State Fund, Auditor Disagree on Level of Reserves

June 2, 2003

In a letter from State Compensation Insurance Fund to its brokers, president Diane Oki reiterated the solvency of workers’ comp carrier, writing “To set the record straight, State Fund is solvent.”

In efforts to assure brokers that State Fund is and will be able to provide an available workers’ comp market to California employers, Oki offered in the letter: “State Fund’s Brokerage Liaisons have all available financial information to review with you to refute any allegations of insolvency.”

Furthermore, Oki revealed that while “State Fund’s claims reserves have been deemed adequate” by their appointed actuary Milliman USA. Auditing firm PricewaterhouseCoopers LLP recommended the company increase reserves by “$800 million retroactively to 2002 and to restate our reserve figure as submitted in our 2002 financial statement to the CDI.”

The letter states, “State Fund has concluded that booking additional reserves is not only overly conservative, but would not be in the best interests of our policyholders, the workers’ compensation system, or California’s economy. Increasing reserves would exacerbate the current capacity crisis, which has already raised the cost of doing business in California significantly.

Commissioner John Garamendi released a statement in response to State Fund’s letter:

“”This is one more sign that the workers’ compensation system in California is imploding. There must be reform and it must happen now, otherwise employers will continue to be faced with ever increasing premiums with no end in sight.

“I am fully aware of the conflict between State Fund and its auditor. I and my Department have been working with State Fund management since January to determine the appropriate and safe level of reserves to ensure that injured workers can be certain that their medical and indemnity needs will be met today and into the future.

Garamendi continued, “Given the recent enormous increases in the cost of medical care and other claims-related expenses, we believe that a conservative approach to preserve the status of State Fund is appropriate. We will continue to work with State Fund, its auditors, and our own actuaries to determine the appropriate reserves level. We expect this issue to be resolved some time in June.”

See the June 9 issue of Insurance Journal West for the latest on the State Fund vs. Garamendi lawsuit.

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