By Kate Ciravolo
In late 2009 several guaranty funds prepared to undertake responsibility for the claims of Park Avenue Property & Casualty Insurance Company. An Oklahoma domiciled company, Park Avenue is an insurance company that wrote primarily workers’ compensation policies involving large deductible policies and Professional Employer Organization (PEO) insureds. It was placed into liquidation by the District Court of Oklahoma County, Oklahoma, on November 18, 2009.
According to the National Association of Professional Employer Organizations (NAPEO) there are about 700 PEOs and they operate in every state. PEOs handle traditional personnel functions such as running benefits administration, payroll, risk management, securing workers’ compensation coverage and other employment–related services. PEOs can be a viable solution for small to medium size employers. The average employer of a NAPEO member has 19 employees. NAPEO states that these workers of smaller employers, without the PEO relationship, would not have protections under Consolidated Omnibus Budget Reconciliation Act (COBRA) or the Age Discrimination in Employment Act (ADA). Nationwide PEOs were estimated in 2008 to have had gross revenues of $68 billion, up from $63 billion in 2007.
Regulatory attention and oversight of PEOs has increased over the past decade. This has included:
- The National Association of Insurance Commissioners (NAIC) through its Employee Model Law working group began in 2004 its charge to create a model law that the states could use to help monitor the employee leasing activity of PEOs. In late 2005 the group’s name was changed to the Professional Employer Organization Model Law Working Group. According to the National Council on Compensation Insurance (NCCI) the objective of the group was to update the existing model regulations to address public policy concerns related to the coverage and rating of employers involved in employee leasing arrangements.
- The Guidelines for Regulations and Legislation on Workers’ Compensation Coverage for Professional Employer Organization Arrangements (NAIC PEO Guidelines) were adopted by the NAIC in 2007.
- The National Conference of Insurance Legislators (NCOIL) adopted its PEO Model Act in November, 2007. NCOIL’s model act focuses on registration of PEOs and preserving experience rating for individual clients of PEOs.
- The Professional Employer Organizations Model Law ( C ) Working Group was formed to develop a paper for implementation of the NAIC PEO Guidelines. Last year, in 2009, the NAIC released an exposure of this implementation paper to accompany the PEO Guidelines. The purpose of this white paper is to be of assistance to states in implementing the NAIC PEO Guidelines. Final adoption may take place as early as the NAIC’s March 2010 meeting.
- Since development of the first NAIC model and act in 1989-1991, the NAIC reports the number of states with any kind of statutory scheme to regulate the PEO (then more commonly referred to as employee leasing) industry has increased from 4 in 1991 to 32 in 2007.
In addition to the above named organizations, the International Association of Industrial Accident Board and Commissions (IAIABC) reports its active involvement in PEO matters involving workers’ compensation issues. The NAIC/IAIABC Joint ( C ) Working Group last met at the Winter 2009 NAIC meeting and received the exposure draft of the implementation paper. The NAIC – IAIBC Working Group Study of Large Deductible Workers’ Compensation Policies (2005) is another work product contribution of this association. Contained within this 68 page study are references to issues associated with guaranty funds, and to PEO’s.
As if prophetic about the recent Park Avenue liquidation, the 2005 NAIC - IAIABC Study includes the following:
An especially hazardous situation would occur if a PEO were allowed to use a small affiliated insurer to write a large deductible policy. The premium to the insurer would thus be minimized, which would have the apparent effect of putting little capital strain on the insurer. If claims were handled by TPAs, there would also be little administrative burden on the insurer. The PEO and the insurer, collectively, would assume the clients’ full workers’ compensation exposure, but only a small portion of that risk would show up on the insurer’s books. The remainder would represent a substantial off-balance-sheet commitment by the insurer to its owner, the PEO, for payment of claims within the deductible should the PEO default on its reimbursement obligations. The danger is that should the PEO become insolvent, either from its assumption of workers’ compensation risk or for some other reason (e.g., health benefits), then its affiliated insurer would be likely to fail along with the PEO. At that point, the guaranty fund would be obligated to pay benefits to client employers, yet it would have no meaningful recourse to be reimbursed under the large deductible, as the PEO would also be insolvent.
While the guaranty funds, coordinated through the National Conference of Insurance Guaranty Funds (NCIGF), undertake the responsibility of the handling of claims resulting from the liquidation of Park Avenue Insurance, states and organizations like the NAIC, NCOIL, NAPEO, NCCI and IAIABC will continue to address the concerns of all stakeholders in the ongoing discussion and oversight of PEOs.
Resources:
National Association of Insurance Commissioners,
www.naic.org
National Association of Professional Employer Organizations,
www.napeo.org
International Association of Industrial Accident Board and Commissioners,
www.iaibc.org
