Two Large Self Insured Groups Fall On Hard Times
The Preferred Auto Dealers Self Insured Program of California failed due to the large reduction in the number of dealers and the shrinkage of the surviving car dealers. Due to the recent credit crunch the fund was unable to obtain an uncollateralized surety bond,
This confirms what I posted in this blog last week on Workers Comp self insureds. Many Self Insured Groups (SIG’s) have failed even when the economy was in much better shape than now. SlG’s often violate the law of large numbers as it applies to risk.
If there are not enough members to spread the risk, the SIG is doomed. The Preferred Auto Dealers Program had 70 members. In my opinion, what happened was there were enough members, but the size of the members were reduced.
A more surprising group that will close down operations is the California Vintners and Independent Producers Self Insurance Program of California – a 30-member self-insured group for the wine-making industry. I was not aware the winery economy was not doing that well. A 30 member group would not have been large enough to satisfy the Law of Large Numbers to spread the risk of claims to all members.
In most states, the Department of Workers Compensation or Department of Insurance will perform an audit to make sure the files are reserved at appropriate levels. Unfortunately, as I mentioned last week, the claims from a SIG will be given right back to the employer to handle. When we have reviewed claims in this type of situation, the claims handling is often sub-par.
I think we will see many more Workers Comp SIG’s fail as reinsurance will become very expensive, if not totally unavailable. As the economy contracts, more employers will have to explore the regular market for coverage. If the employers are bad risks, they may end up in the Risk Pool and pay much higher Workers Compensation premiums.
©J&L Risk Management Inc Copyright Notice
