Machado bill pushes transparency at State Fund, but some want more

A bill to overhaul many of the rules governing the State Compensation Insurance Fund (SCIF) appears to have a clear path to passage. In the meantime, however, there are contentious negotiations going on in the Assembly to narrow some of the exemptions granted in the measure.

AB 1145 from Senator Mike Machado, D-Linden, would set new disclosure rules for SCIF. It makes the body subject to the Bagley-Keene Open Meetings Act, one of the key laws guaranteeing government transparency in California. It also allows SCIF to hire several new staff members; it has already posted ads for a general counsel and a chief technology officer.

The bill sailed out of the Senate on a 39-0 vote on May 27. Since the bill landed in the Assembly, insurance industry group's and others have been working to narrow many of the exceptions to the open meetings rules that are currently in the bill. "When the bill goes down to the governor, it will have fewer and narrower exemptions than when the senate passed it," Rakich said.

The Fund is a public/private hybrid that acts as the insurer of last resort for workers' compensation insurance in California. It provides worker's comp insurance for the clients who aren't considered safe or profitable enough that the private sector wants to take them on. SCIF provides such insurance for about one in every four workers in California, covering 230,000 employers. The Fund has 8,000 employees and about $23 billion in assets.

But SCIF operates more like a public agency than a private one-and therefore is subject to different sets of rules than private companies with which it at least nominally competes. These private companies are subject to the financial disclosure rules under Sarbannes-Oxley. This accounting reform act was passed by Congress in 2002 in the wake of the financial scandals at Enron and other companies.

Machado said his bill is intended to create a level playing field between the different insurers.

"It goes beyond what private companies have to do, but at the same time it does provides protection for confidential information," Machado said.

But J. Dale Debber, publisher of the Workers' Comp Executive newsletter and frequent critic of the Fund, said the bill doesn't make some of the most important information public. He wants SCIF to operate more like another huge public/private insurer, the California Earthquake Authority (CEA). Among other differences, Debber said, CEA contracts are public.

"None of the State Fund contracts are public record," said Debber, who heads a company that worked for years under contract to the State Fund. "Not one. There is no contract that State Fund is involved in that they are obligation to tell the public about."

Much of the disagreement centers around sharing the information SCIF uses to set rates. Mark Webb, vice president of government relations for Employers Direct Insurance Company, said that private insurers must file public documents that list not only their rates but the rationale behind them and when they will vary from them. They also must share privacy and ethics policies.
While Sarbannes-Oxley doesn't apply to SCIF, there is a push to make SCIF work under roughly equivalent rules, Webb said.

"It's State Fund leadership who has invoked Sarbannes-Oxley as a model," Webb sad. "We're fine with that. Go ahead and do it."
Insurance brokers also have concerns. These brokers place clients with SCIF just like they do with private insurers but don't have access to the same policy-holder information, said John Norwood, a lobbyist representing several insurance industry clients. He said he was concerned that exceptions to public disclosure around this information would prevent clients from accessing information they would have a right to when dealing with a private insurer.

"We wanted to make sure that exemption wasn't exempting us from being able to get the policyholder information," Norwood said, adding "We worked out some language with them that we seemed to think solved the problem of our agents."

As the bill is currently written, SCIF can also withhold a wide variety of information having to do with policyholder's financial records, litigation, medical records and other data. They can also withhold policies and ratings used to set insurance rates.

Machado countered criticism of the bill by noting that SCIF has been given the thankless task of providing insurance to the employers the private sector doesn't want to deal with. If it published all of the data that its critics are demanding, he said, it would allow private companies to "cherry pick" the clients that SCIF doesn't lose money. This, in turn, would destabilize a system that has spent the last several years trying to get back on its feet.

"You've got to remember, the private sector failed a decade ago," Machado said.

That failure came in the wake of insurance industry deregulation in the late 1990s. Many private workers comp insurers found themselves unable to charge rates that would keep them in business. Several failed and other left the California market, leaving many employers without the workers comp insurance they are mandated to carry by law. SCIF has been around since 1913, but took on a larger role in the wake of the market turbulence of the 1990s.

Patrick Andersen, deputy spokesman at SCIF, noted the Fund does not take any taxpayer money. While private insurers may need to share more information about rates and policyholder data, they're not subject to Bagley-Keene or any other open meeting rules. Given the different parts of the marketplace they inhabit, this works out to as close to a level playing field as you're likely to see in a split market, he said.
"We have to remain competitive with private insurers," Andersen said.
A little too competitive, Debber said. He said that as the market is currently set up, SCIF covers more than five times as much of the market at their nearest private competitor. This, combined with their lower disclosure requirements, gives them an unfair advantage, he said.
"They're not taking the bottom of the market," Debber said. "They compete for the best accounts with everybody else."
But Webb said that the situation with the State Fund has been steadily improving. He pointed to a pair of 2006 bills as proof: AB 2125, a 2006 bill from former Assemblyman Juan Vargas that increased the Insurance Commissioners power of the State Fund, and SB 1452, a bill from Senator Jackie Speier that gave the State Auditor more access to several state agencies, including the SCIF. He called SB 1145 an important next step.

"It's a little bit off the mark, but it still puts State Fund in a better governance posture," Webb said.