Remarks on Utah’s Workers Compensation Fund
by Governor Mike Leavitt

Presented at the
2003 Taxes Now Conference
April 24, 2003

Each year at the Utah Taxpayers Association’s annual conference I have tried to bring a substantive policy issue to you for discussion. Today, I would like to talk about the future of the workers compensation system in our state.

At the outset, I want to make clear that the Workers Compensation Fund is an extraordinarily well-managed company. It is a tremendous asset to our state, and we have every reason to be proud of its contributions to the Utah economy. My purpose is to explore the future of the Fund within the context of its history and current circumstances.

My remarks do not delineate what the future of the Workers Compensation Fund ought to be, but rather seek to frame the issue. My thoughts on this issue are still in their formative stages. Rather than recommend changes, I desire to provide context for what I believe to be a very significant issue to Utah’s business community.

Now, for some history. Throughout the 19th Century, if an employee was injured on the job, he or she had to demonstrate in court negligence on the part of the employer in order to recover damages and expenses.

Beginning in the 1880s, legislative bodies around the country began to prohibit certain legal defenses for employers. This reform movement ultimately evolved into a system of absolute liability of employers. In other words, if a worker was injured on the job, the employer was presumed to have a legal responsibility not only to pay for the medical costs, but also to compensate the employee during rehabilitation.

As states began adopting this absolute liability doctrine, they also recognized that employers needed to have a means of protecting themselves. Workers compensation insurance systems were created. In most of these systems, employers were required to have workers compensation insurance as a condition of doing business; and, therefore, it was necessary to provide a means of guaranteeing its availability.

The Utah Worker Compensation Insurance Fund was created in 1917 with the mission of providing an “insurer of last resort.” The Fund was required to accept all applicants at a price appropriate to the risk they presented. It was formed by the Legislature as a state agency.

We do the same thing, I might add, for automobile insurance. We require it, and we provide a system of assigning insurance companies their share of the market.

We also do it in a less complete way for health insurance. We don’t require it, but we do have an uninsured pool for people who can’t find insurance elsewhere.

As I mentioned earlier, the Utah Worker Compensation Insurance Fund operated essentially as a state agency for about 70 years. Then, in 1988, the Legislature changed its status to separate the operation of the Fund from state government. It was no longer a state agency.

Instead, they created a quasi-public, statutory corporation. The new corporation operated independently as a non-profit, public-purpose entity.

The Workers Compensation Fund had several characteristics. I’ll mention three:

(1.) It retained an obligation to serve the residual market as the insurer of last resort.
(2.) It continued to operate as a tax-exempt organization. In other words, it does not pay federal income taxes, and its purchases are exempt from sales tax.
(3.) Its board of directors was appointed by the governor.

This raises an important question. Why would the Legislature have the board of directors of a quasi-public corporation appointed by the governor?

It was a protection, a protection for the policyholders. It was intended as a check and a balance. Otherwise, the Legislature would be turning over an organization with an important public purpose to a body without any public accountability.

The Workers Compensation Fund does not have a monopoly in this state. The Fund competes aggressively with dozens of other insurance companies to write workers compensation insurance in Utah. And, the Fund has done so very successfully. They have a substantial market share.

In fairness, I should acknowledge that it is troubling to many of the Workers Compensation Fund’s competitors that they are provided tax-exempt status and allowed to compete with the rest of the market. Some argue that because of the Fund’s tax-exempt status, they have accumulated very large reserves quickly. It is a debate that is reminiscent of another prominent legislative dispute of our day.

Over time, the Workers Compensation Fund recognized the need to enter new markets. Many of their customers did business in multiple states. The Workers Compensation Fund came to the Legislature and sought the authority to do business outside of Utah. The Legislature agreed and the Workers Compensation Fund began to have a multi-state presence.

Initially, this was done by contracting with other insurance companies. The Workers Compensation Fund would then reinsure them. Later, the Workers Compensation Fund formed a series of for-profit subsidiaries for this purpose. Over time, these for-profit companies have become an increasingly important part of their business. Currently, about 80% of their business is written in Utah and 20% out-of-state. Since they already have a substantial market share in Utah, the likelihood is that a great deal of their future growth will be in other states.

Some states have a statutory prohibition against an insurance company that is owned or controlled by another government from being licensed in their state. Even though the Workers Compensation Fund operates in other states as a for-profit subsidiary, some insurance departments are reluctant to permit them to do business there, because they are owned and controlled by a non-profit where the governor appoints the board of directors.

Frankly, this is a sentiment that is inspired primarily by the competitors who have to compete with capital that is accumulated on a tax-free basis. They simply do not think it is fair. I’m not taking a position on this issue; I’m just trying to frame it up.

In order to solve this problem, the leaders of the Workers Compensation Fund approached the Legislature this past legislative session seeking to completely separate the Fund from state government. Many discussions occurred about the ramifications of changing the appointment powers of the governor. Legislation was filed.

