GROUP WORKERS COMPENSATION
Released: January 2003
State of Illinois
Office of the Auditor General
WILLIAM G. HOLLAND
AUDITOR GENERALTo obtain a copy of the report contact:
Office of the Auditor General
Attn: Records Manager
Iles Park Plaza
740 East Ash Street
Springfield, IL 62703
(217) 782-6046 or
TDD: (217) 524-4646
This report is also available on the worldwide web at:
SYNOPSISSince the first pool was licensed in 1981, the Department of Insurance has had the statutory responsibility to regulate group workers compensation self-insured pools. This included the authority to establish standards related to the adequacy of the pools financing and administration, and to collect assessments to cover pool shortfalls. In 1999 and 2000, four pools were ordered into receivership.
From 1981 to 1999, the Department took no formal action against these pools, even though the Department had identified serious concerns about their operations and/or financial viability:
The pooling law has been amended at least three times since 1981. In its response to this audit report, the Department cited that it lacked the tools needed to effectively regulate these pools. However, the Department did not provide the auditors with documentation to show that it proposed legislation to correct their perceived "shortcomings" in the law.The Department increased monitoring of the pools in 1999. Between July 1999 and February 2000, the Department issued corrective orders to three of the four pools. The corrective orders were not effective because the administrator of the pools did not comply with them. Within months, the Department began receivership proceedings against the pools.
The Departments current regulation of pools could be further strengthened, including more effective monitoring of pools boards of trustees, administrative costs, and rate setting practices.
At the time the four pools went into liquidation, there were a total of 628 claims for $18,128,552 outstanding or an average claim amount of $28,867. As of June 25, 2002, the combined assets of the four pools were $4,187,701.
The Group Workers Compensation Pool Insolvency Fund, as of June 30, 2002, had a balance of $152,051 and outstanding claims of $1.1 million.
Since the first pool was licensed in June 1981, a total of 39 group workers' compensation self-insured pools have received a certificate of authority (license) to operate.
Some of the provisions of the new law were already contained in either the existing law or the administrative rules.
Since 1981, the Department of Insurance (DOI) has issued certificates of authority (licenses) to group workers compensation self-insured pools to operate in the State. During 1999 and 2000, four of these pools were placed into court-ordered receivership with the Director of the Department of Insurance because the pools had become insolvent. All four of these pools are now in the process of liquidation with the Office of Special Deputy Receiver (OSD). At the time the four pools went into liquidation, there were a total of 628 claims for $18,128,552 outstanding or an average claim amount of $28,867.
The laws and administrative rules that apply to group workers compensation self-insured pools contained provisions that gave DOI the authority to regulate pool operations prior to the insolvency of the four pools. Although new legislation was passed effective January 1, 2001, some of the provisions of the new law were already contained in either the existing law or the administrative rules. Under the new law, the pools are considered assessable domestic mutual insurance companies and are subject to many of the same provisions of the Insurance Code. Provisions added by the new law included, among others, those which:
The four pools currently in liquidation filed most required financial reports with the Department of Insurance in a timely manner. This included annual financial statements, actuarial opinions, and audits. While some financial reports contained inaccurate or incomplete information, DOI had financial information that showed the financial condition of these pools.
Effective July 7, 1995 (Public Act 89-97), State law requires that each pool be examined at least every five years. Two of the four pools in liquidation had examinations that were adopted by the Director of Insurance prior to the requirement becoming effective. The law also contained time requirements for filing the examinations, transmitting the report to the pool, and adoption of the examination. We reviewed financial examinations with start dates after July 1995 and found that some were not filed in accordance with statutory requirements. Of the 36 examinations reviewed, 10 took longer than 60 days to be adopted and 13 were never adopted. According to the Department, five of the exams that were initiated but not adopted were for the sole purpose of monitoring pools administered by a service agent that was going out of business. Some examinations conducted of the four pools currently in liquidation identified problems such as the organization and membership of boards of trustees and the accuracy of annual financial statements.
The Actuarial Unit at DOI conducted reviews of the pools annual financial statements and actuarial opinions prior to their insolvency and identified several problems including concerns about surpluses, reserve deficiencies, and qualified actuarial opinions. However, no formal corrective actions, such as issuing corrective orders or assessment orders, were taken by DOI prior to July 1999.
