A state audit of Kentucky Employers Mutual Insurance (KEMI), released two weeks ago exposed more than just questionable financial expenditures of the state’s largest workers’ compensation insurance company. It also exposed a potential vulnerability of some “state fund” structures; a non-profit mutual insurance company that is not controlled by the policyholders who allegedly own it. And it is not the first time a legislatively created state insurer with a government appointed board has found itself in the news for questionable actions and decisions.

The Lexington Herald Leader reported that State Auditor Mike Harmon said his office found that Kentucky Employers’ Mutual Insurance has numerous questionable spending practices, “including a lack of competitive bidding and cost controls, inaccurate reporting of its contracts and business funds used for expensive meals, liquor, gifts and entertainment for insiders’ personal benefit.”

His report cited numerous examples of this, from an annual event at Keeneland (a horse racing complex) to questionable real estate deals to “giving hundreds of University of Kentucky basketball and football tickets to senior managers for no identifiable business purpose.” In an interview after the reports release, Harmon said, “They acted as if it was their own money rather than policyholders’ money or taxpayers’ money.” 

To be completely fair, it was the chairman of KEMI’s governing board, Brandon Voelker, who apparently requested the audit. He had become concerned about KEMI’s spending practices. Voelker has said that the 10-member board is trying to impose stronger oversight at KEMI. 

Voelker was appointed to the KEMI board in 2016 by Governor Matt Blevin. KEMI’s entire board is named by the governor, which also includes the state’s secretaries of personnel, finance and labor. The employers who have policies with the company, who, with most other mutual insurance companies would have a say about corporate leadership, are not represented. KEMI says directly on their website; “KEMI is a mutual insurance company owned by its policyholders.”

Those owners just have no say in how the company is managed.

KEMI was established as a part of legislatve reforms passed in 1994. Such state funds, or legislatively created “quasi-governmental” state insurers of last resort are a key component in maintaining economic stability in their jurisdictions. Problems and abuses can occur, however, when a politically motivated oversight process is left in place to guide these entities. I am not suggesting that all such state programs have this problem; merely that the potential for neglect and abuse is more prevalent than when oversight boards are selected through more traditional means. This was most recently displayed a few years ago when the governor appointed board of directors of Oregon insurer SAIF failed to properly conduct due diligence around the firing of a new CEO, embroiling the company in a controversy that lasted years and cost it millions. 

A comment by KEMI Chairman Voelker inadvertently alludes to this issue. He said in an interview, “As you can expect, anytime you’ve got an organization of 220 employees that has been doing things a certain way for 25 years, it takes some time to change behaviors.” 

That is a broader statement that alludes to an organizational culture; a culture that might have been created by lax or improper oversight over that same period of time. 

This is not to suggest that all political appointees are not well intentioned. No, quite the opposite is true. I know a good many people in this industry who have been selected by their governors to fill a position of leadership within their state. The vast majority of them are dedicated people who work hard to understand the challenges of the job and conduct it to the best of their ability. This includes a previous KEMI chairperson, with whom I had a chance to become acquainted several years ago.  

However, board positions are not full-time gigs that require such dedication, and the challenge of getting all the right people in position at one time are much tougher to meet. The chances of every board member understanding the complexities of the insurance world are not that strong, and when you throw in a taste of political cronyism, the situation quickly worsens. 

Perhaps the KEMI board should be chosen by people with actual skin in the game. At the very least give them some seats for representation. That would align them with most other mutual insurance entities and bring accountability to the forefront. 


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