The passage of New York States Workers Compensation Reform Act in March 2007 and the ensuing regulatory provisions and implementation have brought to the surface a variety of issues that have been simmering for some time. Not least of these relate to the insurance fund " known alternately as NYSIF. Over the past several months, carriers, producers, and even the Insurance Department have weighed in with concerns, some of long standing, others related specifically to the new legislation and what many see as an increase in the advantages NYSIF enjoys relative to the private market.

The extent to which these distinctions represent an unfair advantage for NYSIF may be subject to debate, but its standing is not: the fund currently accounts for about 37.5 percent of the workers compensation market in New York, or some 194,000 policies, and it is, by its own description, the largest writer of workers compensation insurance in New York.

But although NYSIF is the target of much complaint, it also receives considerable and genuine compliments; and it is not at all clear that, in the end, the sources of contention are entirely within NYSIFs control.

Cecilia Norat, director of state relations for AIG, was, from 1990 to 1996, the executive director of NYSIF and for the previous four years its deputy executive director. Speaking neither on behalf of AIG nor of NYSIF, but strictly on the basis of her extensive experience, she noted that, in fact, the funds competitive status was the subject of a lawsuit, but the court found its role entirely legitimate. Since NYSIF is obligated to take all comers, she explained, the court reasoned that it was entitled to compete for the business that would effectively subsidize the worst risks. Unlike private carriers, NYSIF can surcharge or discount their rate on a risk-by-risk basis, the payoff, Norat said, for being the carrier of last resort.

No Commissions for Producers

While producers have a number of bones to pick with NYSIF, the fact that it does not pay commissions is perhaps mentioned the most.

Norat said that, since the statute under which NYSIF was created requires that the fund provide coverage at the lowest possible cost, the assumption has been that if you pay a commission, you increase your acquisition costs and therefore its no longer the lowest possible.

Bob Lawson, public information officer for NYSIF, confirmed Norats interpretation: It is our mission to ensure that we can give our policyholders an affordable product and to keep the cost down. That is not to say, he continued, that we dont periodically review the whole issue of paying commissions. But up to this point, we have found that there is a cost to that, and that cost would have to be passed along.

Hampton Finer, deputy superintendent and chief economist of the Insurance Department, noted that NYSIF sells primarily direct to businesses, by-passing the agents and brokers altogether. Its probably a large percentage of customers, he said, but not a lot of the premium. It is also the case, many point out, that brokers and agents can, in fact, charge their customers a fee.

But Ellen Kiehl, assistant executive director for government and industry affairs at PIANY, argues otherwise. For one thing, she said, most of PIANYs members who deal in workers compensation insurance place their customers with NYSIF. While their business may be a small percentage of NYSIFs policies, NYSIF policies represent a large percentage of their business. A significant number of [workers compensation] policies our agents write are in the SIF, she said. If the clients go direct [to NYSIF], they miss certain of the advantages a broker can bring them, including periodically shopping that account to get a better rate.

As far as the fee is concerned, Kiehl and others say that, while charging the client at the time of the initial placement is not necessarily problematic, the drawback is that, once you have your client in the state fund, the service obligations go on and on, including counseling a client on the handing of different situations, doing the certificate of insurance if the client does not want to do it, and the like.

The fee is easy to collect at the time of placement, Kiehl said, but its more difficult to collect [later on] " its a separate billing process for the ongoing services. And clients often resist paying. On the other hand, she acknowledged that it is possible for producers to construct a multi-year fee agreement, an arrangement of which many are unaware.

The producers argue that NYSIF effectively uses the producer to capture business without compensation, whereas the voluntary market recognizes that the producers efforts are part of the package and therefore pays a commission.

To the extent that NYSIFs position on non-payment of commissions is a statutory requirement, Kiehl believes that that provision was well-intentioned, but should be revisited by the Legislature. She pointed out, moreover, that both NYPIUA and the state automobile insurance fund pay commissions to producers, which strengthens the contention that NYSIF is depending on statutory language " the letter of the law " rather than on principle, for making its case.

Would it be nice if [NYSIF] could pay a commission? Norat asked rhetorically. Probably, but then the private sector would scream a little more. At least now, the private carriers pay commissions, so they have that going for them: its an incentive for the agent. Otherwise, why wouldnt every agent place their business in the fund?

When is Competition Unfair?

If the questions of commission are subject to statute and/or interpretation, NYSIFs marketing practices are not. Producers, carriers, and others stop just short of describing those practices as predatory. Lawson emphatically refutes that view, saying, If you look at marketing as a whole, I wouldnt say that we are an aggressive marketer. We let people know what we have, that our product is good, that we are backed by the full faith and credit of the state. The only paid advertising we do, he said, are our anti-fraud efforts, to enlist the publics participation.

PIANY members, Kiehl said, report that once [an insured notified NYSIF of its intent to move into the voluntary market], NYSIF makes an attempt to keep the risk. It has its own sales force and is in direct competition with private carriers. They are competitive not only in fact, she said, but in attitude.

N. Stephen Ruchman, past president of PIANY, added, I personally believe that NYSIF is an unfair competitor.

And Jamie Deapo, member advocate and assistant vice president of member products for IIABNY, believes that, far from being the market of last resort, NYSIF is a competitor to carriers and trusts, and they make no bones about it.

For her part, Norat said, My point would be that [NYSIF] should market, but I dont know that they should be allowed to market with such aggressiveness. Yes, she added, its important that they maintain themselves in good financial condition by writing decent risks because they do have to write all the bad ones; but I dont know that aggressive marketing is the ideal.

Finer described the departments position with respect to NYSIFs competition as ambivalent. Look, he said, they are a competitive state fund; they are designed as such. They cant turn anyone down, and they can vie for business.