The Illinois Department of Insurance increased monitoring of the pools in 1999; however, the increase in monitoring did not occur until after the pools financial problems had occurred. Beginning in mid-1999, all the pools were required to file interim financial statements. DOI has also increased the length and comprehensiveness of the annual financial statement filings as of the year ended December 31, 2001.
DOIs current regulation of pool operations could be further strengthened. DOI does not effectively monitor the pools boards of trustees, administrative costs, or rate setting practices.
Between July 1999 and February 2000, DOI issued corrective orders to three of the four pools currently in liquidation. These corrective orders required steps such as discontinuing issuance and renewal of insurance, considering whether the amount of administrative fees and/or agents fees were excessive, increasing financial reporting, and submitting a general plan for improving the financial condition of the pool. The corrective orders issued were not effective because the administrator of the pools did not comply with the orders and questioned DOIs authority to issue corrective orders. The fourth pool did not receive a corrective order before being placed into receivership. None of the four pools currently in liquidation received an assessment order before being placed into receivership.
We also reviewed corrective orders and assessment orders issued to other pools that are currently solvent and found that DOI conducts limited tracking of whether all required information is received. Based on documentation DOI provided, four of eight pools that were issued an assessment order in 2001 improved their financial conditions between December 31, 2000 and the most recent quarterly statement. Of those four, two pools improved their financial condition based on factors that did not involve assessment collection.
Although court ordered receivership has resulted in the collection of additional assessments, it has not been successful in making the pools viable again. All four of the pools that entered receivership (conservation or rehabilitation) in 1999 and 2000 are now in the process of liquidation. One pool was ordered directly into rehabilitation while another was ordered from conservation into liquidation without an attempt at rehabilitation.
The process for liquidating the four group workers compensation self-insured pools is ongoing and will not be completed until at least sometime in 2003. As of July 2002, OSD had not completed the review of proofs of claim for three of the four pools. The last bar date (date to return a proof of claim) passed in March 2002. The last date to file evidence in support of contingent claims against the four pools is March 2003 (contingent claims due date).
According to OSD, there is an estimated $18 million in claims related to these four pools. In addition, according to OSD court reports, as of June 30, 2002, a total of $3,120,918 in expenses and claim payments have been incurred in administering the pools while in rehabilitation and liquidation. OSD has issued $15,923,416 in assessments and collection notices to the four pools in liquidation. However, only $4,547,028 had been collected (29%) as of July 2002. As of June 25, 2002, the combined assets of the four pools, including assessments collected and expenses paid while in receivership, was $4,187,701.
The Group Workers Compensation Pool Insolvency Fund, as of June 30, 2002, had a balance of $152,051 and outstanding claims of $1.1 million. DOI has levied additional assessments to two of the four pools in liquidation and to all remaining solvent pools; however, most of the pools protested the assessment and litigation is ongoing. (pages 1-3)
On June 26, 2001, the Legislative Audit Commission adopted Resolution Number 121, which directed the Auditor General to conduct a management audit of the Illinois Department of Insurance, the Office of Special Deputy, the Illinois Industrial Commission, and any other State agency with regard to their responsibilities pertaining to group workers compensation self-insured pools in the State of Illinois.
The Resolution asked the Auditor General to determine with regard to the group workers compensation self-insured pools (Pools) in liquidation:
Since the first pool was licensed in June 1981, a total of 39 group workers compensation self-insured pools have received a certificate of authority (license) to operate from the Illinois Department of Insurance. (pages 3-8)
STATE AGENCIES INVOLVED IN ADMINISTERING GROUP WORKERS COMPENSATION SELF-INSURED POOLS
Prior to January 1, 2001, there were two State agencies involved in the administration of group workers compensation self-insured pools: the Illinois Department of Insurance (DOI) including the Office of Special Deputy Receiver (OSD), and the Illinois Industrial Commission. OSD assists the Director with his duties in receivership matters. The Commissions only responsibility related to self-insured pools was administering the Group Self-Insurers Insolvency Fund. This responsibility was transferred to DOI by Public Act 91-757, effective January 1, 2001. (page 8)
POOLS IN LIQUIDATION
As of March 2001, there were four group workers compensation self-insured pools in the process of liquidation proceedings with the OSD. Digest Exhibit 1 shows the four pools and the dates that they were placed into the various stages of receivership (conservation, rehabilitation, and liquidation). (pages 10-13)
Group workers compensation self-insured pools are regulated primarily by the laws establishing the pools and the administrative rules that have been promulgated by the Department of Insurance (DOI). The laws and administrative rules regulating group workers compensation self-insured pools contained provisions that gave DOI the authority to regulate pool operations prior to the insolvency of the four pools. Although new legislation was passed effective January 1, 2001, some of the provisions of the new law were already contained in either the existing law or the administrative rules. The laws and rules also contain requirements for pool administrators.
