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Reason Foundation

Arizona Privatizing State Workers Compensation Fund

Leonard Gilroy
May 24, 2010, 8:07pm

Arizona Gov. Jan Brewer has signed into law Senate Bill 1045, which sets in motion the privatization of SCF Arizona, the state’s workers compensation fund. The bill requires SCF Arizona to become a mutual insurance company, regulated by state insurance officials, by January 2013. SCF Arizona is the largest workers’ compensation insurance carrier in the state, covering 40,000 state businesses and receiving $191.8 million in direct premiums written last year. SB 1045 passed with strong, bi-partisan votes in each chamber (House 37-19, Senate 26-1).

According to the Phoenix Business Journal:

Arizona Senate President Bob Burns, who sponsored Senate Bill 1045, said SCF has weaned itself from state oversight. “I just think the time is right for making them a private company and removing the state from any expenditures or liabilities we have inherited over the years,” Burns said in a prepared statement. “This action reduces the role of government, and it bolsters the private sector.”

[...] Privatization will allow SCF to provide stable rates and broaden its services. For example, it will be allowed to expand into other states, something that was prohibited before.

Privatization is supported by the SCF Arizona management, according to this recent Insurance Journal article:

"This is a case of extraordinary bi-partisan cooperation and common sense good government," said SCF Arizona President and CEO Don Smith. "It was not controversial, so it has not gotten the attention some other issues do, but the businesses of Arizona will be well-served by Senate Bill 1045 and people ought to know that their elected officials came together and did something that will help all businesses in Arizona."

"We look forward to fully competing in the private marketplace and continuing to be Arizona's workers' compensation insurer of choice. We have a long commitment to this state and this only will strengthen our ability to perform on behalf of our customers."

[…] SCF Arizona was created by legislative act in 1925, but has been gradually moving in the direction of privatization since state since legislative action in 1968 separated the State Comp Fund from the Industrial Commission. For the past several years, SCF Arizona has been a hybrid company -- neither fully private, nor fully public. The company has paid both premium and property taxes and has not received state money since the Legislature loaned it start-up money in 1925. Those funds were paid back in 1938, two years early.

Rick Jones, SCF Arizona's senior vice president of sales and business development, said the bill will enable SCF Arizona to provide stable rates and broaden its services, previously prohibited by state statute, and will free the company to be more responsive to its policyholders. Under Arizona insurance laws, a mutual insurance company is owned by its policyholders. Like a credit union, the policyholders are "members" and they govern the company through a board of directors that they elect.

"SCF Arizona policyholders will not notice anything different in their day-to-day dealings with the company," Jones said. "But over time, what they will experience is a more diversified company that can better serve their needs in Arizona and elsewhere."

One of the primary arguments for privatizing Arizona SCF is that it would allow the new company to offer stabilized rates, expand product lines and even expand into other states—arguments that are all borne out by the evidence from the most recent state workers’ compensation fund privatization in West Virginia.

As reported in Reason Foundation’s Annual Privatization Report 2009, West Virginia Governor Joseph Manchin signed a law in 2005 fully privatizing the state's Workers' Compensation Commission, transforming it into a private insurance carrier, BrickStreet Insurance. Since the completion of the process in 2008, workers' compensation rates have declined an average of 30 percent statewide, translating to over $150 million in annual employer savings. The initiative also dramatically reduced the outstanding unfunded liabilities of the old state-run system (from $3.2 billion to $1.9 billion in the first two years), the number of protested claims (down 80 percent) and the amount of time required for a ruling on protested claims. Instead of one, state-run monopoly insurance provider, there are now over 140 competitors operating in the state, and BrickStreet—formerly the state monopoly—is now competing for business in other states.

Unlike West Virginia, in Arizona SCF has not been the monopoly insurer for the state. Rather, it has been a quasi-public carrier with a politically appointed governing board that operates under different rules than its private sector competitors, despite being the largest workers’ compensation insurer in the state accounting for an approximately 30 percent market share.

Good luck to SCF Arizona as it transitions to privatization, and kudos to Gov. Brewer and the state legislature for taking an important step towards getting government out of the business of business and removing unnecessary public sector competition with the private sector.


Leonard Gilroy is Director of Government Reform


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