Beacon Mutual: Where We Are and How We Got Here, Part 3

The first two parts (part 1, part 2) focused on the how-we-got-here part of the Beacon Mutual story. This part will focus on the where-we-are and the what-we-should-do.

1. Without unnecessarily disparaging Beacon Mutual�s initial generation of leadership, it must be understood that the creation of Beacon Mutual was not the most important part of reforming the workers' compensation system in Rhode Island. There's no way any single insurance company could have driven the major reforms that Governor Sundlun reported as early as 1994, unless you assume that the insurers who had been previously operating in Rhode Island were really eager to give their money away.

It was changes applied directly to state government -- in the legal system and the bureaucracy, relating to claims processing and assessment -- that allowed the functioning of a reasonable workers' compensation system in Rhode Island. Beacon stepped into the reformed environment and performed, at least at the beginning, competently or better. But if Beacon were broken up, sold, liquidated, or otherwise changed in some way, other insurers could now step into the breech, and become as profitable as Beacon has been, minus the state subsidies. Beacon Mutual doesn't have magic powers.

2. The most obvious reform now needed is the repeal of the 1996 law that eliminated the concept of the "residual" market and subsidized all of Beacon Mutual's business through a tax break and an exemption from having to pay into the state�s insurance insolvency fund.

If this change occurred, one of two things would happen. We might see that the legal and bureaucratic reforms had completely eliminated the need for a residual workers' compensation market -- that a combination of Beacon Mutual and other insurers could now voluntarily cover everyone. Then we could move on to a discussion of whether Beacon should be fully privatized.

Alternatively, we might see some portion of employers still unable to enter into voluntary deals for workers' compensation insurance. In that case, Beacon would write the policies for these employers using its residual market subsidies to offset the higher risks it was taking on. And Beacon would continue to pay a "price" for its subsidies in the form of an additional layer of government oversight.

I suspect the second outcome is the more likely one, though hopefully we wouldn't see 90% of Rhode Island employers forced into the residual market as they were in the early 1990s.

3. I still can't quite figure out exactly who gets rich in a privatization deal, and how they would do it. I know that some people suspect that this was the master plan all along. However it works, if the state is separating itself from something of value, it should do so through a sale and not a giveaway.

4. Rhode Island's insurance insolvency fund is in trouble -- it is itself insolvent -- because of the exemption granted to Beacon Mutual. In essence, the insolvency fund has been raided to provide subsidies to Beacon. Now, according to the Projo, the non-Beacon 24% of the worker's compensation market paying into the insolvency fund cannot provide enough to cover current costs...

The state's insolvency fund was allowed to borrow up to $14 million a year from Rhode Island auto insurers to finance an anticipated shortfall of nearly $1 million in its workers' compensation account under the compromise bill. The provision would last until the end of 2005; the bill also sets up a study commission to look at the issue.

Insurance companies must contribute a portion of their annual premiums, up to a maximum of 2 percent, to the fund. But the state's largest insurer, Beacon Mutual Insurance Co., which has 76 percent of the Rhode Island workers' compensation insurance market, is not covered by the fund and therefore does not contribute.

There are a few questions about the insolvency fund in need of answering. If the fund was already short in 2004, and Beacon is still not contributing to it, where does the fund get the money to pay a "loan" back? Doesn't the current state of the fund mean that Rhode Island is just one small-time Joe Mollicone (a Molliclone?) away from a RISDIC-type disaster in workers' compensation insurance? And, with no backup to Beacon Mutual, isn't Rhode Island already back in the same position it was in 1991, where a single company could throw the entire system into chaos?