The SCIF, it said, has been advised to develop a plan to "address its capital adequacy, writings and loss reserve leverage issues and action level risk-based capital problems."

Jim Zelinski, spokesperson for SCIF, said that, "Certainly we're going to comply. We're going to respond in a comprehensive fashion to all of the issues that Commissioner Low raised."

"In general," Mr. Zelinski said, "we share Commissioner Low's state of concern over the workers' compensation market. But from our perspective, we're doing exactly what we were designed to do by the legislature when we were created in 1914?to provide a permanent workers' comp market for the employers in California and their injured workers."

He continued that many carriers since open rating have "abandoned the market, they've went insolvent and they've went under regulatory supervision, so we're doing what we're supposed to be doing."

The State Fund, he said, "certainly didn't have any role in creating this crisis." In fact, he added, "I would go further and say that State Fund, in essence, prevented the system from collapsing the last couple of years."

At the outset of 2001, he said, an estimated $2 billion in premium needed to be underwritten. We filled that void."

Regarding reserves, he said, "The DOI, as well as independent auditors, have certified that our reserves are reasonable."

The SCIF, he said, writes about 40 percent of the workers' comp insurance in the state and has $3.6 billion in premium volume. SCIF surplus at the end of March, he added, was $1.38 billion.

"I don't think there is any question about State Fund's rate-making process," he said. "The only issue, given our exposure in the marketplace, is our surplus, and we're finalizing a plan to boost that."

Mark Webb, vice president, state affairs, for the Western region of the American Insurance Association, said the letter, widely circulated in response to a request under California's public records law, was "troubling."

The situation is "good news-bad news," he said. It's positive because "the department is taking aggressive action to make sure the State Fund is able to meet its obligations and fulfill its role as a fairly competitive workers' comp fund here in California." On the other hand, he said, "There is a certain disconcerting part about the fact that this is being done is such a public fashion."

He said that, while risk-based capital reports are given confidential status in the insurance code, "it's clear that the subject and content of this letter was given wide distribution shortly after it hit Ken Bollier's desk."

That action, he said, does not necessarily "instill confidence in the insurer community that issues involving a company's financial status will be handled properly and confidentially."

If this were happening to a publicly traded company, he added, "It could have disastrous results."

Keith Bateman, vice president, workers' compensation-health with the Alliance of American Insurers in Downers Grove, Ill., said that "People have been suggesting for quite a while that the department needed to look closely at the financial condition of the fund."

"We're glad to see the commissioner step in and attempt to protect the interest of the policyholders of the state fund," he said. "We have indicated in the past that we thought the department was not utilizing the powers it already had under the insurance code. We're glad to see them take action if they believe it's appropriate."

SCIF was downgraded, based on the fund's reserves, to double-B-plus from triple-B-plus by Standard & Poor's in December 2001. The fund had been put on a CreditWatch status in November because of "concerns over the fund's very rapid growth, which accelerated in the third quarter of 2001, with $2.6 billion of net premiums in the first nine months of 2001," according to Standard & Poor's.

The letter, dated May 29, called for the plan to be delivered to the department by June 14 and said the plan must demonstrate that SCIF "will improve its surplus level, as well as its leverage ratios and RBC by year-end 2002."

The letter also stated that an action plan submitted on May 1 was "found to be significantly lacking with respect to completeness and comprehensiveness."

In the letter, Mr. Low urged SCIF to "strongly consider" that the plan include options to increase premium rates; eliminate the large credits and discounts currently offered to large accounts; pay no policyholder dividends for the foreseeable future; reduce or eliminate the amount of commissions paid by producers; and eliminate advertising and other marketing expenses.

He also advocated selectively terminating agents that produce unprofitable business and practicing "insurer of last resort" philosophy, and only accepting accounts that are unable to procure workers' compensation coverage elsewhere.