Trusts' failure costs companies $363 million - Poughkepsie's CRM at center of insurance storm

Two startling letters arrived in recent months at Ronnybrook Farms, a family-run farm in Ancramdale that supplies dairy products to New York retailers.

The operation, the letters said, would have to pay an additional $40,000 for workers' compensation insurance for which it had already paid. It seems the money would cover unforeseen deficits of Ronnybrook's workers' compensation insurer, the Wholesale and Retail Workers' Compensation Trust of New York, which had, in a word, gone belly-up.

"It was quite a shock to us all," said Rick Osofsky, who with his brother Ron runs the 67-year-old farm that sells milk in distinctively old-fashioned bottles. More shocking was the response when the farm objected: It owed the money. Period.

Thousands of employers across New York are finding themselves in a similar fix as Ronnybrook Farms, forced to clean up a situation they didn't see coming and bear little blame for. In fact, Ronnybrook hadn't had a single claim.

The problem is a $363 million insurance nightmare: Eleven so-called group self-insured trusts owe hundreds of millions more in claims than they have in assets, including seven, like Osofsky's group, that were run by Poughkeepsie-based Compensation Risk Managers LLC, or CRM. The liabilities of the seven CRM trusts are estimated by the state at $248 million; they have assets of about $52 million. The remaining non-CRM trusts owe $115 million and have about $1 million in assets. CRM has agreed to surrender its license to manage trusts amid charges filed by the overseeing state Workers' Compensation Board that it submitted false information and mismanaged funds.

The collapse of CRM's trusts has prompted finger-pointing between CRM and the board, with the board at one point giving "all Fs" to CRM's trusts and CRM disputing the state's numbers. But according to interviews with trustees, employers, regulators and legislative, union and business officials, the truth behind the insurance debacle is likely somewhere between regulatory failure and corporate misconduct. With the case against CRM settled - and therefore few additional details on the company's activities released - the board has referred the matter to state Attorney General Andrew Cuomo for possible additional action.

The workers' compensation claims have continued to be paid with assets the funds have left and assessments against existing trusts. In addition, the state Legislature passed a $52 million rescue of the floundering system in late June. The legislation includes provisions that point to the roots of the disaster itself - an under-regulated, rapidly growing industry overseen by a state agency that was slow to see a crisis years in the making.

Among other things, the bill, which has been signed into law, increases assets a group trust must have to cover losses; requires annual financial reports prepared by outside auditors; sets deadlines to shut down trusts that aren't adequately funded; and makes it a felony offense with civil fines of up to $20,000 for trust managers who falsely represent the financial status of their operation or do not fully inform clients of the risks.

"Private carriers have numerous, onerous regulations," said Ellen Melchionni, president of the 70-member New York Insurance Association, a trade group, echoing others in the industry. "There is very little oversight of these trusts."

Among the charges CRM had faced: "repeated failure" to pay timely compensation to injured workers and to file paperwork with the board; "repeatedly engaging in dilatory conduct" over cases; failure to cooperate with the board in audits of seven of its trusts, and that it "routinely failed to set aside adequate reserves" and "submitted false information to the WCB and to its clients" regarding the reserves of one of its trusts, the Healthcare Industry Trust of New York.

In a prepared response to the board, CRM denied all the allegations, maintaining it believed it had sufficient reserves to cover the healthcare trust's claims and that it had cooperated with audits. Moreover, it maintained that during the period when the alleged offenses took place, the board twice renewed CRM's license to manage group trusts, in 2004 and again last September.

Broad problem

CRM maintains it is but a symptom of a much larger problem that afflicts the community of 50 self-insured trusts in New York - a problem of over-competition and rising costs that had caused it to voluntarily leave the market even before the board's charges were brought. Indeed, three other trusts unrelated to CRM failed in 2006, and eight others have closed voluntarily. A report on New York's group trusts in 2006 showed that 30 of 64 were deemed "underfunded," having assets of less than 90 percent of liabilities. (The ratio remained about the same through June when the board released "preliminary" figures showing that 10 of 50 trusts were underfunded; it did not include those that were terminated.)

"What we're dealing with here is very clearly a systematic problem," Daniel G. Hickey Jr., 41, the chief executive officer of CRM Holdings Ltd., CRM's parent company, said in an interview. That's why the case against CRM was "favorably settled with no fines, penalties or admission," he said.

