June 23, 2005

Beacon Mutual

Marc Comtois

Governor Carcieri has been "vexed" over Beacon Mutual's plan to expand beyond Rhode Island state lines. Why is the governor upset? Well, Beacon Mutual was started by the State to ease the skyrocketing Worker's Compensation rates in the late '80's. By all measures, Beacon Mutual has been successful and is on solid financial footing. (For both a more in-depth history and proof of Beacon's strong financial standing, see this PDF document). This is good news for the State and quite a return on a $5 million investment of public money. However, Beacon seems to be angling to turn that public investment into private gain while stating otherwise. With a surplus of around $100 million last year, it returned around $2 million back to its policy-holders. Why not more? And why does it want to take steps that would essentially turn it into a private, profit-making entity with little or no government oversight? But I'm getting ahead of myself. What follows is a recap of what Beacon Mutual has been trying to do and what the Governor and others are doing to try to stop them.

The debate started last year when Beacon Mutual decided to create another company, Castle Hill Insurance, in hopes of being able to underwrite insurance in other states, though it was a little more than that.

Beacon Mutual Insurance Co., Rhode Island's largest workers' compensation insurance writer that was formed in 1990 as a state fund, is taking steps to write coverage outside of the state.

The Warwick company has put up $20 million to license and create a subsidiary, Castle Hill Insurance, which will sell workers' compensation insurance to cover out-of-state employees of Rhode Island companies, according to Cynthia Lawlor, Beacon Mutual chief financial officer.

Beacon Mutual had been making available coverage for employees who work in other states through a fronting arrangement with another insurer, Fairfield Insurance, but after Sept 11 Fairfield indicated its unwillingness to continue that arrangement, Lawlor told Insurance Journal. So Beacon is looking to replace that capacity by creating its own insurer.

The company's plans ran into a snag last fall at the insurance division within the Department of Business Regulation, which required the company to agree that its expansion would be limited to employees of companies from Rhode Island and would not include any other employees in other states.

Director of Business Regulation Marilyn Shannon McConaghy told Insurance Journal her agency has "serious issues" with further expansion by Beacon Mutual.

The company also sought legislation authorizing its expansion but gave up on that after some opposition. Lawlor said the insurer was seeking the legislation in order to make the process of getting licenses in other states easier but it does not feel a legislative change is necessary for it to proceed with its plans.

"We're going to test the law," she said.

Lawlor says the insurer does not have a problem limiting its expansion to out-of-state employees of the state's employers as requested by state officials, at least for now. "It probably makes sense to go forward in other states at some point," she added.

Unfortunately for Beacon, other states weren't sure if the scheme would pass muster and have been reluctant to accept Castle Hill.
To get around restrictions on the sale of coverage out of state, Beacon created a subsidiary, Castle Hill Insurance. But other states have refused to license Castle Hill because of "regulations that prevent companies that are state controlled from conducting business out of state," [Joe] Solomon [CEO of Beacon Mutual] told the committee.
Thus, the new attempt to legalize Beacon Mutual's expansion.
... proponents of the bill say it had its genesis when Carcieri proposed removing Beacon’s tax exemption from next year’s budget.

Losing the state tax exemption could cost the company about $3.1 million state officials said, but Beacon President Joseph Solomon said that might also jeopardize the company’s federal tax exemption, "so we could be talking $6 million."

Solomon said that when the governor proposed eliminating the exemption, the company had two options - fight it, which Solomon said he didn’t think would be successful, or "find a way to make up those costs." [The new budget did indeed remove Beacon's exemption.]

Beacon was successful in getting their bill through the Senate, no doubt the lobbying helped, though some senators objected.
Beacon "was created to provide the lowest priced workers' comp possible," said Sen. Marc A. Cote, D-Woonsocket. "That's being eliminated. . . I believe we're straying from the original intent" of the law.
Meanwhile, the vote is still pending in the full House, though it passed through committee by a vote of 10-2. At this, the Governor really raised his hackles.
"The governor fears that this bill could be a disaster for Rhode Island business," Carcieri's deputy chief of staff wrote in a letter to House committee chairmen. The legislation "might further restrict competition and increase Beacon's monopoly in workers' compensation insurance in this state."

The letter compared Beacon's marketplace might in Rhode Island with that of health insurer Blue Cross & Blue Shield of Rhode Island, saying, "yet in Beacon's case we are considering legislation that might further restrict competition and increase Beacon's monopoly . . . "

If approved, the legislation would rewrite the law enacted by the General Assembly in 1992 to create a state Workers' Compensation Insurance Fund. The fund was to provide Rhode Island employers with low-cost coverage for on-the-job injuries to their employees. At the time, private insurers faced with skyrocketing costs for workers' compensation coverage were leaving the state.

But don't take just the Governor's word for it.
An analysis of the House bill conducted at the request of the DBR by the national consulting and actuarial firm Milliman raised questions about the freedom the bill would grant Beacon in setting rates.

While other states have allowed individual carriers to create sub categories based upon the rates developed by a national rate-setting organization, the bill would "appear to give the corporation (Beacon) a vast amount of rating freedom." That, in turn, "raises some equity issues" with respect to other carriers in the market, according to the Milliman report.

The language of the bill also makes it unclear, the Milliman report stated, as to whether it would allow Beacon to write other lines of insurance besides workers' compensation. "This would be a major step," the report said, "that should be studied carefully."

The governor and the director of the DBR asked for more time to study the bills.

Among the concerns raised are:

The legislation could increase Beacon's competitive edge in the marketplace.

It could remove regulators' ability to find rates "excessive."

It could restrict regulators' authority to hold hearings on rate filings.

It could restrict public access to rate filings.

