AIK Comp, the troubled Kentucky workers compensation self-insurance group, was paying members advance discounts to attract business, when rates were inadequate to fund reserves, according to press reports about of the contents of a private consulting firm's audit. Insurance Journal reported that $38.6 million in discounts over a three-year period led to a $59 million shortfall at AIK Comp, forcing it to assess 3,700 member employers.
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According to the Kentucky Post, the Office of Workers' Claims received a report from a private consulting firm, York Consulting, on the status of AIK Comp. "Giving discounted premiums to members before loss reserves can be reasonably established appears to be a key factor in the current financial distress of the fund," said the York Consulting report, according to the Post. "The current deficiency could have been partially or completely offset had the trustees allowed for time to see losses develop over a reasonable time prior to returning any potential excess premiums to members," the York report added, according to the Post.
A "lack of appropriate oversight" by the Kentucky Office of Workers' Claims allowed the situation to continue until a cash crisis forced the situation to the surface, according to a F.A.Q. on the website of the Office of Workers' Claims.
Following the discovery of AIK Comp's financial status, on August 3, 2004, the Governor of Kentucky signed an order relieving OWC of authority over self-insurance funds, including AIK Comp, placing it under the supervision of the Department of Insurance. By August 5, the Department of Insurance placed AIK in rehabilitation. As explained by the DOI in its own FAQ on the action:
"Rehabilitation is a first step to reform and revitalize an insurer. The rehabilitator assumes control, but not ownership, of assets and property owned by the insurer. Under court supervision, the rehabilitator assumes the power of the board and trustees, has the power to direct and manage, can hire and fire employees and can plan and carry out a reorganization of the company. After successful rehabilitation, the court may terminate the proceeding and return control to the insurer. Liquidation begins when rehabilitation is seen as failing or futile. The liquidator assumes title to all assets and property and asks the court to declare the entity insolvent. In a liquidation proceeding, the Court determines the rights and liabilities of the insurer, its creditors, policyholders, shareholders, members and all others interested in the estate."
Within the month, five senior officers of AIK Comp were fired, according to a D.O.I. press release.
According to the various news stories, FAQs and press releases, 100% collection of the assessed funds is considered doubtful. Many former members of AIK Comp have gone out of business or do not have the ability to pay their assessment. The membership in the fund has declined dramatically since it stopped discounting its premiums in advance and began charging an actuarially sound rate.
The Kentucky Department of Labor provides material from a public hearing on AIK Comp's status, including an actuarial report of financial dealings over the period of concern.
More information is available at AIK Comp's website.
See also: Unintended Consequences: Member Assessment : Dangers of Under-reserved S/I Plans
Posted by dougsimpson at December 15, 2004 05:38 PM | TrackBack