Lumberman's Underwriting Alliance: WTF?

There are a lot of news stories recently about a small Workers Compensation insurer, Lumberman's Underwriting Alliance, being put into "rehabilitation" by a Missouri judge, putting the Missouri Department of Insurance in charge of figuring out if the company needs to be liquidated or if it can be saved. The news stories explain that Lumberman's was a specialty insurer of companies in the forestry industries, with only about 3,000 policyholders.

These news reports then go on to explain that Lumberman's was brought down when a large PEO insured, TS Employment, failed to properly fund collateral obligations, went into bankruptcy, and left Lumberman's holding the bag for a lot of Workers Comp claims.

The news stories also note that TS Employment served another "defunct staffing company" named Corporate Resource Services. A lot of people outside the insurance industry might be forgiven if the phrase "WTF?" formed in their minds when reading these news stories, but in truth this illustrates some disturbing developments in the field of Workers Compensation that regulators do not seem to have addressed very well.

How exactly did it come to pass that the Missouri Department of Insurance will now take control over a small insurance company with a home office in Boca Raton, Florida that was imploded by insuring a PEO based out of New York?  A PEO, by the way, that covered yet another staffing company. And the news reports indicate that most of the 6,000 open claims for Lumberman's Underwriting Alliance are from California. This would seem to give new meaning to the saying about a tangled web.

And this insurer, that historically specialized in underwriting those in the forestry industry, instead underwrote a large deductible policy for an employee leasing company in New York that apparently covered a lot of California businesses. This may be because the PEO, TS Employment, covered another staffing company, this Corporate Resource Services. No wonder things blew up, this arrangement was more complicated than anything Rube Goldberg ever designed.

And yet, all of this is, sad to say, not all that unique in our modern insurance industry. Large Deductible Workers Comp policies, where the policyholder is supposed to reimburse the insurer for all claims under the deductible limit, can produce these kinds of megawatt clusterfucks when wishful thinking and avarice outweigh sound underwriting.

Mind you, I have no idea what actually happened behind the scenes at this particular megawatt clusterfuck--but one can tell, just from the scant details in the press, the general outlines of how this mess may have happened.

The combination of an employee leasing company, which provides Workers Compensation coverage for hundreds of different client companies, with a Large Deductible policy that leaves the insurer responsible for paying claims even if the policyholder defaults on the required reimbursements, can leave an insurance company holding a very large and expensive bag at the end of the day.

Why exactly would an insurance company that specialized in the forestry industry even want to underwrite a large employee leasing company--an employee leasing company that contracted to extend WC coverage to a different staffing company, for heaven's sake--is beyond me.

But I am sure an explanation will eventually be uncovered, as regulators belatedly sift through the rubble.

Here's a question someone might want to ask: why the hell was this ever allowed in the first place?

The answers, at least as this writer sees them, would be:
the insurance industry has succeeded in largely getting itself pretty much effectively unregulated by getting state insurers to first buy into the idea that a largely unregulated marketplace would foster price competition for policyholders, and then by getting state insurance regulators starved for staff and budgets. So there is no one really looking over their shoulders as they chase cash flow and throw old fashioned underwriting caution to the wind.

Then you get the combination of PEOs, which are largely unregulated, and Large Deductible Workers Comp, which seduces some insurers with thoughts of making these large accounts essentially "cost-plus" contracts, where claims costs are just a pass through to the policyholder, along with claims adjusting fees and other charges. No more worries about underwriting losses, because the claims are the responsibility of the policyholder.

Except when they're not, as in this case.

Employee leasing can provide valuable services to employers, with cost savings from economies of scale, when done right. But nobody really oversees these PEO operations, so you can get a fair number of companies that seem like financial miracles for a while, but which are actually ticking weapons of mass financial destruction. And it's difficult to tell the difference between a well-run PEO and one that is running on borrowed time.

This is hardly the first insurance company to run aground by insuring the staffing industry--and it is far from the largest--but it should serve as a warning sign to just how crazy things can get in an industry that is supposed to be cautiously conservative, an industry that the public relies upon to maintain a reliable Workers Compensation insurance system.