It could weaken public participation on Beacon's board of directors.

It could allow Beacon to "take great risks in new out-of-state markets."

It could allow Beacon to set rates "according to an unproven and still secret formula."

It could remove the state and DBR's influence over the corporate governance and organization of Beacon.

It could eliminate Beacon's role as "a public corporation established for the good of the people of Rhode Island."

Joseph Solomon has offered up a more detailed explanation (available from Providence Business News via Google cache).
The proposal before the General Assembly would scrap most of the company’s legislative charter and write a new one that, as Solomon put it, makes The Beacon “like every other insurance company.”

Gone would be the language defining the company as a nonprofit independent public corporation, and its purpose as ensuring “that all employers in the state of Rhode Island have the opportunity to obtain workers’ compensation insurance at the lowest possible price.”

Gone would be the governor’s power to appoint four of The Beacon’s seven board members, as well as the state labor director’s seat as an ex officio board member.

And gone would be any restrictions on where The Beacon operates – it can now do business only in Rhode Island, with a limited exception – and what lines it can sell.

At the same time, however, The Beacon would forgo not only its tax exemption, but also its exclusion from the state workers’ comp insolvency fund, which competitors have long said gives the company an unfair advantage.

(Former R.I. Department of Business Regulation Director Marilyn Shannon McConaghy, however, used to argue that the insolvency fund in particular couldn’t afford to include The Beacon, because the company’s liabilities, if it went under, would overwhelm the fund.)

The only part of the company’s original mission that would remain is its status as the insurer of last resort. But to offset the expense that comes with that, Solomon said, The Beacon needs “rate flexibility” – and for that, it’s seeking two things: the right to structure its rates independently from the National Council on Compensation Insurance’s regular loss-cost filings, and the right to “file and use” its rates, without a public hearing and with only 30 days for the DBR to raise any concerns.

The NCCI, an independent industry group, regularly analyzes the loss history and trends in each market and suggests how much carriers should charge each type of employer to ensure they’ll be able to cover the loss costs. Each carrier then sets its rates by filing a proposed “modifier” factor that builds in operating costs as well as any discount programs it offers. The NCCI’s filings are subject to public hearings and extensive scrutiny by the DBR and the attorney general’s office. The modifier filings are just reviewed and approved by DBR staff.

In January, the DBR approved a revised version of the NCCI’s latest filing calling for an average 20.2-percent cut to workers’ comp rates in the state – but as much as a 50.3-percent cut for some employers, and hikes of up to 11.9 percent for a few.

The Beacon has not adopted the NCCI guidelines, and with this legislation, it’s hoping to get clearance to file its own set of guidelines, relying on its extensive database of Rhode Island claims. Solomon said the NCCI’s system is “antiquated” and not an accurate predictor of local loss costs. As an olive branch to competitors, the bill would allow other carriers to also use The Beacon’s guidelines as an alternative to the NCCI’s.

As for the change in the company’s board membership, Solomon said it’s not only a matter of letting policyholders choose the people who run their insurer, but also essential to clear the way for The Beacon to do business outside Rhode Island.

The company has no interest in establishing a major presence out of state, Solomon stressed, but it serves many employers who have a presence outside Rhode Island. The Beacon now meets their needs through some “extremely expensive” fronting arrangements, Solomon said. But Castle Hill, the company’s long-term solution to the problem, is having trouble getting licensed in various states because The Beacon’s board membership qualifies it as a “state-controlled” entity, which many states won’t allow to operate within their borders.

Yet Neal, at the governor’s office, said loosening The Beacon’s state ties and eliminating its state-defined mission would contrast sharply with what legislators did last year with Blue Cross & Blue Shield of Rhode Island, another state-created entity. It took almost a year and a lot of collaboration to develop “a good package of reforms” for Blue Cross, Neal said. If The Beacon is going to be redefined, he argued, it should be done with just as much care.

Solomon claims that Beacon isn't looking to grow substantially out of state, but Lawlor (in 2004) seemed to intimate that such plans were in the future. This doesn't smell right. This "corporation" was set up using the public's money, but those running it seem to want to change it into something else. This is worth keeping our eye on. If Beacon Mutual is so successful, they should lower their rates even further, which would help to attract business to Rhode Island, reduce the burden on Rhode Island employers, and facilitate economic growth. It seems that the only economic growth that BM is interested in now is their own.

FYI, here are the members of Beacon Mutual's Board of Directors:

Mr. Sheldon S. Sollosy, Chairman, President Manpower, Inc.of Providence

Mr. J. Thomas Chellel, Vice Chairman, President, AFSCME Council 94

Mr. William C. Clifton, Esq., Secretary/Treasurer, Attorney-at-Law, William C. Clifton &Associates

Marvin Perry, Acting Director, Rhode Island Department of Labor and Training

Mr. Henry Boeniger, Government Relations Specialist, NEA Rhode Island

Mr. John Holmes, President, Holmes Consulting Group,Ltd.

Mr. Carl I. Hayes, President, C.I.Hayes,Inc.

Mr. George H. Nee, Secretary Treasurer, Rhode Island AFL-CIO

Mr. Joseph A. Solomon, President &Chief Executive Officer, The Beacon Mutual Insurance Company

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Beacon Mutual is one of about 25 state-sponsored workers compensation insurance companies. It is one of a small cohort of these companies that were created in the early 1992s in response to crises in their respective states. The crises have gone away. There is a legitimate question as to why these insurers should continue under their original charter, with all the attributes associated with state sponsorship, rather than completely to privatize. The state funds of Maine and Utah in recent years have expanded into other states, using subsidiaries.

Posted by: peter rousmaniere at July 16, 2005 3:20 AM