Premium income rose for state funds in both years despite a precipitous decline in the California state fund, the report said.

Excluding State Compensation Insurance Fund of California (SCIFCA) premiums, the premium increase of the 19 other competitive state funds rose a 18.3 percent in 2012, compared to 11.7 percent in 2011--an indication state funds may be fulfilling their role as residual market providers to a greater degree as workers’ comp markets harden.

The report notes one emerging concern: the Internal Revenue Service’s Exempt Orga­nizations division is reviewing the tax-exempt status afforded state funds.

“While still in a preliminary and exploratory phase, any eventual IRS rulings in this regard could have significant impacts on affected state funds’ markets, business strategies and operations,” the report said.

One factor in premium growth is most of the funds predominately serve residual markets--small businesses, for example--while also competing with the private market. Tyypically during hardening markets, some businesses find it more difficult to afford or secure coverage in the voluntary market and turn to state funds.

The report noted that each fund tends to develop its own, unique characteristics, largely depending on its business profile and growth initiatives.

The report said some state funds maintain a steadfast role in the residual market and often contend with political pressure that can affect surplus and rate levels. Others have undergone transformations toward becoming private, mutual insurers. Some funds have taken to writing business beyond their state borders, the report said.

The term “state funds” is used for the 20 U.S. competitive state compensation funds, the report said.

It does not include the monopolistic funds oper­ating in North Dakota, Ohio, Puerto Rico, Washington or Wyoming.

The report said that financial information for former state funds also has been excluded from the historical data presented here.

The report said that the pace of rate declines had been slowing since the second quarter of 2010, but rates continued to fall until the second quarter of 2011.

At that point, rate changes turned positive, and they have trended higher since. Initially, much of the premium increase was achieved by reduced use of scheduled credits within rate plans, rather than through direct increases in filed rates, the report said.

However, most companies had filed for and received approval of increased rates, which took effect in 2012.

Premiums grew for state funds despite the fact that the SCIFCA reported that premiums declined 11.2 percent in 2011 and 10.8 percent in 2012.

California was the only state fund to report such substantial double-digit declines in both years, the report said.

“A.M. Best believes these recent declines in SCIFCA’s premiums largely reflected the continued highly competitive workers’ comp market in California; the state’s higher than average unemployment rate; and the effects of the company’s internal restructuring initiatives over the past several years to improve operating effi­ciencies and underwriting results,” the report said.

SCIFCA’s depopulation continued in 2012, with its policies declining 10 percent rom the prior year.