In response to a workers comp crisis, state legislatures are often tempted to set up their own insurance companies. Unfortunately, the insurer of last resort frequently becomes the one and only insurer: bloated by patronage and the recipient of unfair market advantages, the state fund can become a monstrous leviathan, dwarfing other carriers and all but eliminating competition in the marketplace.
Take Rhode Island. Beacon Mutual dominates the market. It would be nice to report that the dominance is based upon fair pricing and sheer competence, but it isn't. Studies last year (one by Guiliani Associates) revealed that the fund made political payoffs, undercharged companies with ties to politicians and misspent millions. (See The Insider's perspective when the scandal first broke here.) Rhode Island might be small, but when it comes to corruption, they think big.
Governor Carcieri did not mince his words:
Specifically, this market conduct examination shows that Beacon Mutual’s former leadership fostered a corporate culture that suffered from weak management and controls; inappropriate producer, agency and vendor relationships; favoritism and bias in pricing; inappropriate and lavish spending; and a total disregard for public oversight and for Beacon’s public mission and purpose. In short, Beacon Mutual’s conduct was completely inappropriate and reprehensibly abusive of the public trust.
Underwriting for Gangsters
In response to these rather embarassing findings, Beacon Mutual has made a a lot of promises. You can find 79 specific recommendations and Beacon Mutual's response here. Let's focus for the moment just on the underwriting process: the way an insurer evaluates risk and prices policies. It's supposed to be objective and fair. It's supposed to operate the same way for every risk in a given class. Here's how it operated under Beacon Mutual:
Underwriters priced accounts any way they liked. If you were well connected, you might enjoy a substantial discount over your competitors. Two companies, same work, very different cost of insurance (with no relationship to prior losses).
- Now Beacon Mutual promises to file pricing plans and rigidly apply the same criteria to all risks.
The former head of underwriting had no background in insurance or underwriting. He maintained a "VIP list" of companies that should receive favorable rates, including the companies of board members and those with ties to high-ranking managers and certain Rhode Island politicians. Apparently, the only risk assessment he was concerned with involved not getting caught. (He screwed that one up, too.)
- Now Beacon Mutual has hired a professional underwriter as a Vice President.
The unusual underwriting process at Beacon Mutual involved a committee comprising, among others, of the human resource director and the VP for information Systems. I'm sure that those folks had interesting things to say about risk, but their opinions were on the level of the proverbial "man in the street."
- Beacon Mutual promises more "transparency and control" in the underwriting process.
There were no written procedures for underwriting. The process was whatever political expediency dictated at the time.
- Beacon Mutual now has an underwriting manual. (Gee, I hope they follow it.)
Documents at Beacon Mutual had no date stamp, so it was pretty easy to retrofit documentation when the need arose.
- Beacon Mutual now has a date stamping machine (and they promise to use it).
Finally, if Beacon Mutual liked an agent, they cut a bigger commission check. Conversely, if an agent dared to write a policy with some other carrier, they would likely see a reduction in their future commissions. Agents had to think long and hard about writing business with an outside carrier.
- Beacon Mutual now promises to eliminate higher commissions for preferred agents.
Open Market in RI?
Until recently, if an outside carrier offered a policy to a RI company, Beacon could arbitrarily lower their rates to keep the business. No one can compete against that kind of advantage.
So is Beacon Mutual really going to play fair? Is this a good time for other carriers to re-enter the RI marketplace? Maybe. Beacon Mutual has made a lot of promises. They have committed to the kind of transparency that governs virtually all other comp carriers. Beacon Mutual has long ruled RI, the way a bully rules a neighborhood. Bullies don't like to give up control. Only time will tell if Beacon Mutual and the state's traditionally lax regulators are really serious about leveling the playing field.