Gov. John Hickenlooper and Pinnacol made the right decision last week in deferring further consideration of plans to restructure Pinnacol. There remains considerable misunderstanding about the future of Pinnacol, the state’s government-sponsored insurer for workers’ compensation insurance, and there is now time to clear away the fog of confusion surrounding Pinnacol’s purpose and future and do the job right.
The proposals were mischaracterized as “privatization” or “separation.” That was inaccurate and evaded fundamental questions about the future role of Pinnacol and of the state’s involvement in that enterprise.
At stake is the workers’ compensation environment if Pinnacol, which by law guarantees insurance coverage to any employer, is put financially at risk through its reorganization. Because Pinnacol would have become a member of the state’s property and casualty guaranty fund — the insurance industry’s financial backstop to guaranty benefits owed injured workers by insolvent insurers — the private insurance market’s assets would have been jeopardized, despite Pinnacol’s assertions to the contrary.
All parties should reconsider their approaches and, rather than the faux “privatization” or “separation” envisioned, follow the lead of other states (Arizona, Nevada, and West Virginia) that have privatized their state’s workers’ compensation insurance funds in recent years.
There is fundamental confusion about what “privatization” means. Would any Colorado business feel independent of state government with the governor appointing a majority of its boards of directors?
Accomplishing a bona fide privatization begins with repealing Pinnacol’s statutory authority, the legal foundation for its existence, and permitting Pinnacol to operate as a mutual insurance company doing business pursuant to the mutual insurance company laws of Colorado. The current board and operational members, designated by the governor, would sunset upon filing of its new charter. Then, establish a clearly defined residual market mechanism (independent of Pinnacol) designed to be self-funded, ensuring that better, safer employers do not subsidize losses of less safe employers.
Next, financially secure pre-privatization liabilities through reinsurance, insulating the private market from Pinnacol’s retroactive liabilities once it becomes a member of the guaranty fund. Pinnacol would operate on a completely level playing field.
Instead, this year’s proposals sought greater marketing freedom for Pinnacol while retaining key features of a government-created insurer. The result would have been an enterprise guaranteed a market (so-called “residual risks”) and able to deploy its assets to compete unfairly against the private market, in Colorado and in other states, while tasked with new public functions — “funding economic development and higher education scholarships.” How is a supposedly private or “separated” entity mandated by statute to use its capital to finance unrelated public policy objectives?
Pinnacol would continue to be governed by a majority of its board appointed by the governor (as would the new “heritage funds”). It is not possible for Pinnacol to be deemed private (or “separate”) with its board appointed by government designees.
The governor and Pinnacol contended their proposals were fair because Pinnacol would pay federal income taxes and state premium taxes, just like private insurers. However, so long as Pinnacol is tethered to the state, a future legislature and governor can agree to change the terms of the deal. There now is an opportunity to do the job right: Leave Pinnacol alone, or get the state out of its business completely and free Pinnacol to compete as a private insurer in fact.
Bruce Wood is associate general counsel and director of workers’ compensation programs for the American Insurance Association.
