Pinnacol Assurance assets to go under review

Ken Ross, CEO of Pinnacol Assurance, says he’s looking forward to an audit and review of the state’s workers’ compensation insurance provider this summer under Senate Bill 281, passed in the final days of the 2009 Colorado legislative session.

The bill, sponsored by Sen. Brandon Shaffer, D-Longmont, creates a 16-member “interim committee” to decide what status Pinnacol should have and whether its assets should be fair game when the state is in economic crisis.

“From Day 1 we’ve told anyone who would listen, if you want to audit us, fine,” Ross said. “If you want to study us, fine. But just structure the committee so it’s unbiased and you can get accurate data.”

Members of the committee had not been named at press time.

For about a week in the first half of April, the state was buzzing with the Pinnacol drama unfolding at the Colorado General Assembly.

Lawmakers, faced with the possibility of a $300 million shortfall in funding for higher education because of the recession, were looking at tapping the bulging reserves of Pinnacol Assurance, the state-created insurance company that handles workers’ compensation claims for about 58,000 businesses in Colorado.

Senate Bill 273 – sponsored by Sen. Al White, R-Hayden – proposed taking $500 million from Pinnacol’s surplus and using the money to shore up higher education. At the time, Pinnacol allegedly had a loss reserve account of about $1.2 billion and another surplus fund of about $700 million, and SB 273 was based on the premise that the state legally had access to those funds.

Opinion: Unconstitutional

The Capitol drama included a protest by about 250 people against the proposed “raid” on Pinnacol’s surplus. By the middle of April, Gov. Bill Ritter had weighed in and said he could not support SB 273’s asset transfer plan. That came a few days after Colorado Attorney General John Suthers issued an opinion that said seizing Pinnacol’s assets would violate the state’s Constitution.

Lawmakers eventually decided to find other ways to cut the budget and reduce the impact on higher education.

But SB 281 – introduced April 6 and passed on May 4 – is expected to get Ritter’s signature. Shaffer, the bill’s main sponsor, said its aim is to sort out how much control the state should have over Pinnacol and whether its tax-exempt status should change.

“There were a number of ideas that floated out there,” Shaffer said. “One was to sell it, but what’s it worth and who do we sell it to? Do we bring them back into the state or leave them alone in the structure in which they currently exist?”

Shaffer said he has no confusion about Pinnacol’s status. “The statute’s pretty clear,” he said. “It says it shall act like a mutual insurance company but it never says it’s not a state entity. It is a state entity.”

But Ross concedes no such status. “We’re a hybrid, created by statute and not unlike other states that have created workers’ compensation agencies,” he said. “It specifically states we are not a state agency and we are regulated by the Division of Insurance as any other insurance company. Our view is we’re a mutual insurance company.”

Nearly a century of history

Pinnacol’s history dates back to 1915 when the state created the Colorado Compensation Insurance Authority to offer worker’s compensation coverage to high-risk industries.

In 2002 – after CCIA faced large deficits in the late 1980s and early 1990s – the Legislature passed a bill that morphed the CCIA into Pinnacol Assurance and declared its assets would be off limits to the state.

“All revenues, moneys and assets of Pinnacol Assurance belong solely to Pinnacol Assurance,” the act states. “The State of Colorado has no claim to nor any interest in such revenues, moneys and assets and shall not borrow, appropriate or direct payments from such revenues, moneys and assets for any purpose.”

Some Republicans, in opposing SB 273 and SB 281, declared Pinnacol a private company whose assets should be outside the reach of government. Highlands Ranch Sen. Ted Harvey called the intent of SB 281 a “witch hunt.”

“At best, this bill is a witch hunt – an investigation lacking even the hint of a problem in the first place,” Harvey said.

Mike Pierce, an agent with LBN Insurance in Estes Park, demonstrated against the Pinnacol bills and said he hopes the Pinnacol study results in few if any changes.

“From an agent’s perspective, it went from the worst company we dealt with to by far the best,” he said. “If they come in with this committee and throw in a monkey wrench they could destroy what’s happened over the last 20 years.”

Supporters of Pinnacol note that the company has returned more than $225 million in dividends to policyholders since 2005.

Ross, who earns $500,000 a year heading Pinnacol, said the company managed to amass its surplus by “managing its claims very efficiently” and doesn’t believe it is overly large.

“The surplus is there to help us return money to our policyholders, reduce rates by 42 percent over the last few years, and I have liabilities that go out 10, 20, even 40 years,” he said. “We have to take care of that employee years and years into the future.”

How did surplus grow?

Shaffer said he hopes the interim committee study – scheduled to begin in July or August – can answer how the company amassed such a huge surplus and how it should function in the future.

“It’s hard to understand,” he said. “They either don’t pay out on legitimate claims or their premiums are too high or their actuaries are too conservative as to how much they should have on hand.”

Shaffer said he doesn’t expect the committee will recommend that Pinnacol’s assets should be open to general fund use. But he said he hopes questions about the company’s huge surpluses may be answered.

“They’re supposed to operate at cost, which means they’re supposed to maintain an adequate reserve, determined by the insurance commissioner, and then operate at cost and give out dividends so they don’t end up with the huge surpluses they have,” he said. “If the inquiry ends up doing that – giving more dividends back – then the inquiry will have been successful.”