Each group workers compensation self-insured pool has an appointed board of trustees that exercises management control of the pool. Administration of the pools, which includes such items as risk management and claims administration, are generally delegated to an independent service company. Most of the group workers compensation self-insured pools, including the four pools in liquidation, had a third party administrator.
Boards of Trustees
Having an active and informed board of trustees can play a vital role in the success or failure of any organization. These boards are responsible for such critical functions as hiring the pool administrator to manage the pool and also hiring the auditors and actuaries that review the pools operations. Several of the boards for the four pools currently in liquidation did not have full membership, were not meeting on a regular basis, and had non-members on the board.
The Departments monitoring of board activities could be improved. We recommended that the Department should ensure that each pool maintains a board of trustees in accordance with each pools trust agreement and should consider promulgating rules that require these boards to file meeting minutes and board resolutions with the Department so that their activities can be better monitored.
Rate setting can be a major factor in the financial success or failure of a pool. Determination of pool participants standard premium and risk classification is to be done in accordance with the National Council on Compensation Insurance (NCCI) Workers Compensation Manual. Rates used for workers compensation insurance are to be filed with DOI.
Three of the four pools currently in liquidation had the same administrator. On November 4, 1999, the Director of the Illinois Department of Insurance filed an Order of Revocation to revoke the service company license of this administrator. Among other things, the Order alleged that the administrator failed to adequately document the basis of premium discounts given to some clients and that this jeopardized the financial status of the pool. The service agent voluntarily surrendered his license.
Under the new law effective January 1, 2001, these pools are considered assessable domestic mutual insurance companies and are required to file with DOI every manual of classifications, rules and rates, rating plan, and related modifications. We recommended that the Department should monitor and review the rate setting practices of group workers compensation self-insured pools.
Three of the pools currently in liquidation may have paid significantly higher amounts for administrative costs than the other pools. Service agreements show that the pool administrator for these three pools was charging 39 percent of standard premium for administering the pool. The other pool currently in liquidation (BYRMA) was paying 14 percent of actual premiums as of 1998.
Administrative costs being paid by the remaining active pools were well below the 39 percent of standard premium paid by the three pools. We recommended that the Department should review administrative service agreements between the pools and their prospective administrators for reasonableness of administrative fees.
Pools With Dissimilar Risk Characteristics
Several of the pools currently in liquidation included members that did not have similar or homogeneous risks. These employers were allowed to join the pool because they were members of the sponsoring organization. For example, BYRMA membership included employers from Chicagos western suburbs to as far away as Cairo, Illinois. It also included members with risks as different as fast food restaurants and lumberyards.
Having similar risks in these pools is important because it is easier to accurately predict loss experience when determining the basis for premiums. While the Department does receive a list of the initial membership and applications of new members, they could not provide a list of the current members of each pool or the amount of total payroll.
The laws governing the group workers compensation self-insured pools that went into effect January 1, 2001 require that all pools have members with homogeneous risks. The statutes and rules do not define homogeneous. We recommended that the Department should promulgate rules that define the term "homogeneous" for pool membership before issuing any new certificates of authority and monitor pools for members that do not have homogeneous risks.
From 1983 until the new pooling law became effective January 1, 2001, the pooling law required that every group self-insurer maintain reserves which are actuarially sufficient, as determined by the Director of Insurance, to provide for the payment of all losses and claims incurred (P.A. 83-1005). It also stated that the Department shall promulgate rules that establish standards and guidelines to assure the adequacy of the financing and administration of group self-insurance plans. Although the Department promulgated rules, the rules did not include a specific surplus or reserve requirement.