If things could go this wrong at Lumberman's, what might be going on at other, larger insurers, where the impact of these kinds of bad decisions might be disguised for much longer?

Here We Go Again

So, our new Illinois governor wants to make further "reforms" in Workers Compensation in the Land of Lincoln. Alas, his approach appears to be pretty much confined to making injured workers get less when they are hurt. It's an approach that has been tried before, as in, the last time (four years ago) when Illinois enacted Workers Compensation "reform".

This time, Governor Rauner wants to change things so that workers are not eligible for Workers Comp if injured while traveling to and from work.  Ummm, governor, I don't actually think that is a major cause of current Illinois Workers Comp costs. Because right now, workers are not eligible for Workers Comp in Illinois if injured driving to or from work. Workers now are only covered by the act when driving to or from a client, as part of their work duties.

So what are the more serious proposals our governor is advocating? You know, the ones that aren't actually already in place?

Rauner wants to put the burden of proof onto workers that their injury stems from work, and that workplace exposure was the main cause of the injury. Now, mind you, a lot of injured workers already say that insurance companies screw them over, taking their sweet time paying medical bills and for lost wages. So just imagine how really hellish life will be for injured workers once the insurance companies can really dick them around (sorry, didn't mean to use a technical insurance term, but sometimes it must be done) and tell them that the worker has to prove that the back injury that's crippling them was caused mainly from work and not from, say, mowing the lawn or picking up their grandkids or that fall down the steps fifteen years ago. No potential for abuse there, governor.

Rauner also wants to cut back some more on what doctors and hospitals are paid. Which was already done four years ago, and didn't produce the rate-reduction nirvana proponents predicted.

That brings up an interesting point, one that Rauner doesn't talk about. For most employers, the cost of Workers Comp isn't really driven directly by the cost of claims---it's driven by the cost of insurance.

That's because most employers, save all but the largest, have to buy insurance for their Workers Comp liabilities. And we've rather completely de-regulated the cost of Workers Compensation insurance over the last twenty five years, and completely wrecked the ability of the Department of Insurance to enforce what rate protections are still in place.

I have pointed out to the Illinois legislature how some simple steps could serve to reduce Workers Compensation insurance costs for many Illinois employers. Once those ideas were presented, all that could be heard was the sound of crickets, and then the legislators returned to their script.

That noise you hear in the background? It's the sound made while grinding political axes. You have to listen hard, though, because it's hard to hear over the sound of groaning business people who have to pay their latest Workers Comp insurance bill, and the moans of injured workers who are trying to get those insurance companies to pay claims on a timely basis--if their injuries are even reported.

I know someone, a construction worker, who failed to report a serious hernia injury from his work out of fear his small employer would not take it well. He ended up using his regular health coverage instead, with deductibles and co-pays. It shouldn't be that way, but for people who have to work for a living, that is reality sometimes.

People who work for a living, and small businesses who have to scramble to pay sometimes outrageous Workers Comp insurance bills--those don't seem to be the kinds of folks Governor Rauner is very worried about. When you've made your fortune as a cutthroat financier, the worst you have to worry about is paper cuts. And the Workers Comp rates for financial services and office work are still very, very low. So I don't think he and his advisers have much in the way of a real appreciation for the realities that a lot of folks in Illinois face on a regular basis.

Realities like my client who saw his Workers Comp insurer write him a policy with an initial premium of $2,500.00, only to have the insurer later bill him for $3,000,000.00 (and file suit against him to try and get it.)

Or my client, the folks who operated a petting zoo, whose insurance company sought to re-classify them as a rodeo (with a resulting huge increase in premiums). Or all the construction companies facing being locked out of bidding on new projects because the insurance industry changed the formula for calculating experience modifiers, and suddenly their mods have jumped over 1.00 without there being any real change in their loss history.

Those weren't problems caused by workers with exaggerated claims, or doctors gouging the system--they were problems caused by an unregulated insurance industry.