Nevada workers’ comp deal risky, expert says

Chris Jones

Thursday, March 21, 2002 | 11:15 a.m.

Employers Insurance Company of Nevada's proposed acquisition of a California workers' compensation provider would expose the longtime Nevada insurer to an unfamiliar, volatile and expensive business environment, a top insurance industry analyst said Wednesday.

Santa Monica, Calif-based Fremont General Corp. on Wednesday said EICON has exclusive negotiating rights to acquire its struggling workers' compensation division, the Fremont Compensation Insurance Group (Fremont Comp). The companies hope to complete a deal before June 30.

Douglas Dirks, president and chief executive of EICON, said Wednesday the deal should help its current policyholders through expanded coverage areas and an improved bottom line.

"Our Nevada policyholders who do business in other states won't have to find another company to provide coverage (in states Fremont Comp currently operates)," Dirks said. "And by spreading our fixed costs over a larger base, our ultimate goal is to drive down our costs to provide coverage and push those savings on to our policyholders within the next 12 to 18 months."

Dirks said acquiring Fremont Comp would give EICON access to new markets in five Western states, as well as the addition of experienced staff members and an improved computer system.

Despite those potential gains, however, Matt Mosher, a group vice president who oversees property and casualty lines for the New Jersey-based insurance industry rating firm A.M. Best Co., said the acquisition presents significant risks for EICON.

EICON, which has operated under several names, most recently the State Industrial Insurance System, was formed in 1913 as a state system with a monopoly for covering injured workers. At the request of Gov. Kenny Guinn, the 1999 Nevada Legislature in January 2000 converted it to a private company owned by its approximately 12,000 employer policyholders.

Because EICON has historically operated in a non-competitive environment, Mosher said he's concerned about its ability to compete in California, a less-stable business environment where about 90 percent of Fremont's business is based.

"(EICON) has focused on Nevada, which up until two years ago was a monopolistic state," Mosher said. "They haven't had to deal with a lot of the market issues that run rampant in California."

Mosher said California's workers' comp system allows just one physician to evaluate the condition of an injured worker with little possibility of dispute. That structure has generated statewide loss costs that are two to three times higher than the national average, he said.

"California just passed a law that will alleviate some of the pressure, but it's not clear how much it will alleviate that concern," Mosher said. "It's the largest workers' comp market in the United States, but it's also the most volatile."

Dirks said Wednesday he believes his company's plans to focus primarily on insuring small employers would provide a safe harbor in California's turbulent market.

"The overall market has been volatile over the last five years, but there are niches within the workers' comp market that have been very stable," Dirks said. "California is a $12 billion market and we're looking at a very small niche within a very large market that we believe will be profitable."

Mosher said the unfamiliarity of EICON's employees to factors in the California market could also hinder the company's progress, but Dirks countered that EICON would likely retain Fremont Comp employees who have prior experience in the state.

"They'll help guide us," Dirks said.

Mosher said he could not project the costs of EICON's acquisition and Dirks said negotiations were "in the early stages" and declined to project a dollar figure for the deal.

Fremont Comp's troubles are more clear. A.M. Best Co. said the company was the ninth-largest writer of workers' compensation insurance in the United States in 2000, based on direct premiums written. However, Fremont Comp has endured financial problems in recent months and its operations have been reduced.

A.M. Best Co. said last week Fremont is under regulatory supervision in California and is asking states to waive their annual assessments to their guaranty funds. The company said it has more than $1 billion in invested assets and enough money to pay claims and assessments, but it is seeking waivers where allowed by law.

"They were writing $1 billion in annual premiums in 1999," Dirks said. "They've gone through a massive restructuring and last year their premiums dipped to about $125 million."

On Wednesday Fremont General told A.M. Best the company actually had about $110 million of business in force. As Nevada's largest workers' comp insurer, EICON wrote about $125 million in direct premiums last year, according to the Nevada Division of Insurance.

Regardless of what happens with Fremont, Dirks said he expects Nevada businesses will soon be forced to pay higher premiums to protect against losses from injured workers.

"The market is going to harden. There will be fewer options and higher prices," Dirks said.

Dirks would not speculate how much his company's or Nevada's overall workers' comp costs could rise, but he does not expect the line to experience problems similar to the malpractice market.

Cliff King, a chief insurance examiner for the Nevada Division of Insurance, said Tuesday the division has scheduled an April 11 rate hearing to discuss whether the state will adopt pending rate changes proposed by the National Council on Compensation Insurance, an advisory organization that sets target rates for insurers.

The NCCI is not scheduled to make its recommendations for the state until March 29, but Dirks said inflation and factors such as Sept. 11 are likely to push rates higher.

"(At) the World Trade Center, those were primarily low-risk, white collar employees who would have had workers' comp rates amongst the lowest you might find," Dirks said. "Reinsurers are now asking us if companies have concentrations of employees in a single location.

"If you've got 50,000 people in one building and they're all killed, (reinsurers) are saying that's a risk they've never considered and that's likely to drive up rates."

Enron's collapse and the downturn in investment markets have also hurt insurers' profitability and could prompt premium hikes.

"Enron is going to be a dramatic loss," Dirks said. "The insurance industry is anticipating the lawsuits that will come against the auditors, board, officers in the company and law firms. Professional liability rates are already going up.

"The insurance industry was also using investment returns to offset underwriting losses because the stock market was so strong for most of the 1990s. Now companies have pushed through more premiums to the policyholder knowing that there will be less investment income (as the stock market slowed)."

King said Nevada's workers compensation market changed little from 2000 to 2001. Although two insurers failed last year, the total number of companies writing workers compensation policies climbed from 212 two years ago to 215 last year.