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Background on EquityComp
EquityComp is a multi-year profit-sharing loss sensitive program marketed by AU and offered through CIC. In order to enter into this program, employers have to buy a guaranteed cost workers comp policy from CIC.
In June of 2010, AU filed a United States Patent application for a “Reinsurance Participation Plan” (RPA). The patent was subsequently granted in March of 2011. The patent describes the “invention” of EquityComp. Many states only allow loss sensitive programs to be sold to large employers because of the general belief that larger employers are more likely to have the sophistication needed to evaluate the cost effectiveness of these types of insurance policies. Through EquityComp, AU attempts to provide a mechanism for small and medium-sized employer to gain access to a loss sensitive rating scheme by creating a “reinsurance-based approach to providing non-linear retrospective plans to insureds that may not have the option of such a plan directly.”
To implement this multi-year profit-sharing loss sensitive program, AU introduced a company called AUCRA to the mix. When an employer wished to participate in the EquityComp program, CIC would issue an annual guaranteed cost workers comp policy to the insured, while AUCRA would enter into a separate 3-year RPA with the insured and establish a segregated cell for the insured under AUCRA. The cell would be funded by the premium ceded by CIC on the risk, as well as capital funding provided by the employer. All the insured’s losses would be paid from the cell. The mechanical details of the “profit-sharing plan” are described in the RPA document. Based on the patent documents, if the insured had lower-than-average losses in the next year, then the reinsurance company could provide a premium reduction according to the participation plan. If the insured had higher-than-average losses in a given year, then the reinsurance company would assess additional premium accordingly.
Shasta Linen vs. AU and CIC
Shasta Linen, a privately-held, family-owned California Corporation linen rental business, entered into a three-year EquityComp program through CIC. Shasta Linen contends that after 3 years, it paid approximately $934K of EquityComp cost. One month after the termination of the program, it received an additional bill from AU for approximately $220K. Shasta took action against CIC and AU, as it felt that the total amount of premium they paid was higher than what they would have paid under the guaranteed cost policy, and significantly higher than their total losses during the three-year period. It also contends that, despite multiple request, CIC/AU was unable to provide them with detailed documentation supporting the amount of premium they were charged.
The legal question in dispute is whether or not the RPA that Shasta Linen signed to take part in AU’s EquityComp program is an unfiled WC rate plan or a collateral agreement, and, therefore, illegal under California insurance regulations.
Shasta contends CIC violated numerous Insurance Code provisions, as well as the California Code of Regulations, by failing to file the EquityComp program and the RPA with the WCIRB and the Insurance Commissioner.
CIC and AU argued that the reinsurance participation agreement1:
The Commissioner rejected all three of these arguments2:
Furthermore, the Commissioner cites statements made in AU’s own patent application, which says the RPA would create a “non-linear, retrospective rating plan.” Since all loss sensitive plans must be filed with the WCIRB, approved by the Insurance Commissioner and attached as endorsements to a guaranteed cost policy, failure to do so renders the plans unlawful.
In conclusion, the Commissioner writes3:
Even though the California Insurance Commissioner has made his ruling on the case and the EquityComp product, the full ramifications of this decision are still unclear. Based on case documents, 80% of CIC’s workers comp book of business is related to EquityComp. The Commissioner has ordered the DOI to take affirmative actions against AU and CIC that could include market conduct examinations, financial examinations, and potentially enforcement of actions.
Despite these decisions, it appears that AU is going to compel arbitration which the RPA requires with various employers who have filed complaints. Their lawyers appear to be proceeding with these arbitrations as scheduled.
On June 29, 2016, Commissioner Jones issued a cease and desist order for the Equity Comp program. California is the third state to stop the sales of Applied Products, along with Vermont and Wisconsin. Furthermore, by declaring his decision “precedential,” Commissioner Jones allows his decision to control all future cases brought against AU. There are several other cases against AU currently pending, including a class action law suit.
One thing is certain: This story is far from over. Stay tuned for more as the saga continues.
Jing Liu is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the San Francisco, California office. She has over 15 years of experience in the property/casualty insurance industry, in both actuarial and underwriting capacities. Her experience includes assessing reserve and funding adequacy for captives, managing a portfolio of reinsurance treaties as well as ratemaking and filings. Jing is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.
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