Several pools had a negative surplus in the years preceding the four pools being placed into receivership. These include pools that are currently in liquidation as well as some that are still in operation. Digest Exhibit 2 shows that as of the end of 1997 there were four pools reporting a negative surplus in their annual financial statements submitted to DOI. By the end of 1998, this had doubled to eight pools.
Under the current reserve requirement, the Director is required to order the pool trustees to assess the individual pool participants in an amount not less than necessary to correct the deficiency when he determines by means of audit, annual certified statement, actuarial opinion, or otherwise that the assets possessed by the pool are less than the reserves required together with any other unpaid liabilities (215 ILCS 5/107a.14). According to DOI officials, the current requirement means that no pool can have less than a $0 surplus. In May 2001, DOI began issuing assessment orders to the pools with a negative surplus. As of December 31, 2001, 3 of the remaining 23 pools reported a negative surplus. All three of these pools are no longer writing business. We recommended that the Department should take available regulatory actions to ensure that each group workers compensation self-insured pool maintains adequate reserves. (pages 15-32)
FINANCIAL OVERSIGHT AND MONITORING OF POOLS
DOI has a system of financial reporting and monitoring in place, most of which was in effect prior to the four pools being ordered into liquidation. Pools are required to file annual financial statements, audits, and actuarial opinions.
Financial Reporting Review Process
The current process contains adequate controls for DOI to detect problem financial conditions of pools. In July 1998, the Regulatory Action Unit (RAU) was assigned to review the annual financial statements of the group workers compensation self-insured pools and effective January 1, 1999, the pools were assigned to the RAU. Prior to July 1998, the Financial/Corporate Regulatory Division was responsible for overseeing the pools.
DOI Analysis of Financial Information
The required financial reports include information that is central to the monitoring function, for example, the amount of surplus and premium, assets, liabilities, number of members in the pool, and the estimated total annual payroll. DOIs Actuarial Unit conducts a review of annual financial statements and actuarial opinions, which includes a summary of surplus, premium, net underwriting gain (loss), findings of reserve adequacy, and reviewer comments. DOIs Regulatory Action Unit prepares a number of ratios when analyzing a pools annual statement. Prior to the four pools being placed into receivership, these reviews identified several problems including concerns about surpluses, reserve deficiencies, and qualified actuarial opinions.
Timeliness and Comprehensiveness of Financial Information
DOI had sufficient information regarding the financial condition of the pools to identify those that were in hazardous financial condition. We determined that solvent and liquidated pools alike were submitting most of the required reports in a fairly timely basis prior to any of the pools becoming insolvent.
Digest Exhibit 3 shows the amount of surplus for each of the pools currently in liquidation for calendar year 1995 through 1999. The exhibit shows that in 1998, three of the four pools had a negative surplus. It also shows that BYRMA had a large negative surplus in 1997 and 1998 before going into conservation in April 1999. The Illinois Electrical pool had a negative surplus from 1995 through 1998.
Additional Financial Statement Requirements
The Illinois Department of Insurance increased monitoring of the pools in 1999; however, the increase in monitoring did not occur until after the pools financial problems had occurred. In addition, DOI has expanded the information required in the annual financial statement filings. Workers compensation self-insured pools as of the year end 2001 statement are now required to file a statement that is approximately 40 pages in length as opposed to the shorter 10 page filing that had been used in the past. The year end 2001 annual statements require additional information for an expanded time frame regarding premiums, losses, expenses, investments, cash, and reinsurance. Interrogatories, which contain pool membership information, are also required. (pages 33-41)
DOI FINANCIAL EXAMINATIONS
Effective July 7, 1995 (Public Act 89-97), State law requires that each pool is examined at least every five years. It also contains time requirements for filing the examinations, transmitting the report to the pool, and adoption of the examination.
