Arizona Compensation Fund Goes Private

The Arizona legislature recently voted to approve the State Compensation Fund of Arizona’s conversion from a state supported entity to a mutual insurance company that will be owned by its policyholders. Effective January 1, 2011, the change will separate the State Compensation Fund from the government altogether. 

What it means
Employees will no longer be employed by the state, and the Fund will no longer receive any support from the state. The State Fund will continue to provide workers' compensation coverage to businesses in Arizona, but will be on the same competitive footing as all other private and mutual companies in Arizona. This will have a significant impact on the workers’ compensation market in Arizona as the State Fund currently insures more than 40,000 businesses, which represents more than half of the firms in the state. As a separate entity, the State Fund will carry its own liability, which will remove any liability the state might have for the activities of the insurance provider.

More options
Western Growers Insurance Services has a number of workers’ compensation carriers that will now be able to compete effectively with the State Fund. In addition, with the increased competition in the marketplace, other carriers will enter the state and provide even more options for WGIS customers.

History of SCF
The State Fund was originally created in 1925, the same year Arizona employers were first required to provide workers’ compensation coverage. It has operated continuously since that time, growing to become the leading provider of workers’ compensation coverage in the state with more than half of all companies in Arizona insured through the State Fund. It has also been a fierce competitor for workers’ compensation business in the state, providing coverage for virtually all risks.  Rates for the State Fund have also been extremely competitive. With these advantages, it’s understandable how the State Fund grew to become the largest workers’ compensation company in Arizona. Historically, most private companies have found it difficult to compete in Arizona because of these factors.

Changes
In the last few years, things have been changing. The State Fund has started the process of splitting its business into different companies but still under the State Fund umbrella. The risks with better experience have been placed in a preferred State Fund carrier. Poor risks have been placed in various State Fund companies based on their experience. The State Fund has also become more selective in what risks they accept for insurance. In prior years, they accepted virtually all risks, but it now rejects risks it does not want to insure and refuses to renew accounts with poor loss experience.

The State Fund has also prospered in the past by offering dividend programs to a number of business associations as an enticement to write business with the State Fund. It’s not clear whether the State Fund will continue these programs in the future, but these programs have provided a great source of business for the program in the past.

Why the change?
The Arizona Legislature is making this change in order to protect the State Fund from “the whims of the Legislature,” according to Michele Reagan, Commerce Committee chairman.

It should help to support a more competitive workers' compensation environment in Arizona. As a state supported entity, the State Fund had some advantages over private insurance carriers. When it becomes a mutual company without ties to the state, other insurance carriers should be able to compete more successfully with the State Fund. By July 1, 2012, the State Fund must change its name, so even its name will not reflect its former connection to the state.

If you have any questions about your business or workers' compensation insurance or are interested in considering Western Growers Insurance Services as your broker, please contact us.