Overview of Pinnacol Assurance
INTERIM COMMITTEE TO STUDY ISSUES RELATED TO PINNACOL ASSURANCE
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02:30 PM -- Overview of Pinnacol Assurance
Mr. Ken Ross, CEO Pinnacol Assurance, and Mr. Dan O'Neil, Vice President of Claims and General Counsel for Pinnacol Assurance distributed a book of information regarding the history of Pinnacol (Attachment D). Mr. Ross talked about his work experience and background. Mr. Ross gave the history of workers' compensation in Colorado. Mr. Ross discussed the history of Pinnacol and the members of the Board of Directors who are each appointed by the Governor. Mr. Ross stated that from 1987 to 2000, Pinnacol was in debt and at one point they were $500 million in debt. Following this, Pinnacol was put on a recovery plan in 2000 to reach a reasonable level of surplus. In 2003, the recovery requirements were reached and Pinnacol had a surplus of $250 million. Once the level was reached, Pinnacol gained control over its own assets. Mr. Ross talked about the various units within the company, including the fraud department and the return to work specialists. He talked about the dividends have been distributed over the last 5 years totaling about $350 million.
Mr. Ross talked about the Pinnacol Foundation which awards scholarships to children of workers killed or seriously injured in a compensable work-related accident while working for a Colorado employer using money raised in the community. He also talked about Pinnacol in Action, the volunteer program at Pinnacol where employees volunteer at various nonprofits.
02:46 PM -- Mr. Dan O'Neil, Vice President of Claims and General Counsel for Pinnacol Assurance, talked about the structure of Pinnacol Assurance. He clarified that Pinnacol lost government immunity in 2003 when the recovery requirements were reached. Mr. O'Neil talked about the make-up of the board of directors. Mr. O'Neil discussed the four committees under the board: the Audit Committee, Compensation Committee, Investment Committee, and the Governance and Ethics Committee. He discussed the audits that are conducted by the state and the Division of Insurance. Mr. O'Neil responded to an earlier question about federal tax exemptions.
Representative Pace asked about the surplus in Pinnacol Assurance and whether they have considered returning more in dividends. Mr. Ross talked about the process the company goes through to determine surplus. He explained that the company had a good year in 2008, and as a result, the dividend were increased from $55 to $120 million. Representative Pace asked if there are any incentives for denial of claims. Mr. O'Neil stated that bonuses are not given for individual performance. Senator Carroll stated that there are team incentives. Mr. O'Neil agreed and was asked to expand on the bonus structure. He talked about what they look at when deciding bonuses. He said they look at how the company is doing on a whole and how is the team doing relative to its goals. There was a discussion about losses and benefits paid to workers. Mr. Ross talked about how insurance companies measure performance. He said if you took the combined premium collected and it matched the amount of benefits paid (losses) the company would be at 100. If a company is under 100, it is doing well, and if a company is over 100, it is losing money. Mr. Ross responded to additional questions from the committee about denial of claims and talked about the reduction in claims in the last 18 months.
Representative Ryden asked the witnesses to explain the difference between reserves and surpluses. Mr. Ross explained that every insurance company has to hold a certain amount of reserves to cover claims. He stated that it is difficult to determine this because of the long tail for claims and explained that some workers get paid benefits for 10, 20, and even 30 years. As of the end of 2008, Pinnacol set aside $1.2 billion in reserves for liabilities. Above that, there is a surplus, which Mr. Ross explained is more than most insurance companies because Pinnacol only writes workers compensation and writes it only in Colorado. He went on to explain that other companies spread their costs over employers in a number of states and can offer policies for less than cost as a result. Mr. Ross talked about the impact of 9-11 on New York's surplus. He said that Pinnacol has determined that between $450 and $600 million is where its surplus should be. In 2008, Pinnacol had just under $700 million in surplus and gave out $120 million in dividends. Mr. Ross stated that in August, the process will start over again and the surplus will be adjusted or dividends will be given if applicable.
There was a discussion about reinsurance and what it covers. Senator Harvey talked about the charge of the committee. Representative Ryden asked about the tax exemptions Pinnacol receives. Mr. Ross said there are two, the federal tax exemption and the state premium tax exemption. The state premium tax is 1 percent of premium, and last year Pinnacol had $500 million in premium, so if it paid the state tax, it would have had to pay $5 million last year. He also mentioned that they do not pay sales taxes or real estate taxes. Mr. Simon asked about the federal catastrophic coverage in disaster situations.
There was a discussion about the charge of the committee. There was also a discussion about the relation of the amount of dividends and the cost of premiums. A discussion ensued about how compensation is determined at Pinnacol.