Examinations of Pools in Liquidation
Illinois Earth Care Workers Compensation Trust and Illinois Environmental Services Workers Compensation Trust were both examined for the period ended December 31, 1993, prior to the statutory requirement for the examinations. These examinations were not adopted by the Director of the Department of Insurance until June 1996, 2 ½ years later. Other examinations were also conducted but not filed. According to DOI officials, instead of adopting the examination, corrective orders were issued. Digest Exhibit 4 illustrates the financial examinations conducted of the pools in liquidation.
Financial examinations of two of the pools in liquidation noted some considerable differences between the reporting of fund balances in the annual financial statements and the examinations. For example, an examination for the period ended December 31, 1997 found that Illinois Electrical underestimated liabilities by $150,000 and over reported assets by $17,946. As a result, the surplus was overstated in the pools annual financial statement by $167,946. Illinois Earth Care reported a surplus of $227,069 in its 1997 annual statement; however, DOIs financial examination discovered that the surplus was actually a negative $850,931, or $1,078,000 less than reported by the pool in the annual statement. Illinois Earth Care had over reported assets by $228,000 and underestimated liabilities by $1,000,000.
Financial examinations of the pools were not filed in accordance with statutory requirements. DOI provided complete data for 36 examinations of group workers compensation self-insured pools that had been performed. Of the 36 examinations:
According to the Department, 5 of the 13 exams never adopted were related to a pool administrator who surrendered his license. These were conducted for the purpose of having an examiner on site to monitor the pools and no exams were actually conducted or intended so no reports were ever prepared.
Financial examinations can provide confidence in financial information reported by the pools as well as correct annual statement surplus fund balances. As a result of issues identified during the audit, DOI recently updated its examination report processing policies and procedures in November 2002. We recommended that the Department should conduct all required financial examinations and adopt them in a timely manner to comply with statutory requirements. (pages 41-46)
There are two general categories of corrective actions that can be taken prior to liquidation of a group workers compensation self-insured pool: 1) Departmental supervised actions (such as corrective orders and assessment orders); or 2) Court supervised actions such as receivership.
Since July 26, 1999, DOI has issued corrective orders to seven pools and stipulation and consent orders to two pools. Corrective orders recommend that pools take certain steps to improve operations, including ordering the pool not to write new business or spend money on advertising. Of the four pools currently in liquidation, three were issued a corrective order. However, none of the four pools were issued an assessment order. One of the pools now in liquidation did not receive either a corrective order or an assessment order from the Department before receiving an order of conservation through the Illinois courts. Some of the issues that may have contributed to the ineffectiveness of the corrective orders include: pool administrator protests to corrective orders asserting that the pool was not an assessable domestic mutual insurance company and not subject to corrective orders and untimely issuance of corrective orders.
Public Act 91-757 (effective January 1, 2001) includes a section that now clarifies pools as assessable domestic mutual insurance companies and contains a section that specifically gives DOI authority to issue corrective orders. These revisions of the law should assist DOI in executing future corrective orders. However, based on rules and statutes, DOI had authority to regulate the pools dating back a number of years prior to the four pools being placed into liquidation, both preventative and curative. Provisions either in statute or rule have, for example, allowed DOI to:
DOI did not issue assessment orders to the pools currently in liquidation prior to them being placed into receivership. Assessment orders are issued to pools with the intent of having pool members contribute additional funds to the pool to correct any deficit.
Four of eight pools that were issued an assessment order in 2001 improved their financial conditions between December 31, 2000 and the most recent quarterly statement. Of those four, two pools improved their financial condition based on factors that did not involve assessment collection. The financial condition of the four other pools worsened.
While assessments have resulted in pools obtaining additional funding, it is difficult to measure the degree to which the assessment alone had an effect on improving pools financial conditions because: 1) assessments are not always collected by the due date, and 2) external factors can affect pool surpluses. We recommended that the Department should continue to issue corrective orders and assessment orders to pools in hazardous financial condition as well as monitor the collection of assessments.
Court Ordered Corrective Actions
Although court ordered receivership has resulted in the collection of additional assessments, it has not been successful in making the pools viable again. If DOI finds that the financial condition of a pool is hazardous the Director can, through the Illinois Attorney Generals Office, seek a court order of conservation or rehabilitation prior to a court order for liquidation. These receivership proceedings are handled by the Director, who is assisted by the Office of Special Deputy Receiver (OSD).