The idea of group trusts, which flourished in the 1990s, seemed sound: Employers in similar businesses would join forces to self-insure, reviewing membership to closely control risk and controlling administrative costs associated with higher-priced commercial insurance. The bonus was that employers would get dividends - refunds on premiums - in years when claims were low. The catch was that each was "joint and severally liable." Unlike traditional insurance, employers, such as Ronnybrook, would be proportionally liable in the event - considered unlikely - that the fund ran short and members had to be "reassessed."

Workers' compensation insurance pays the medical and living expenses of workers injured on the job. Most such insurance is provided by private companies or the state Insurance Fund. But in New York, about seven of every 100 employers are in group self-insured trusts - about 16,000 employers in all. For many, the trusts were a welcome respite from high-cost, hard-to-get compensation insurance.

"My experience with it is that everything that was told to me was delivered," said Louis Strippoli, owner of Caffe Aurora, a Poughkeepsie bakery that paid $1,400 a year through a CRM trust - a 40 percent savings. "I already paid one reassessment" - about $300 - "and I still come out ahead."

Worry about what's next

But other employers worry about the implications of such a huge insurance failure.

"It could put some of these companies out of business," Maynard A. Darrow, owner of Darlind Construction in LaGrangeville and a member of a non-CRM trust, said of potential assessments to cover the losses of the failed trusts. While that's how the state intends to pay back the bailout, the question remains whether that approach will be enough to cover all the failed trusts' liabilities.

The slide to economic disaster did not begin just in the last year as the compensation board moved to close the CRM trusts. Rather, figures released by the board show it was several years in coming.

The Healthcare Industry Trust, one of the largest to fail, saw its annual deficit more than double between 2004 and 2005 - then grow more than twelvefold from 2005 to 2006 to $91 million. The deficit of the Wholesale & Retailers Workers' Compensation Trust grew sixfold from 2005 to 2006 - then tripled between 2006 and 2007 to $19.1 million.

Eric Egeland, CRM's vice president of trust relations, disagreed with the methodology used by the state to compute the deficits. "When you're doing an actuarial study," he said, "it's always a guess." Others accept the board's math - and suggest it did not move quickly enough to contain the damage.

"The workers' comp board knew these funds were underfunded," said Nancy Richard, risk manager for Darlind Construction. "They did not move effectively to do anything in a timely way."

The reason may be in the board's longtime mission: its traditional role has been as an overseer of benefits provided to injured workers rather than as a regulator of insurance providers. For all other workers' compensation providers, the state Insurance Department plays the role of regulator, approving rates, inspecting financial statements and making certain that insurers have sufficient assets.

The board - which did not even approve rates charged by trusts until 2006 - assumed control of the self-insured market on the premise that employers were much more involved in claims and accident prevention. Some observers suggest the board was relatively hands-off because, under the liability provision, members of the trusts had such a clear stake in the outcome.

But the problem soon became one of scale. What began as small groups of like companies turned into conglomerates covering hundreds of thousands of workers and handling millions of dollars in premiums.

"Group trusts have been allowed to grow in size to the level of becoming mutual insurance companies which have a whole host of regulations and loops and hurdles," said Art Wilcox, public employee division director for the state AFL-CIO. "That wasn't done for the group trusts. They are starting to unravel."

Rapid growth

CRM itself is an example of the breathless speed at which the group trust industry has grown. The company started in 1999 in the Poughkeepsie offices of the insurance brokerage Hickey-Finn & Co. with two employees and a cubicle. By 2006, it had 150 employees in New York, was collecting more than $200 million in insurance premiums and had revenues of $40 million. Clearly, CRM had filled a void in the market.

"For the first five years, everything was great," said Joseph Dotterweich, chief financial officer of Buffalo-based Ficel Transport and chairman of the Transportation Industry Workers' Compensation Trust, one of the defaulted CRM trusts. "We were saving a lot of money over the standard market for trucking companies."

Then around 2005, he said, the state began to take a closer look at the trust's finances: Did it have enough money to cover expected claims of injured workers? These so-called Level 2 audits, under which auditors calculate a trust's liabilities, were the beginning of the end for the New York trusts managed by CRM.

