingency Reserve has fallen from 22% to less than 5% of Basic Plan liabilities -  placing our State Fund at greater risk than any other State in the nation. In order to insure solvency of our Contingency Reserve, we should raise the minimum Reserve to 20% and the maximum to 40% with an mid-range target of 30%. This would place our State’s workers and tax payers at near the national average in terms of exposure to risk.

 

To reach the minimum target of 20% would require an additional $1.5 billion dollars. It is possible to get this amount without raising Workers Comp rates simply by requiring Retro agencies to restore at least half of the $3 billion dollars in overpayments they have been given as a result of L & I errors in calculating the Performance Adjustment Factor.

 

How much would the reserve fund improve if we eliminated retro subsidies?

Year to year retro subsidies currently average is about $120 million dollars. All of the refunds are taken from the Accident Fund Reserve (actually it is taken from Accident Fund claims which has the same effect). If retro employers had put in $80 million in extra assessments instead of receiving $120 million in refunds during the years 2008 and 2009 (because they are in fact slightly more expensive than non-retro programs), then a much different picture would have immerged from the above chart:

Break down of fund reserves into two components (in Millions $)

With more honest distribution of claims costs:

	Accident Fund Reserve	Medical Fund Reserve	Total Contingency Fund Balance
June 30, 2008	776 + 200= 976	826	1,602
June 30, 2009	249 + 200 = 449	495	544 + 400 = 944
One Year Loss	927 – 400 = 527	331	1,058 -200 =858
End Reserve as % of Liabilities	10%	14%	8%

While the medical fund is not affected by retro refund “errors”, the accident fund is. Had retro claims been handled correctly in 2008, the accident fund would start out $200 million higher at $976 million. The 2009 losses would have been $200 million lower (at $527 million). This would have left a balance of $449 million, greatly reducing the urgency of enacting yet another Workers Comp rate fund increase with just two years of equitable treatment of retro claims.

 

A Plan to Restore the Contingency Reserve in the next ten years

During the past 10 years, Retro programs were given an illegal 10% advantage over non-retro programs. The best way to correct this huge problem is to require Retro programs to pay 10% more during the next 10 years. In other words, instead of receiving a benefit of $100 to $200 million dollars a year, as they did for the past 10 years, Retro programs would be required to pay an additional $100 to $200 million per year. Non-retro programs would see no change. Instead, the additional fees assessed to Retro agencies (which are merely recovering subsidies given in error) would be used to restore the Accident Fund and the Contingency Reserve. (Interest from investments would be used to restore the Medical Fund Resserve):

Break down of fund reserves into two components (in Millions $)

(data from Industrial Insurance State Fund Preliminary information, L & I, September 15, 2009)

	Accident Fund Reserve	Medical Fund Reserve	Total Contingency Fund Balance	Reserve to Liability Ratio
June 30, 2007	1,200	900	2,100	22%
June 30, 2008	776	826	1,602	16%
June 30, 2009	49	495	544	5%
June 30, 2010	49 + 200 = 250	500	750	7%
June 30, 2011	250 +200 = 450	600	1,050	10%
June 30, 2012	450 + 200 = 650	700	1,350	13%
June 30, 2013	650 + 200 = 850	800	1,650	16%
June 30, 2014	850 + 200 = 1050	900	1,950	19%
June 30, 2015	1050 + 200 = 1250	1000	2,250	22%
June 30, 2016	1250 + 200 = 1450	1100	2,550	25%