He pointed out that there are some risks for which only very few carriers, NYSIF included, can provide coverage. We like [NYSIF] for that purpose. Wed rather not have just one company that can write [such concentrated risks]. At the same time, he continued, [NYSIF] does have certain kinds of statutory advantages, and there are certain assessments to which they are not subject. I think they need to moderate the extent to which they sort of exploit some of those advantages, and we get that. We certainly dont want a monopolistic state fund.

Among those advantages are tax breaks. Because NYSIF is a non-profit state agency, it enjoys certain tax advantages: paying premium taxes, but not income tax. And it is subject to a different accounting treatment than the private carriers. Finer explained, NYSIF is reserved for their assessment, calculated on indemnity amount, which accrue as a result of claims, whereas the carriers reserve based on premium.

Nobody in the private sector likes the fact that [NYSIF] doesnt pay [all the same taxes], Norat said. Then again, she pointed out that because workers compensation is not that wonderfully profitable a business, the income tax level is not tremendous.

No one argues against competition per se. Its outstanding that the superintendent wants to create an open, competitive market, Deapo said. But thats not going to work when you have competition from a fund that has special rules that make them competitive right out of the gate. Were saying create a level playing field.

And the department evidently has no argument with that, at least in principle. Finer said that, while its often productive to have a competitive state fund, the department is concerned when [that fund] uses its competitive advantages to undercut the private carriers in various ways.

It could be said that, if NYSIF is, in fact, attempting to undercut the commercial market, it has not been notably successful. Lawson said that, over a 20-year period, NYSIFs market share has probably dipped as low as 25 percent and risen up to as much as 40 percent, but since about 2000, it has varied by only a few percentage points. That does not suggest that NYSIFs competition is driving private carriers out of the market. And Lawson pointed out, further, that NYSIFs largest market share coincided with the virtual collapse of the self-insured trusts.

The Proverbial Straw

And then theres the Aggregate Trust Fund (ATF), into which private carriers are obliged to make lump-sum payments to cover permanent partial disability (PPD) awards. NYSIF and self-insured trusts are exempt from that requirement, leaving them in control of their reserves.

Exactly how it came to pass that NYSIF and the self-insured trusts are exempted from payments into the ATF is a matter of much speculation and off-the-record comment. What matters is that those exemptions, from just about any perspective, significantly disadvantage the private carriers.

One provision [of the workers compensation reform legislation] that is outright discrimination against private carriers is that we have to deposit all our reserves in the ATF, Norat said. The state fund does not; the self-insureds do not. Its outrageous.

Depending on whom you ask, the purpose of the ATF is either to provide safety and security for injured workers " in other words, protection against a carriers insolvency " or to increase the speed and success of negotiated settlements. Neither argument holds up strongly to close scrutiny, and neither explains the exclusion of the self-insured trusts from the provision.

The department doesnt believe there are valid solvency concerns that need to be addressed by this type of collateral or these types of payments, Finer said. For a carrier that is supervised by this department, wed be sort of saying that we are unable to do our job. And we dont believe that. We think we do a terrific job of supervising the carriers.

The Liquidation Bureau, he noted, is busy, and there are companies in run-off. That happens, he said, but we dont think its workers compensation thats doing it.

Norat offered to play devils advocate: I would say that, if the logic behind [the ATF] was that the security and safety of the injured worker requires that the money be there, you could leave [NYSIF] out because the state stands behind it, so it will never be out of money. Why, then, she asked, leave the self-insured trusts out, but require payments from the likes of AIG?

Finers response is that the self-insureds are required to put up money elsewhere that [is] kind of equivalent to an ATF contribution. He acknowledged that carriers have made the case that the self-insureds do not always put up the full amount required and that they often get waivers. Historically, in the past, its true that the compensation board, which regulates the self-insured trusts, has been lax, he said. But in recent years theyve gotten much better about making sure that the self-insureds are posting sufficient funds for claims.

Still, he said, The department is not enamored of the ATF provision. Its hard for us to see that theres a security rationale for that fund, [and] I dont know that theres an insurance reason that we can point to.

With regard to the argument that the possibility of having to make large payments to the ATF would encourage settlements, Finer described that as a blunt tool. To the extent that it does encourage settlements, he said, there could be potential benefits to the system, but theres too much bad with the good.

If the purpose [of the ATF] is to encourage settlements, Norat asked, why leave out the state fund and the trusts? Its the same process. And for the carriers, as many have pointed out, once they have made payments to the ATF, the money is gone.

Not quite so, Finer said. Under the ATF provision, it is at least theoretically possible for a carrier to seek an adjudicated modification to the award, in which case there would be a refund. On the other hand, he also noted that the way the law is written, an injury that occurred prior to March 13, the effective date of the reform act, but not yet classified is eligible for lifetime benefits.

You basically have a situation, he said, where the claims are grandfathered in for the purposes of the law, but the ATF contributions are not. As consequence, the carrier would have to pay into the ATF the net present value of a lifetime award: It could potentially be a big bite, Finer said. It just seems kind of inconsistent and arbitrary to us.

Norat has stronger words to describe it: It looks like a direct attack on the private carriers. And while Finer agreed that the ATF needs to be looked at in a serious way, Norat said bluntly, This is not over, I think. Were not going to just sit back, were going to try to fix this somehow.

Between a Rock and a Hard Place

What distinguishes so many of these issues, of course, is the extent to which they are not directly within the funds control. However much NYSIF may benefit from its statutory protections and requirements, unless the underlying legislation is changed or new legal interpretations imposed, it is what it is.

What NYSIF is, in many respects, is a necessary and well-run carrier. Keep in mind, Norat pointed out, that the benefit to the private sector is that because we have a state fund, New York has no residual market. A lot of other states have residual markets that we all either have to write on an assigned risk basis or be assessed to pay for those risks.