Amid legal battle, LGC says Insurance Department might be a better regulator
It’s an understatement to say relations between the Local Government Center and its regulator, the state Bureau of Securities Regulation, are strained. There’s plenty of mutual mistrust amid their ongoing legal battle over the Concord-based nonprofit’s business practices.
Executive Director Maura Carroll last week said the group, which operates risk pools to provide insurance to local governments, has no plans to seek legislation at the State House during the coming session. But she and other LGC leaders indicated that they might prefer to be regulated by the New Hampshire Insurance Department instead of the securities bureau, which is part of the secretary of state’s office.
“It seems to me that if we’re regulated, which we are now, it would make sense to have it regulated by the entity that has the most familiarity with these kind of issues, like risk and reserve levels, et cetera,” said David Frydman, the LGC’s general counsel, during an interview with the Monitor’s editorial board. “That’s a policy question. It’s a policy question for the Legislature. It’s not for me to decide. But it seems a natural – I would like the group with the most experience and knowledge to be the ones regulating the industry, or products that are like that industry with the same issues.”
But, Carroll said, “the fact of the matter is that our regulator is the bureau, and we’re going to make every effort to try to work better with them, to establish a relationship.”
In 1987, the LGC began operating public risk pools that now provide health, property and workers’ compensation insurance to municipal governments, school districts and other local governments in the state. The group is exempt from the state rules and regulations that govern insurance providers – until 2009, state law merely required the group to make an annual filing with the secretary of state’s office.
That year, the Legislature granted additional regulatory powers to the secretary of state’s office, which began to investigate the LGC’s business practices. That led to an August order by an administrative-hearing officer, who ruled among other things that the LGC had to reorganize and return more than $52 million in improperly retained surplus for 2010 to its member governments.
The LGC has appealed that order to the Supreme Court, which agreed to hear the case but declined to stay the order. In response, the LGC last month took steps to comply with the order, though state officials have said they’re not convinced the group has fully complied.
Andru Volinsky, special counsel to the securities bureau, said deciding how the LGC and similar risk pool-operators should be regulated, and by whom, is a question for the Legislature. He and Carroll both said oversight was assigned to the secretary of state’s office in 1987 because the Insurance Department wanted regulatory authority beyond the annual-filing requirement, which the Legislature was unwilling to grant.
“It’s appropriate for the Insurance Department to regulate these entities if they are treated as insurers and subject to Insurance Department regulation as an insurer,” Volinsky said. “And I don’t know where (Secretary of State Bill Gardner) comes out on that issue, but that is a different question than simply assigning the exempted entity to the Insurance Department because they like them better.”
Reserves and surplus
The dispute between the LGC and its critics is complex and technical – the August order runs 81 pages. But in short, state officials said they believed the LGC’s corporate structure was illegal under state law, that the group retained too much money instead of refunding it to member communities as surplus and that surplus was returned in an improper fashion, among other things.
LGC officials defend their practices, especially on the issue of reserves. When payments from member communities exceed their claims for the year, the excess is returned as surplus, except for an amount retained as a reserve. The LGC says it needs to maintain a certain level of reserves in order to guarantee it can cover claims in case of a catastrophe like an epidemic or hurricane, and the state agrees.
The question is, what level of reserves is appropriate?
The August order required the LGC to maintain reserves at a risk-based capital ratio of 3.0 or 15 percent of claims, whichever is lower – compared, the officer wrote, with the group’s past practice of retaining an amount approximately equal to 24 percent of claims, which he called “unreasonably high.”
But Frydman described the new level as fairly low. The 15 percent threshold has come out to a risk-based capital ratio of 2.7, he said, compared with the state of Massachusetts’s recommended ceiling of 7-10 and below the 3.0 level that is designed as representing “concern” for Blue Cross Blue Shield insurance affiliates across the country.
“I keep hearing from our board: ‘We don’t think we could prudently represent our members, our own communities who buy these products, and feel safe going to bed at night with too low a reserve level,’ ” he said.
State officials reject the argument that the reserve level is unreasonable. The August order also required the LGC to purchase reinsurance to cover catastrophic claim overruns. Carroll said it’d be cheaper in the end to retain a higher reserve level and that reinsurance will cost $5 million this year, but Volinsky said that cost could be lower if the LGC changed some of its operating practices.
“When you understand the technical aspects of it,” Volinsky said, “they’re actually in a better position than their competitor, SchoolCare.”
A level playing field?
SchoolCare and Primex are the state’s two other operators of public risk pools. Both groups voluntarily entered into agreements with the bureau in early 2012 to change their practices.
But LGC officials said it’s unfair to have three sets of rules, one for each risk-pool operator, instead of a single set of standards for the industry.
“Pass rules that apply across the board,” Frydman said. “Create a fair, level playing field that best meets the needs of members. . . . Set it up and then let it run. But that’s not what’s happened.”
Volinsky responded that it’s disingenuous for the LGC to say it wants a single set of rules, since the bureau negotiated agreements with Primex and SchoolCare only after such talks with the LGC broke down.
“We involved all three of the existing risk pools in discussions about what practices should be adopted across the board,” Volinsky said. “And after insisting that the others be involved, the LGC was really unwilling to agree to anything reasonable.”
Leaders of the LGC say they’re eager to enter into mediation and come to some sort of agreement before the group’s appeal is heard by the state Supreme Court next year. Lawyers’ bills on both sides in the case have been estimated at more than $2.5 million, and that cost is rising.
“My goal . . . is to put this mess behind us and go forward, get back to going what we’re supposed to be doing,” said Shelagh Connelly, a Holderness selectwoman and LGC board member. “I would like to settle. I’ve met with them and said, ‘Could we mediate? Could we get beyond this rancor? Could we get beyond this wasteful spending?’ ”
But Volinksy said the bureau has tried to talk with the LGC many times, and never with success.
“You mediate before you lose the final hearing, and we asked for negotiations and mediations all through the spring,” Volinsky said. “And the LGC is now willing to mediate after they’ve lost, which makes little sense for the regulator, because we’ve gone through all of the efforts to enforce the statute because the LGC wouldn’t mediate, number one, and number two, the hearing officer chose requirements after looking at what the LGC has done and what the risk pool agreements require of Primex and SchoolCare.”
He added, “The only thing for the LGC to seek in mediation is a better position than its peers, because if the hearing officer’s order is enforced as written, they come out in the same place as their peers, which is as it should be. And they shouldn’t be given an advantage for dragging this out and fighting it at every step.”
(Ben Leubsdorf can be reached at 369-3307 or firstname.lastname@example.org or on Twitter @BenLeubsdorf.)