IF THINGS GO VERY WRONG

Bay Area residents were awakened last night to a 6.0 earthquake in Napa.

News reports indicated that Napa County’s old courthouse was among the downtown buildings sustaining major damage.

For many years, California has been lucky in not having an earthquake that caused widespread loss of life.

But what if a major earthquake struck during work hours, killing or severely injuring scores of workers in a facility operated by one of California’s public entities?

Such a scenario is clearly not out of the question, as schools, courthouses, hospitals, municipal administration buildings and other large structures are located in at-risk fault zones up and down California.

Such structures could also be at risk for a terrorist incident. Hospitals could be at risk for a severe infectious disease incident.

Many California public entities are self-insured. How would they deal with a widespread catastrophic incident?

Thinking about this made me turn to a recent study that is currently posted on the CHSWC site for public comment. The study, titled “California Public Sector Self-Insurance” (link to the study can be found at the end of this post) was produced by Mark Priven, an actuary with Bickmore Consulting.

Priven’s study examines many aspects of public sector workers’ comp insurance in California, including a section on solvency.

Recent municipal bankruptcies of cities such as Vallejo and Stockton have not resulted in defaults on workers’ comp obligations, but there has been some rising concern about the adequacy of public-self insurance plans. In his public presentation to CHSWC, Priven noted that he had not delved into the specifics of how workers’ comp claims were handled in those high-profile municipal bankruptcies, though it did not appear that there had been any default on workers’ comp obligations.

Further clarity on that would probably be worthwhile, but those bankruptcies had nothing to do with any catastrophic disaster.

SB 863 added Labor Code 3702.4 which required that CHSWC conduct a study of public self-insured programs.

California public entities use a variety of means to handle claims. Some self-administer their own claims. Some are members of Joint Power Authorities (JPAs). Some use third-party administrators (TPAs).

According to the DWC website, some 1.9 million California workers are covered by self-insurance. This includes 4,3337 California public agencies.

The Bickmore study authored by Priven is tough reading for laypeople not accustomed to actuary-speak.

The study doesn’t provide bright-line answers regarding how self-insured public entities would handle claims arising out of a widespread catastrophic event. That was not the specific focus of the study. It would probably be worthwhile for CHSWC and California’s Office of Self-Insured Programs to develop more data on how self-insured public entities would weather catastrophic losses.

But the analysis does make a number of recommendations that may help shore up public entity self-insured programs.

Here is what Priven’s study concluded on the issue of solvency:

There is inconsistency in the manner in which public sector self-insurance activities are accounted for and reported;
It is difficult to compare actuarial information to the entity’s financial statements;
Very little financial and actuarial information is provided to OSIP on self-insurance activities; and
Without clearer and standardized financial reporting, the public employees and regulators such as OSIP are unable to evaluate the solvency of self-insured programs. Individual public self-insurers commonly comingle multiple lines of coverage in one fund or account for their activities in the general fund. JPAs maintain separate fund accounting.

Moreover, Priven notes that:

“Many public entity self-insurers obtain an actuarial estimate of the liability for unpaid losses despite the fact that there is no regulatory requirement to do so. The standard for actuarial studies was developed by the Governmental Accounting Standards Board in the early 1990s (referred to as GASB 10). For the actuarial reports we reviewed, it was difficult to compare the independent actuarial estimates to the financial statements. This is often due to the actuary using claim data that is valued as of a date that does not coincide with the entity’s fiscal year end. As a result, the actuary’s estimates of unpaid liability will include projections of payments and case reserves for the period from the valuation date to the fiscal year end, but the financial statements will reflect actual activity through that date. ”

Under California law, private self-insured entities must be members of the California Self-Insurers Security Fund, which is set up to pay claims of insolvent private self-insured companies. Insurers participate in CIGA, the California Insurance Guarantee Association. Those guarantee funds are not open to public self-insureds.

Priven’s study does not appear to delve into issues of excess insurance coverage that some self-insureds or JPAs might have to serve as a backstop for solvency in the event of a catastrophic event. The existence and adequacy of that type of coverage could be a very important item in how a catastrophic event is handled.

This whole subject is quite complicated. Some public entities or districts are funded through a larger public entity, such as a county, creating a somewhat deeper pocket in the event of a truly catastrophic event.

Other entities and districts are much smaller, which could make for a much more dire situation. If the local self-insured mosquito district headquarters collapses during a big shaker, will there be an adequate fund to pay those claims? If not, who will pay?

In any event, the Bickmore analysis does make a number of solvency recommendations, as follows:

“OSIP should consider developing guidelines, rules, or regulations to require actuarial reports be obtained by all public entity self-insurers, and that the actuarial reports include specific items and disclosures.”

Priven says “We recommend that actuarial requirements include the following elements.

Actuarial reports should separately state the self-insured workers’ compensation liabilities for unpaid loss and loss adjustment expenses.
Actuarial reports should be performed by an actuary with experience performing actuarial estimates involving California workers’ compensation. The actuary must be an Associate or Fellow of the Casualty Actuarial Society or a Member of the American Academy of Actuaries.
The actuary’s estimate of ultimate loss must reflect potential loss development (IBNR).
Estimates of unallocated loss adjustment expenses (ULAE) should include the ultimate estimated cost to adjust claims arising during the program (even if those claims are reported after the end of the program year) and be actuarially determined.
Projections at the expected confidence level should be point estimates and not ranges.
The actuarial report should present unpaid loss and loss adjustment expenses both on an undiscounted and net present value basis and the assumed interest rate should be disclosed in the report.
Estimates of the liabilities for unpaid loss and loss adjustment expenses should be presented on a gross, ceded, and net basis.
The actuarial report should document significant changes in the exposure or composition of a JPA over time.”

As more information becomes available on this topic, I’ll cover it.

Meanwhile, here is a link to the Priven study:

http://www.dir.ca.gov/chswc/PublicCommentsAndFeedback.html

Here is a link to the DWC site for the Office of Self-Insured Programs:

http://www.dir.ca.gov/oSIP/

Julius Young