Workers Comp Insider alerts us to a state court decision in Kentucky that members of the failed AIK Comp self-insured workers' compensation fund bear "joint and several" liability for the estimated $97.3 million fund deficit. That deficit estimate has almost doubled from last year when AIK Comp was taken over by the Kentucky Insurance Commissioner. The fund's insolvency resulted from its management undercharging members for coverage, distributing dividends to members and underestimating its liabilities so that deficits were not revealed.
Cases like this illustrate the dangers of efforts to make insurance "affordable" by sacrificing the future ability to pay all claims. In this case, business owners formed their own fund to "self insure" workers comp risks because they found the actuarially sound prices of commercial insurance "unaffordable." They are learning now the full meaning of the phrase "Pay me now, or pay me later."
Similarly, Hurricane Katrina is now showing us the "back end" cost of subsidizing the cost of flood insurance in flood-prone areas, as the federal government has done for years with the National Flood Insurance Program (NFIP), a part of FEMA. By encouraging and making economically possible the building of owner-occupied and tenant-occupied properties in flood prone areas, the flood insurance subsidy may have done more than cost our children the burden of billions of dollars in flood relief. It may have also condemned thousands of the poor, aged and helpless to a gruesome death by drowning in sewer water.
Judge issues ruling in AIK Comp rehabilitation case - 2005-09-08
See also:
Unintended Consequences: AIK Comp to assess members $97 MM (June 16, 2005)
and
Unintended Consequences: AIK Comp Paid Discounts (Dec. 15, 2004)