During the session it became clear to many that this issue was of such importance that it warranted more time. I concluded that we needed to do more research. I asked the Legislature to join me in a period of due diligence and expressed a willingness to call a special session to deal with this if necessary. They agreed.

I want to make another thing clear. The state of Utah is a major policyholder. But my focus in this discussion is not state government, but policyholders. Why? Because this decision should be made on the basis of what is in the best interest of policyholders.

Moreover, every business in Utah has a stake in this decision, because when we give an organization tax-exempt status, it comes with a duty. In this case, the duty is to provide insurance to any employer who applies.

This background frames up what I think are the pivotal questions:

Is it in the best interests of policyholders or the state as a whole for the Workers Compensation Fund to continue as the market of last resort?

Are there alternatives that would serve the public interest just as well?

In doing so, can we set free a huge asset that is now being constrained by its obligation to be the insurer of last resort?

Now, let’s break this down.

The state has guarded and protected our attachment to the Fund because of its status as the insurer of last resort. How large is the residual market? I’m told it’s between 8%-10% of the Workers Compensation Fund business.

How do other states handle this? About 38 states use an assigned risk pool. When a business can’t get workers compensation insurance they are placed in a risk pool. The results on the risk pool business are then apportioned to all of the companies that write workers compensation insurance in the state.

So, the question for the Worker Compensation Fund policyholders is this: What are the advantages and disadvantages to policyholders of each option? The Legislature also needs to ask about the advantages and disadvantages of each alternative to the people of the state.

Let’s look at this issue for a minute from a policyholder point of view. Workers Compensation Fund customers are customers for one of two reasons: They like the price and the service, or they can’t find insurance anywhere else, and they purchase from the Fund as the insurer of last resort.

So, if Workers Compensation Fund were no longer the insurer of last resort, 90% would still purchase insurance from the Fund, because they like the service and premium. The majority of the other 10% would likely continue to insure through the Workers Compensation Fund, as well, because the Fund is the dominant carrier; but they would have a choice, where before they only had the insurer of last resort.

But, let’s look at it from another policyholder perspective, that of policyholders as the owner of the company. Currently, the company is a quasi-public corporation. The surplus of the company is there for the protection of the policyholders.

What would happen if Workers Compensation Fund was converted to a fully mutualized or a stock company?

Let’s look at a hypothetical example. Assume Workers Compensation Fund becomes a mutual worth $300 million. The Utah Widget Company has been a customer for many years and currently pays $150,000 premium to the Fund. That represents about one-tenth of one percent of the Fund’s premium writings. In a mutual, the policyholders are the owners. So the Utah Widget Company’s percentage of ownership in the mutual version of the Workers Compensation Fund would be one-tenth of one percent.

Would the Utah Widget Company have this on their balance sheet? No. Would they be concerned about who was on the board of directors? Likely not. They bought insurance; they didn’t make an investment. If they stopped buying insurance from the Fund, their ownership interest would cease.

Now let’s assume for the sake of discussion that the Workers Compensation Fund was converted to a stock company. One day in the mail the Utah Widget Company would receive a stock certificate representing the one-tenth of one percent of the Workers Compensation Fund stock. That is $300,000.

Can it be listed on the balance sheet? Yes. Will the Utah Widget Company care about who is on the board of directors? Yes.

This is just one of many hypothetical examples that needs to be considered and that lead to a plethora of questions.

Will the market of last resort be jeopardized if the Fund privatizes? Is there still a public purpose being served by the Fund remaining as it is? What public purpose is served if the Fund becomes a private mutual? What is the value of the Workers Compensation Fund if it becomes a stock company? If the Fund is demutualized now, or in the future, what should the law provide as a means of distribution among past and present policyholders? What is the likelihood of Workers Compensation Fund keeping its tax-exempt status? If it continues to grow outside the state, is it fair for it to remain tax-exempt? If the governor no longer appoints the directors, who will; and will the directors provide adequate independence to assure policyholder protection?

There are many options. How do we consider them carefully? Let me now describe the process I will use over the next 45 days to make a recommendation to the Legislature on how to proceed.

First, we will use money appropriated by the Legislature to hire an independent consultant with investment banking and significant insurance consulting experience. Next, I have tasked the Department of Insurance to consider alternative ways to provide an insurer of last resort. I will take the information from our consultant and the Insurance Department to seek counsel from a small group of knowledgeable advisors. The group will include representatives from the Legislature, Attorney General’s Office, State Auditor’s Office, industry experts and members of the Workers Compensation Fund board.

I plan to make recommendations to the Legislature by May 31. If there is a reason to make changes, I am prepared to call a special session of the Legislature to address this issue.

I want to thank the Workers Compensation Fund executives and board for working productively with the state as we consider the options. I implore you, Utah’s business community, to actively contribute to this important discussion. Thank you and I will take questions now.