The board normally finds some variation between liabilities calculated by trusts and those computed in a Level 2 review. For some CRM trusts however, "the magnitude of the changes necessary…were way outside of normal actuarial ranges," the compensation board's Keegan said.

Suddenly, the liabilities of CRM-managed trusts soared. From 2004 to 2006, for example, the Healthcare Industry Trust went from having liabilities of $32.2 million to $134.3 million, according to figures provided by the compensation board, and the Trade Industry Workers' Trust for Manufacturers saw liabilities grow from $2.7 million to $8.5 million. CRM, meantime, went from having two trusts labeled "underfunded" in 2005 to having six in 2006.

"It was a perfect storm," Hickey said, employing a term used by several other people to describe the factors that brought down the company's trusts.

The trusts had long offered lower rates compared to the general market for workers' compensation insurance. That was their appeal and their strength - they could control risk by picking pool members and hence contain costs. But then, in March 2007, the state passed workers' compensation reform legislation that sealed the CRM trusts' fate.

The legislation - good news to employers generally - streamlined the claims system, created incentives for employers to control risk and limited payments for diagnostic tests, pharmaceuticals and medical equipment. The upshot: the legislation worked so well that in July 2007 the Insurance Department ordered a 20.5 percent rate cut for workers' compensation insurance. While trusts operate outside the department, they also cut rates to stay competitive.

"No business, no matter how well run, can handle all these problems at once," CRM's Egeland said, maintaining that other non-CRM trusts would share the CRM trusts' fate if subjected to the assumptions used by the state's auditors. He disputed a statement by a board spokesman, Brian Keegan, that "CRM's actions have singled them out."

"Of course CRM has been singled out because they have only done this to CRM trusts so far via their recent Level 2 audits," he said. Egeland noted that a judge ruled last week that the state had failed to prove the trusts were "insolvent" in a legal action filed by trusts that had been billed for the losses of failed trusts; the decision gave the state the option to assess the trusts in the future, however.

In an e-mail, Keegan maintained, "The focus has been on CRM since all of their trusts have been or will shortly be closed." The four other trusts closed by the board since 2006 involve three other administrators, he noted.

Circumstances changed

CRM officials repeatedly put the onus for its woes on the changing liability picture wrought by the Level 2 reviews and the sudden plunge in rates. But others said the system encouraged bad practices that likely contributed to CRM's downfall, including paying dividends and giving discounts too freely, letting risky businesses into trusts to increase profits and inflating overhead through overpaid executives. Hickey earned $1.7 million last year, which company officials said was "in line" with companies its size.

Mary Beth Woods, director of licensing for the Workers' Compensation Board, questioned the way in which third-party administrators like CRM are paid, namely through a percentage of the premium. She said the fee is generally 18 percent to 20 percent, though CRM claimed it collected on average 8 percent to 10 percent. "Does it cloud their judgment because they stand to bring in a half-million dollars to the trust?" she said, adding third-party administrators earn "tens of millions in administrative fees."

Woods saw a potential conflict in another way in which CRM made money - by having its subsidiary, Majestic Insurance, provide "excess" or "re-insurance," a form of coverage that continues to pay claims that exceed a certain maximum. CRM denied there was a conflict and said it won bids for the insurance from each of its trusts.

While faulting CRM for the failure of its trusts, board officials acknowledge they have not had the tools to adequately regulate the group trust industry. The board's Keegan said the new legislation gives the board "real teeth" that it did not have before, including 30 provisions for "increased regulatory authority… (including) deadlines, increased reporting requirements, penalties, and licensing of group administrators."

Full funding required

Under the legislation, for example, trusts that do not have assets equal to 100 percent of projected liabilities will have a year to come up to full funding. Monitors can be appointed for those that fail to comply, and underfunded trusts can be stopped from granting premium discounts or admitting new members. The legislation also sets up a guaranty fund - similar to those associated with traditional insurers - to cover any calamity.

"What is currently in regulation is discretionary," said Kenneth Pokalsky, senior director of government affairs for the New York State Business Council, who was involved in crafting the new legislation. "Generally we're in agreement - we need to enhance the oversight."

Ronnybrook's Osofsky, meantime, has paid the first $20,000 assessment for back workers' comp insurance but is holding off on the second. Still, he holds strong opinions on what happened.

"If it's not criminal, it certainly approaches it," he suggested of CRM's actions. "It's terrible mismanagement."