Proponents claim bill would reduce state’s workers’ comp premiums

A future legislative bill aimed at revising Montana’s Workers’ Compensation is still in draft form but is expected to be introduced in the Montana Legislature soon by State Sen. Eric Moore of Miles City.

The bill would basically eliminate the Montana State Fund and set up a residual market for high risk workers’ comp cases. The National Council on Compensation Insurance would manage the residual market which has a lot of buying power and will cover high-risk workers.

In a press release, Moore said the bill will create greater competition, thereby giving employers and businesses more choices and “significant reductions in Worker Compensation Insurance premiums.”

Currently workers’ comp rates in Montana are among the highest in the nation.

The draft bill originally was expected to be introduced in late February but the deadline for it to be introduced in this session is Friday.

Currently the State Fund carries 60 percent of the Montana workers comp market, State Fund CEO Laurence Hubbard said in a telephone interview. 

State Fund is an independent corporation that is managed by a board of directors appointed by the governor. “We are created, by law, to serve an insurance purpose, to provide workers’ comp insurance as a guaranteed market,” Hubbard said. 

It cannot deny coverage to anyone who asks, while private companies can. 

In an interview Moore said taxpayers are ultimately liable for any shortfalls with State Fund and Montana is one of about 15 states that still has a State Fund. The others have gone to private insurance and there are only about eight states that have more expensive work comp rates in the nation. 

His bill would make State Fund stop selling policies on a specific date and cut its work force by two-thirds, then combine it with the Department of Labor.

State Fund currently has 290 workers throughout the state, according to Ethan Heverly, State Fund director of government and community relations. 

Moore said State Fund has $900 million in reserves to satisfy potential claims in the future. That will have to remain to pay off claims until everyone who has been covered by it has died, but the interest can be used elsewhere. 

State Fund also has $500 million in “excess reserves,” he said. “And it’s just sitting there. There’s a big disagreement throughout the Legislature and the state as to who owns this money.”

Some say it belongs to the ratepayers. Others say its the taxpayers’ money because they had to bail out the fund once.

The Montana State Fund began in 1915. In the late 1980s it didn’t have enough equity and taxpayers had to bail it out. The new State Fund was started in 1990. 

Hubbard said: “It’s for that very reason (the bailout) that we don’t ever want to be a potential liability to Montana taxpayers, that we have such a strong financial condition, because if we were a weak company that likelihood of having to have some sort of bailout would increase. … That’s why we have the level of equity that we need. 

“We need that equity to ensure that over $900 million in claims liabilities are paid for over many, many years,” he said. “All insurance companies carry strong equity balance sheets, even private companies do, because they need to, particularly with workers’ compensation.”

Moore said Montana should cap the $500 million in State Fund’s reserves, like it did with the Coal Trust, and not touch it without a 75 percent agreement in the Legislature, which he said is “nearly impossible” to get. 

The revenue from investing that money could go toward school infrastructure, general infrastructure or other needs. “There’s all kinds of things we can do with it,” he said. 

Then the state would privatize workers’ comp and create a residual market that every work comp insurer would pay into and that would cover the high-risk policies, which is why state funds are referred to as “the insurer of the last resort,” so high-risk companies can get workers’ comp coverage for their workers, Moore said. 

Creating a residual market would eliminate the need for a state fund, Moore said.

Hubbard had not seen an actual bill at the time of the interview, but disagreed that if the bill passed, it would create greater competition among insurers.

“There are over 70 workers compensation insurance companies licensed in Montana, that have the ability to write insurance if they want to. That’s a lot of insurance companies,” he said. 

“There are 15 or so companies that write most of the insurance, including State Fund,” Hubbard continued. “State Fund is the largest writer of insurance but that is because we are a competitive fund but we also are a guaranteed market responsibility, so we have to insure people that the private insurance companies don’t want to write. That’s the reason we are so large. So the statement that there would be greater competition, I don’t believe is correct.” 

Employers can self-insure, or go with a private company or the State Fund. State Fund has 60 percent of the Montana workers comp market, when you exclude the self-insured companies, Hubbard said.

Hubbard said according to an Oregon Department of Consumer and Business Services study, Montana has the 11th highest premiums in that nation and North Dakota is ranked the lowest, although North Dakota has a state monopoly on workers’ comp insurance, he said.

“So the fact that there is a state fund or not a state fund has nothing to do with the ranking,” he said.

Hubbard said what does in fact influence Montana’s high premiums is the accident frequency in the state, with Montana being twice as high as the national average, and the length of time it takes to get back to work, with Montanans taking longer.

“Those are really the reasons why the costs are so much higher,” he said.

He said: “We are all working harder to get worker compensation costs lower for Montana businesses. In fact Montana State Fund has not had an increase since 2007. We’ve lowered rates by about 39 percent since 2007. And rates today are lower than they were in 1994, and that’s despite wage [increases], inflation, medical costs. So we’re making progress but it’s just getting lost in some of the rhetoric.”

