The inadequate rates that many workers compensation self-insured trusts charge may increase effective January 1, 2007, due to a review of rate adequacy being conducted by the New York Workers Compensation Board.

Insurance brokers may advise their clients to cut their losses and choose guaranteed, lower priced alternatives rather than continue to be exposed to the unjustifiable risk of assessments and non competitive pricing of some trusts.

Since December 2005, five trusts were closed, despite multi-million dollar assessments billed to members. According to the Workers Compensation Board Group Self-Insured Trusts Summary of Funding Status, 44 percent of the trusts were still under funded as of October 20, 2006.

Trusts with assets greater than 90 percent of liabilities are considered to have no funding issues, and those with assets below 90 percent of liabilities were deemed to be under funded.

Both the Independent Insurance Agents and Brokers of New York (IIABNY) and the Professional Insurance Agents (PIA) have expressed concern about the status reports not being more specific about the degree of under funding.

Many trusts charged inadequate rates to cover the ultimate development of all expenses, including reserves, administrative expenses, assessments, and reinsurance. According to an October 2 article in workcompcentral, The board reported late last year the states 60-odd self insurance trusts had a combined regulatory deficit of $162 million.

Members are responsible for any shortfalls due to the joint and several liability provision, required to join a self-insured trust. Agreeing to joint and several liability is like signing unlimited blank checks, collateralized by members assets, to pay for any unfunded liabilities and expenses, and worse, those of participating competitors.

The board is reengineering the way it evaluates group self-insured trusts. In a letter dated July 27, 2006, Suzanne Aluise, director of self insurance at the Workers Compensation Board, states that an integral part of the success of a group self-insured trust is the adequacy of the rates charged.

Determining rate adequacy, she continues, is complicated by the long-term development inherent to workers compensation claims. However, with the vast experience we have had in the past with under funded groups, it has become very evident that, in order to avoid significant deficit, it is necessary to base the rates charged on a well developed rate analysis. We are asking every group to file with the board a rate adequacy review which supports the rates that will be charged in the fiscal years that begin January 1, 2007. The rate analysis should be prepared by a qualified actuary, and should clearly identify the breakeven rate and assumptions therein. The filing will be informational for trusts with no funding issues, and will become the foundation for remediation for those trusts deemed under funded.

In the workcompcentral article, Jon Sullivan, a spokesman for the Workers Compensation Board said of these rate analyses, In some cases these rate analyses are requiring trusts to increase rates by as much as 20 percent or 30 percent.

Since most businesses joined trusts for projected savings, they will likely leave trusts for the lower priced alternatives. Unfortunately, members will still be responsible for any unfunded liabilities and expenses incurred during their membership.

New York regulations also require that all trusts are jointly and severally liable for the unfunded liabilities of the other group self-insured workers compensations trusts. The financial strength of healthy trusts would be undermined by the assumption of any unfunded liabilities of weaker trusts.

Based upon the experience of other states, this liability can be significant. In Florida, self-insurance trusts dropped from 60 to 4 during the 1990s, due to numerous insolvencies.

The AIK workers compensation trust in Kentucky closed in February of 2005, going from a small surplus to a $92 million deficit in less than one year. 1,200 members were sued in order to collect the assessment.

Some brokers have taken steps to protect themselves. In some cases brokers have asked clients to sign agreements to hold them harmless if they elect to obtain coverage from a trust, said Jamie Deapo, a spokesman for IIABNY, to workcompcentral.

Their concern relates to the insolvency exclusion of self-insured trusts in the errors and omissions policy issued by Westport Insurance Corporation to members of IIABNY. Westport will not assume that risk for an additional premium.

Members of trusts have not been overly concerned about their under funded status. But increased pricing, to achieve rate adequacy, may get their attention. Fortunately, brokers have risk-free alternatives that are competitively priced, including safety groups and standard carriers.

Adam Friedlander is president of Friedlander Group, a group manager of four workers compensation safety groups for retailers, wholesalers, restaurants and hotels, underwritten by the N.Y. State Insurance Fund. He can be reached at 914-694-6000, ext. 206, or adamf@friedlandergroup.com.