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Financial Stability: It’s More than Just the Bottom Line As a start-up operation, KEMI didn’t have money that would be needed to pay employees, secure space, obtain an operating system, begin paying benefits to injured workers, or do anything for that matter. As mentioned, HB 928, KEMI’s enabling statute, authorized KEMI to borrow up to $7 million from a state agency to meet start-up expenses. In May 1996, six years earlier than expected, KEMI held a payoff celebration and repaid the $7 million start-up loan to the Kentucky Workers’ Compensation Funding Commission. Since that time, KEMI has been debt-free. The Purpose of a Policyholders’ Surplus Recognizing the nature of workers’ compensation insurance, development of KEMI’s surplus required immediate attention. By definition the term “surplus” is typically misunderstood outside the insurance industry and is misconstrued as profit or excessive funding. However, surplus is essential as the ultimate backstop for policyholder claims. As individual claims are reported they are evaluated and KEMI sets a monetary reserve for medical costs and income benefits. In addition, insurers like KEMI must set a reserve to cover claims that have occurred but have not been reported each year. In contrast to reserves, surplus is accumulated to cover unexpected occurrences such as mining catastrophes, unanticipated medical inflation over the long tail of workers’ compensation claims, and the impact of legislative action like the federal Byrd amendment which passed with the healthcare reform bill of 2010. That retroactive legislation provides for the filing and reopening of workers’ compensation insurance claims for benefit payments which it would have been impossible to anticipate when initial claims reserves were set. Essentially, surplus is a safety net providing financial stability above and beyond operating expenses and claims reserves; it is the working capital needed to support past, present, and future risk and operations, and it ensures a workers’ compensation insurance company can live up to its obligation to pay claims as required by law. The Comp Market Stabilizes as KEMI Grows Though very few people knew exactly what to expect when KEMI opened its doors for business, under Roger’s leadership, the board, management, and staff were prepared for changes to Kentucky’s insurance market. By the end of 1996, KEMI had grown to over 18,000 policyholders and was the largest workers’ compensation insurance company in the state - writing more than $93 million in premium. Just as expected, competition in the workers’ comp insurance market returned to Kentucky and by the end of 1999 KEMI’s written premium was reduced to $28 million. After just five years, the workers’ compensation market in Kentucky was recognizing the impact of KEMI’s successful creation and execution. All the while, KEMI was continuing to fine-tune its services and anchor itself in the solid business practices that would reinforce the company’s competitive presence and be necessary for future growth. KEMI Rated “Excellent” by A.M. Best In 2000, after four complete years of operations, KEMI had reached the age necessary to apply for a financial strength rating from A.M. Best. The evaluation process was extremely intense and time-consuming; historical data had to be generated and analyzed, corporate structure and planning had to be discussed, financial forecasts had to be prepared and presented, the impact of potential legislative involvement had to be considered and business strategy had to be laid out in detail. After months and months of working through the 9
process, in March 2001, A.M. Best issued KEMI’s first financial strength rating, A- (Excellent), which would be one of the most significant events in KEMI’s short history. At the end of the 90’s and start of the new century, the workers’ compensation insurance industry across the nation was struggling with irresponsible business practices and pricing wars; Kentucky was no exception. Now that KEMI had obtained an “Excellent” rating from A.M. Best, the organization was keenly positioned to compete with the other insurance companies in the state to provide workers’ comp insurance for large, highly-respected Kentucky operations, many of which are restricted to obtain coverage from insurance carriers rated “A-” or better by A.M. Best. Even in this new culture dominated by competition, KEMI maintained a position to avoid price wars, evaluate each risk, and price each policy accordingly. Many other carriers and self-insured funds were irresponsibly pricing policies to post policy premium on their books, but KEMI was unwavering in its commitment to ensure adequate rates and financial stability. That particular time in workers’ compensation insurance history led to the demise of many insurance companies. In Kentucky, AIKComp fell victim to its self-inflicted wounds, unable to fund claims liabilities being forced to assess policyholders and ultimately close their doors. Sharing Our Success The financial success KEMI has garnered from avoiding compromise and conducting business with integrity is a concrete advantage of placing coverage with KEMI; the long-term financial stability of the organization provides peace of mind to policyholders and injured workers alike. Repeated affirmation of KEMI’s “Excellent” rating by A.M. Best and clean financial audits from KEMI’s independent auditors as well as the department of insurance confirm the continued solvency of the organization. A conservative investment strategy, placing 90% of investments in bonds, and routinely monitoring the portfolio with reputable asset management partners has proven beneficial for KEMI even when markets have struggled. Though as a mutual insurer, KEMI has the ability to issue dividends to policyholders, and did so in 2010, the company has found greater long-term impact for its policyholders by returning premium to them through rate reductions. Over the course of the past 15 years, KEMI has issued eight rate reductions; keeping rates lower than they were when KEMI opened for business in 1995 and promoting Kentucky’s economic development by providing a quality source for workers’ compensation insurance and outstanding service at a competitive price. KEMI continues to excel and is positioned to face the future with great confidence. We expect KEMI to continue to be the cornerstone of a stable, competent workers’ compensation system in Kentucky with all the attendant benefits to workers, businesses, and the prospects for sustained economic development for our great state. David Snowden Board Chairman 10
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