Kentucky Commissioner of Insurance Sharon Clark told the KSBA Board of Directors Friday that she doesn’t expect to approve a final assessment plan to eliminate the Kentucky School Boards Insurance Trust (KSBIT) deficit until early fall.
And Clark said she is working to make sure that the ultimate option provides the “softest landing” for districts being assessed for the years in which they had KSBIT insurance and in which actuaries now project that the self-insured pools may have a future deficit.
Speaking at the KSBA board’s quarterly meeting, Clark also said she has begun traveling the state to meet with superintendents, talking about how the KSBIT deficit came about, why she determined that an assessment is necessary and what remedial options she will consider approving.
“My first priority is to protect the injured workers and to make sure there are monies to pay those claims. Insurance is a promise – you promise to pay those claims,” Clark said, acknowledging she is well aware of the fiscal impact the assessment poses to districts. “These are huge burdens for the schools. Many of these schools can’t take on a $500,000, a $600,000 assessment. What we are working to do is what I call the softest landing for school systems. We will be working on every option that we can.”
Clark said many people don’t fully understand the concept of self-insured workers’ compensation, property and liability insurance such as those provided by KSBIT and other entities.
“People are not familiar with self-funded insurance. They’re used to paying their home insurance or their car insurance. In this situation, instead of the insurance companies taking on the risk, it was the membership who did,” Clark told the KSBA board.
“A self-insured fund differs from private insurance in that the risk of the fund is on the members’ shoulders. When you get insurance from a private insurance company, the risk is transferred to that company. With a self-insured fund – and there are several in the state – the risk stays with that entity. It’s not an unusual concept. In self-insurance, when entities come together, we have what is called joint and several liability. That’s a legal term meaning that that the members are responsible, jointly, for the responsibilities of the fund.”
In a 70-minute presentation and question-and-answer session, Clark focused most of her attention on the KSBIT workers’ compensation pool. That fund had been in and out of deficits for several years until 2009, when the Kentucky League of Cities insurance program made an $8 million loan to KSBIT and took over management of the KSBIT pools.
However, Clark said, by March 2011, the KSBIT workers’ compensation pool again had a deficit ($2.2 million). After actuaries revised projections last year, the deficit for all KSBIT pools stood at $28 million. Add in repayment of the $8 million KLC insurance loan and KSBIT needed a $36 million infusion of cash in 2012.
“The deficit was growing very fast and I told them the decision had to be made – it was time for an assessment,” said Clark.
How the deficit came about
Clark said some factors that affected the deficit - medical inflation, loss of investment income, changes to the workers’ compensation law making awards more generous – were beyond KSBIT’s control. However, she pointed to three other issues contributing to the trust’s financial problems:
· * “Reserves were booked too low. In workers’ compensation, actuaries look at claims and suggest a best estimate of cost of the claim. Traditionally, from the inception of the fund, reserves were booked low. You can imagine over time that something that was booked in 1983, because of medical inflation, today it might be well over the highest projection. So there was no cushion.”
· * “Premiums were discounted to school districts. I know this was done with intention of helping school districts. But when those premiums are discounted from what should be charged, you start to dig yourself into a hole. “
· * “When these programs were founded, there was an agreement from the beginning that there would be a royalty paid to KSBA (estimated at a total of $6.6 million between 1997 and 2009. Workers’ compensation fund royalties were halted in 2003-04 and overall in 2009, according to KSBA Executive Director Bill Scott.). “That is not an uncommon practice. There are lots of insurance funds that have such licensing agreements or royalties. “
“Something that gets lost in all of the discussion is that schools did benefit by having discounted insurance (from KSBIT),” Clark said. “So instead of paying $100,000 back in 1980 for this policy, they got it for $70,000. They’re forgetting that aspect of it. That’s the story that needs to be told.”
Options for resolution
According to Clark, the KSBIT Board of Trustees has three options to fix the deficit, although she has determined that she won’t consider one of the avenues – rehabilitation – for this situation.
Novation – “A major national insurance company would take over the business and schools would walk away. They are looking at all of the claims and all of the responsibilities and are making projections. They are not going to do it free of charge.”
Run-off – “An entity would pay the claims of injured school employees before KSBIT went out of business. A run-off means the entity could come back and say we’ve run out of money and we have to do another assessment.”
Rehabilitation – “We will not do (this option). My agency would be named by court the rehabilitator. I would employ, at the fund’s cost, people to run the fund. They would employ their own actuaries and their own claims administrator. That is not an option. The AIK (Associated Industries of Kentucky – a self-insured pool of businesses) has been in rehabilitation since fall of 2004. As of the fall of 2012, costs have been almost $10 million just for the administration of that fund. By far, it is the much more costly measure, so that’s why it’s not an option. The AIK deficit was $95 million but you still have to pay claims administrators and actuaries.”
Clark said KSBIT has received bids from several companies. “That has been a lengthy process because those insurance companies don’t want to lose $5 million, $10 million down the pike,” the commissioner said.
When the KSBIT trustees select a company to contract with for either the novation or run-off options, the Department of Insurance must sign off on the remediation plan. “Once that plan is submitted, I’ll have my own actuaries look at it and we will make a determination. If it’s not what I think is in the best interest of the members and the Commonwealth, we might have to go in a different direction,” Clark said.
“I’m not going to slap something together in a day or two. I think this all may come to fruition in early fall. A commitment has been made to do this right, whether run-off or novation; I don’t want to have to come back to schools in five to 10 years,” she said.
In response to a question, Clark urged the KSBA board to educate local board members and superintendents about the KSBIT deficit, the options that exist as well as options she has heard are being discussed and should be avoided.
“You entered into a contract not with KSBIT, but with all of your other members,” the commissioner said. “If a school system refuses to pay its assessment, it’s going to mean legal action. If a school system tried to fight the assessment, that adds to the cost.
“Anybody can sue at any time for anything. But the message that has to be given to them is that the only person who is going to profit is the attorney representing them. It’s going to drive up the (final) cost for everybody. This isn’t a private business where you can just walk away from your obligation,” she said.
To help improve local leaders’ understanding of the situation, Clark recently started visiting with superintendents at the state’s regional educational cooperatives. She said she plans to take a similar presentation to every co-op as soon as she can.
“That is part of my hope going out all over the state and that’s an area I think I can help. KSBIT is my No. 1 issue,” she said. “In these situations, communications are crucial. It doesn’t do any good to point fingers. We’re here and we’re going to go forward.“I’m going out there and saying, ‘This is what happened. This is where we are. Let’s work together and get through this,” Clark said.
Photo above: KSBA President Durward Narramore of Jenkins Independent listens as Kentucky Department of Insurance Commissioner Sharon Clark discusses KSBIT with the KSBA Board of Directors.