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Established in 1914 by the state legislature, State Fund is California's most reliable provider of workers' compensation insurance and a vital asset to California businesses. State Fund supports California's entrepreneurial spirit and plays a stabilizing role in the economy by providing fairly priced workers' compensation insurance, helping California employers keep their workplaces safe, and restoring injured workers.

Testimony of Janet Frank, President, State Compensation Insurance Fund, to the Senate Banking, Finance and Insurance Committee

February 06, 2008

Hello. I am Jan Frank, State Fund’s new president and CEO. Although I just recently marked my first 100 days with the organization, I have already had the pleasure of meeting many of you. Today, I want to update you on the important work State Fund has been doing, the changes I am implementing and the direction this organization is headed.

The past 18 months have been challenging for State Fund and the road has been a rocky one. However, this organization has made significant strides in what I would describe as a transformative process. There is still much work to be done and organizational change does not occur over night -- it is a long race -- not a sprint, but State Fund is prepared to go the distance.

It is also important to note that despite the challenges and upheavals State Fund has faced, we remain financially solid. Recently, our 2006 financial statement was accepted by CDI demonstrating that we have emerged from one of the most difficult periods in workers’ compensation history well positioned for the future. Today and going forward, we are fully committed to a path that is focused on transparency, solvency, accountability and trust.

Since I joined State Fund last October, we have begun several large initiatives. One of my first priorities was to conduct mini operational reviews to begin to understand our strengths, weaknesses and opportunities. To that end, the executive team and I spent considerable time reviewing all of our operations and I also spoke with employees to get a sense of what was working well and what needed improvement. These operational reviews continue and probe increasingly deeper into the organization to determine how we can further increase efficiency and best serve our customers.

I also directed our corporate communications department to develop a coordinated and comprehensive communications plan to begin addressing the needs of our stakeholders – both internal and external including the legislature, governor’s office, California Department of Insurance (CDI), our brokers and policyholders, the media and our own employees.

Communication has been – and will continue to be – a key component in setting a new course for State Fund. In my first 100 days – actually even before I started – I have been able to make several trips to meet with policy makers and other important stakeholders here in Sacramento. These meetings have been valuable and provided me an opportunity to hear your concerns and provide you updates on the progress State Fund is making in strengthening our corporate governance.

Of course, the completion of CDI’s operational and financial review was also a very large event that transpired during my first 100 days. We are fortunate to have been able to establish a cooperative process with CDI during the course of their review and we appreciate the important roadmap their findings have provided for State Fund. In fact, as we noted in our detailed response to the report, which we also released in December, State Fund had already made significant progress in many of the areas that CDI identified.

For Example:

  • State Fund’s Internal Audit Department now reports directly to the Board of Directors’ audit committee. Each month -- and independent from management -- Internal Audit reviews a wide range of issues including financial and internal controls.
  • We have strengthened the policies and procedures that govern State Fund’s group administrative fee program and have new contracts in place that provide a greater emphasis on safety services, performance metrics and audit provisions.
  • I am also pleased to report that our technology improvements and strategic staffing initiatives have been effective in resolving the timeliness of our payments to medical vendors.
  • State Fund has taken decisive steps to tighten controls in many operational areas including our budgeting process and payment to vendors.

These are just a few examples of the progress we have made. We have developed action plans for all of the remaining CDI recommendations. The highest priority items have been incorporated into our strategic initiatives for 2008 and that work is already underway. We will be reporting quarterly to the CDI on our progress.

Building on the progress that has already been made, I have worked with our Board and executive team to develop a business model that positions us well for the future and focuses primarily on the following three areas:

  • Corporate Governance
  • Expense Management/ Platform Stabilization
  • Building Flexible Capabilities and Capacity

Let me take a moment to explain each area beginning with Corporate Governance.

Even before I joined the organization, State Fund had made significant strides in strengthening operational oversight as we have highlighted previously. A top priority in the governance area is the expansion of our Board of Directors. Increasing the board’s size will allow the creation of three to four subcommittees to provide additional oversight in the areas of audit, legal and finance, risk and compensation. Accomplishing this will require legislative action which I will address in just a moment.

Expense management and platform stabilization is another priority for State Fund in 2008. Aggressive competition has returned to the workers’ compensation marketplace and as a result our premiums have fallen significantly. Falling premiums place additional pressure on our expense ratio which is another reason we must be focused on prudent expense management.

In order to stabilize our business platform, we must ensure we are delivering the best possible customer service. Recently, we announced to our staff that we will be reorganizing our operations to create functional alignment within our claims and policy services to better meet the needs of our customers. By internally aligning our business areas we will be more effective in delivering our products and services to all of our customers – injured workers, our policyholders and their brokers.

Building a flexible organization – one that can operate in the ever changing market place – is our final priority for 2008. State Fund is creating a more unified and responsive operation designed around our core businesses. We have an urgent need to develop the right talent and technologies that will help us anticipate and meet the needs of California employers – and their injured workers – in any market condition.

We need your help to accomplish this ambitious agenda. In December, I submitted proposals for the legislation necessary to create additional exempt positions. Specifically, I have requested a Chief Financial Officer, Chief Technology Officer, Chief Risk Officer, General Counsel, Chief Investment Officer and Chief Operating Officer. I have provided you with detailed information on the specific responsibilities for these positions and why they are so critical to the success of our organization. These positions, along with the proposed changes to the Board’s structure and size, are critical to providing the proper level of oversight for an organization of our size and importance.

As you know, State Fund has a unique role in the highly competitive California workers’ compensation market place. We are both a market of choice AND the safety net for California employers and provide a stabilizing impact on this business. In good times, there are numerous insurance companies providing coverage to California employers. Typically in these markets, State Fund’s market share declines. We are in this kind of a market today. However, when market conditions worsen, private insurance companies often scale back their product offerings. During these markets, State Fund’s operations typically expand to meet the needs of California employers. Quite simply, our commitment is to be here in good times and bad and we must be prepared for both.

As the bedrock for this market, it is critical that State Fund maintains a solid financial position and that we operate ethically and efficiently. The changes initiated by our board, underscored by CDI and now being implemented by myself and our leadership team provide a clear roadmap for action.

In conclusion, let me leave you with this final thought. In March 2007, our Board took unprecedented action that set State Fund on a new course. The pace and magnitude of change in this organization has been remarkable. Today, we are a more open, more accountable and more collaborative operation. State Fund remains committed to this positive course and we look forward to working closely with you and your staffs to ensure we have appropriate corporate governance, an effective management structure and responsibly transparent business operations.

Thank you for the opportunity to be with you today and now I look forward to answering any questions you may have.

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