OSD is notified when the Department determines that an insurance company or pool is in need of receivership. The Attorney General petitions the court to appoint the Director of Insurance as the receiver, as specified in statute. Once the court signs the order, the Director may appoint a special deputy to assist him.
Once a pool has been placed in liquidation, there are many steps before the final liquidation and claims are paid. OSD has an established liquidation process, some of which is specified in statutes, for all insurance companies, including the group workers compensation self-insured pools.
The statutes contain a priority for paying claims during a final distribution. Administration expenses, which include OSD expenses, are the highest priority in the statutes. Therefore, costs of administration will be the first priority to be paid out of a pools remaining funds. If the cost for administering the pools uses up all a pools funds, there will be no funds to pay claimants. In these cases the claimants would have to go to the Insolvency Fund for payment.
According to OSD, there is an estimated $18 million in claims related to the four pools that are currently in liquidation. As of July 2002, adjudicated claims totaled $13.8 million. As of July 2002, the review of proofs of claim had only been completed for one of the four pools. Each pool also has a contingent claims cut-off date that must pass before liquidation can be completed. The last bar date (date to return a proof of claim) passed in March 2002. The last of the four pools contingent claim cut-off date is in March 2003.
OSD has issued $15,923,416 in assessments and collection notices to the four pools in liquidation. However, only $4,547,028 (29%) has been collected as of July 2002. As of June 30, 2002, OSD had disbursed from the four pools estates a total of $3,120,918 in claim payments and expenses in administering the pools while in liquidation. As of June 25, 2002 the combined assets for the four pools, including assessments collected and expenses paid while in receivership, was $4,187,701. (pages 59-64)
The purpose of the Group Workers Compensation Pool Insolvency Fund is to compensate eligible employees when their group workers compensation self-insured pool is unable to pay compensation and medical service payments due to financial insolvency. As of January 1, 2001, the Department of Insurance (DOI) is responsible for collecting semi-annual assessments for the Insolvency Fund. Prior to that date, the Illinois Industrial Commission had that responsibility.
Statutory Semi-Annual Assessments
The Workers Compensation Pool Law (215 ILCS 5/107a.13a) requires all qualified group workers compensation pools to pay a sum equal to 0.5 percent of all compensation and medical service payments, into the Group Workers Compensation Pool Insolvency Fund. Payments are due on January 1st and July 1st for the preceding six months.
The pools previously paid 0.5 percent on compensation payments prior to January 1, 2001, but now they pay 0.5 percent on both medical and workers compensation payments. The Insolvency Fund Balance as of June 30, 2002 was $152,051. The estimated amount of outstanding claims against the fund as of June 30, 2002 was $1.1 million dollars. Some claims have been waiting to be paid since November 2001.
Insolvency Fund Special Assessments
The Director can issue special assessments of pools to pay claims against the Insolvency Fund. The Director of Insurance ordered several special assessments on December 21, 2001. These special assessments included an assessment of $257,851.27 to members of the Illinois Earth Care Workers Compensation Trust and an assessment of $82,596.88 to members of BYRMA. As of June 30, 2002, DOI had collected $87,843.27, or 34 percent, of Earth Cares special assessment. DOI also collected $40,318.51, or 49 percent, of BYRMAs special assessment.
In addition, DOI sent a letter to the remaining pools assessing them a total of $1,000,000. As of June 30, 2002, DOI had received $52,044, or 5 percent, of this special assessment. Of the 25 pools, 3 paid their total amounts due, 20 filed for an administrative hearing, and 2 did not pay or request a hearing. In October 2002, the pools obtained a Motion to Stay the administrative proceeding pending before the Illinois Department of Insurance from the Circuit Court because they are challenging the constitutionality of the statute. We recommended that the Department should consider whether the statutory percentage of semi-annual assessment paid by the pools should be increased to raise the funds balance and seek legislation to assist in preventing future shortfalls. We also recommended that the Department ensure that each pool is paying the correct amount of semi-annual assessment and that it is collected in a timely manner. (pages 64-69)
The audit report contains nine recommendations to the Illinois Department of Insurance for which the Department provided extensive responses. Appendix E to the audit report contains the agency responses.