Since the interview, State Fund has proposed another 5 percent reduction in premium rates.  The reduction will have to be approved by Montana’s Insurance Commissioner.

Keith Brownfield owns Victory Insurance Company, which is headquartered in Miles City and provides workers’ comp insurance.

In an interview he said North Dakota is one of four state monopolies yet it has one of the best rates in the nation, but the other three states (Ohio, Washington and Wyoming) have an average cost that is ranked at 26th in the nation, so they are right in the middle of the rate rankings. 

In the beginning most states had monopolistic funds or state funds.

“As time progressed now, you only have four monopolistic states left in the entire nation. Over 30 states have these residual market programs that replace state fund functions. … It’s time we address that problem especially when we’re the 50th highest in 2011 and now 40th highest today. We’re not making any progress here,” Brownfield said.

 

According to 2015 rate figures in the Western states provided by State Fund, California had the highest rate at $3.24 (per $100 paid to employees), Montana was second at $2.10, and North Dakota was the lowest at 89 cents.

Brownfield explained that with Moore’s bill, Montana could move from 40th in the nation to ninth, “if we preform like the last three states that transitioned to this residual market program. … We could save 40 to 22 percent of the work comp premium per year.”

In the 1990s State Fund was suppose to be “an insurer of the last resort but somewhere down the line it became a dominating player in the market,” Brownfield said. 

In an interview Brownfield said there are 2,000 to 3,000 companies that could provide workers comp insurance to Montanans and more than 300 insurance companies that have expressed an interest in doing business here but “it’s not a competitive market. It’s basically a controlled market.

“Basically people won’t come into Montana because Montana is considered a monopolistic state. Whenever you have a monopoly, it’s not a fair trade situation,” he said.

“Victory would be a lot larger of a company right now and we’d be employing more in Miles City if the system were to be changed. The monopolistic process inhibits Victory’s growth as well. … It should be four times as big as it is by now,” he said.

Victory currently employs 25 people.

“Our company is designed to do much more premium. All the people we have there are in anticipation of eventually growing,” Brownfield said. 

Victory opened its doors in 2007, occupying a portion of the fourth floor of the VA building. 

“The people there in Miles City that we have working there have picked up on insurance and are some of the best in the state already. They are hard workers, they are professional … they are exceeding industry standards by doing it much better than anybody,” he added.

Brownfield said the State Fund has consistently had 60-70 percent of the marketplace, which means there’s not much market left for anyone to go after, so the other carriers aren’t going to come to the state. “They can’t competitively compete against the State Fund,” he said. 

Brownfield said State Fund doesn’t have rate regulations or financial regulations, and doesn’t have to pay taxes, premium taxes, income taxes, or tax on their investments.  

Hubbard said State Fund is subject to the same regulatory oversight (financially and in how it conducts business) that private insurance companies are.

“In fact we do have higher capital thresholds under the insurance law than private companies do, just to make sure we don’t become a burden on the state taxpayers,” Hubbard said.

All the surrounding states’ work comp rates are among the lowest in the nation. 

“We’re the highest in the area and there’s no reason for that,” Brownfield said.

South Dakota is half the size of Montana, doesn’t have a state fund and has lower rates. “They have a great business environment in South Dakota,” he said.

State Fund’s Hubbard said: “I think the important message here is the insurance commissioner regulates the insurance industry, including Montana State Fund. If they felt the market was imbalanced, they can take regulatory action to ensure the market is competitive, so we don’t need this kind of bill to achieve that which already exists in terms of insurance regulation in Montana. … Without a Montana State Fund, a lot of small businesses would find their workers compensation goes up substantially — on the average 35-40 percent higher — because they would go into a high risk pool under this kind of proposal.”

“We don’t think that’s good for Montana business,” he added.

Brownfield said: “Eric’s got a great idea (with the bill) and he’s trying to do something great for Miles City and he’s trying to do something great for Montana. Because nationwide Montana, in 2011, we were the highest rates in the nation for workers’ comp. There was legislation passed in 2011 which dropped Montana from 50th to the 40th.”

He said if the rates could drop further, employers across the state would save $60 to $100 million a year.

Brownfield said he believes if the bill passed in the form it’s in, the transition is expected to take a year but people should start seeing the benefits right away.

“From Victory’s standpoint, (the bill) is good for Miles City. We can grow the company and add more jobs. It’s great for the state as a whole, to be more competitive with neighboring states,” he said. “We want people crossing over into our state because it’s fair and they can do business here. … Eric is trying to pursue that goal.”

Brownfield said there are 300 insurance companies licensed in Montana “and are just waiting to do business here” but don’t because of the work comp situation. “And it’s obviously costing our state money. It also inhibits free enterprise and a free market system.”

Moore said he doesn’t know if the bill will pass this session, but explains that often when a new drastic idea is brought up, legislators gasp and vote it down but two years later people are familiar with the idea and are more likely to pass it. 

“A lot of Democrats don’t like it. A lot of Republicans don’t like it. State Fund swings a big stick in Helena. They have a lot of clout,” Moore said.