Compensation Risk Management (CRM) is a third party administrator for eight workers comp trusts in New York. These trusts offer comp coverage to affinity groups in the areas of health care, wholesale/retail and transportation. As we read in the New York Times in an article by Steven Greenhouse, there is good news and bad news about CRM: the good news is that CRM offered low cost premiums to members and high rates of reimbursement to its own executives. The bad news is that the reserves in the the trusts were woefully inadequate. In one of the trusts, reserves fell from 90 percent to 40 percent of liabilities in just a few months.
Trusts have long offered a major alternative to (expensive) conventional insurance for New York employers. About 35 percent of the state's businesses are self insured for comp, with one fifth of those participating in trusts. The really bad news in CRM's collapse is that other, healthy trusts may have to pick up at least part of the tab for CRM's poor management. The workers comp board has ordered that the state's 50 healthy trusts pay emergency assessments totaling tens of millions of dollars. As you might imagine, they are not thrilled to be doing this. In fact, they have sued the board, saying that it has no right to force them to contribute. At this point, they have been granted injunctive relief.
State officials believe that a $200 million emergency fund will be needed to finance the statutory benefits of thousands of injured workers covered by 12 failing trusts. So ultimately, the taxpayers will have to make up for CRM's management deficiencies.
The Company Line
Eric Egeland, a CRM VP, said that the problems were caused by an unexpected increase in workers comp liabilities and fast-rising medical costs. (Gee, Eric, that's why you have actuaries!) He said the eight trusts could not increase reserves fast enough in response to their increased liabilities because of recent state-ordered cuts in comp premiums. (I don't think so, Eric. If you set reserves properly, a cut in rates will not present any unusual problems.)
If you peruse the long list of executives at the company website, you begin with the CEO, Daniel Hickey, who is described this way: "At age 22, he attended the Aetna Institute, the nation’s top property and casualty training program, and received the coveted Gold Ribbon for excellence in sales presentation." Note that the gold ribbon is for sales. He might have been better off shooting for a gold ribbon in management.
CRM's management of their comp business is now under intense scrutiny. Too little, too late. The artificially low premiums pleased their participants, but these deflated premiums simply masked inadequate reserves. The risk managers took far too many risks. Now, as usual, those who played by the rules will have to pick up the tab.