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?