Beacon Mutual: Where We Are and How We Got Here, Part 2

The key event in the transformation of Beacon Mutual from the Rhode Island's workers' compensation insurer of last resort to a virtual monopoly occurred in 1996. That year, the state legislature acted to block private workers' compensation insurers from returning to Rhode Island. (For part 1 of the story, click here.)

In the early 1990s, Rhode Island reformed its workers' compensation system in two ways. First, the state reformed the administrative and legal practices governing worker's compensation claims. In a very short period of time, the amount of compensation awarded by Rhode Island, which had been amongst the highest in the nation, fell into line with national averages. Second, the state created the Beacon Mutual insurance company to fill the void left by several large insurance companies who had departed from Rhode Island because they were unable to do business under the strain of losses incurred under the old workers' comp system.

The success of Beacon Mutual showed that it was possible to turn a profit selling reasonably priced workers' compensation insurance in Rhode Island under the new rules. Private insurers who had left the state prepared to return.

The state legislature, however, wasn't overly keen on allowing back the insurers who had left the market. Legislators claimed they didn't want the state to find itself in the position it had found itself in at the end of 1991 when a decision by a single out-of-state company could -- and did -- throw the entire workers' compensation system into chaos. There was also probably a punitive attitude involved; legislators didn't feel compelled to roll out a red carpet for insurance companies who had abandoned Rhode Island in a time of crisis.

Whatever the reason, on May 29, 1996, the state legislature changed the nature of Beacon Mutual, insulating the company from competition. The original concept behind Beacon Mutual was that the state needed to provide some compensation to the insurer that would be taking on the employers that no private insurers were willing to take on. The competitive advantages granted by the state -- a tax break and an exemption from paying into Rhode Island's insurance insolvency fund -- would offset the higher costs of providing policies to high-risk employers.

The 1996 changes to the law erased the distinctions between Beacon Mutual's clients. Beacon's policyholders would no longer be divided into a "voluntary" pool of employers able to shop for insurance with other companies and a "residual" pool of employers unable to make a deal with a private insurer because their businesses were considered high-risk. The tax breaks and insolvency fund exemption, originally applied only to Beacon's residual pool policies, would now apply to all Beacon Mutual policies.

The 1996 changes virtually guaranteed that Beacon could always charge lower prices than its competitors for the same insurance product. Private insurers had to subtract taxes, insolvency fund payments, and administrative costs from their premiums before banking reserves. Beacon Mutual had only administrative costs to subtract. As a result, private insurers had to charge higher rates in order to offer coverage equal to Beacon's, restricting their ability to compete; what Rhode Island employer would want to pay a private insurer for the same coverage they could get from Beacon Mutual at a lower (because subsidized) rate?

Of course, we know now that Beacon Mutual didn't use its advantages purely to lower its rates. Beacon set its prices just low enough to discourage competition, while still building up more money than needed to run an honest insurance business. Beacon Mutual used its advantages in state subsidies to pay for things like a sweetheart insurance deal for former Beacon board chairman Sheldon Sollosy and granite countertops installed in the home of former Beacon President Joseph Solomon. But the problems with Beacon Mutual extend beyond just the usual corruption...

Coming in Part 3: The big-picture problems with Beacon Mutual...