6.	Workers’ Compensation Claims

The Company is a self-insured employer with respect to workers’ compensation coverage for all of its employees (including employees co-employed through our client service agreements) working in Colorado, Delaware, Maryland and Oregon, except as described below. In the state of Washington, state law allows only the Company’s staffing services and internal management employees to be covered under the Company’s self-insured workers’ compensation program. The Company’s wholly owned, fully licensed insurance company, Ecole, provides workers’ compensation coverage to our employees in Arizona, Nevada and Utah.

Effective January 1, 2015, the Company stopped maintaining a certificate to self-insure in the state of California, and it now obtains individual policies from ACE Group (“ACE”) for all California-based clients along with clients in Delaware, Virginia, Pennsylvania and the District of Columbia. The arrangement with ACE, typically known as a fronted program, provides BBSI a licensed, admitted insurance carrier to issue policies on behalf of BBSI without the intention of transferring any of the workers’ compensation risk for the first $5.0 million per claim. The risk of loss up to the first $5.0 million per claim is retained by BBSI through an indemnity agreement. While this portion of the risk of loss remains with BBSI, ACE assumes credit risk should BBSI be unable to satisfy its indemnification obligations to ACE. The arrangement is effective through February 2017 with the potential for continued annual renewals thereafter.

As part of the ACE fronted program, the Company makes monthly payments into a trust account (“the ACE trust account”) to be used for the payment of future claims. The balance in the ACE trust account was $166.6 million and $50.1 million at December 31, 2015 and December 31, 2014, respectively. The ACE trust account balance is included as a component of the current and long-term restricted marketable securities and workers’ compensation deposits in the Company’s consolidated balance sheets.

In the event of catastrophic injuries or fatalities, the Company maintains excess workers’ compensation insurance through its wholly owned captive insurance company, AICE, with a per occurrence retention of $5.0 million, except in Maryland and Colorado, where our per occurrence retention is $1.0 million and $2.0 million, respectively. AICE maintains excess workers’ compensation insurance coverage with ACE, between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with ACE is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with ACE is between $2.0 million and applicable statutory limits per occurrence.

The Company provided a total of $255.7 million and $225.3 million at December 31, 2015 and 2014, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by a third party actuary at December 31, 2015 and 2014. Included in the claims liabilities are case reserve estimates for reported losses, plus additional amounts for estimated future adverse cost development of reported claims, incurred but not reported claims, legal expenses, MCC expenses, as well as estimates for unallocated loss adjustment expenses which include future administrative fees paid to third party service providers. These estimates are reviewed frequently and adjustments to liabilities are reflected in current operating results as they become known.

Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given accounting date. The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, modifications in reserve estimation procedures, changes in individuals involved in the reserve estimation process, inflation, trends in the litigation and settlement of pending claims and legislative changes.

Beginning in late 2013 and continuing into the second half of 2014, the Company took the following actions to improve its claims handling practices:

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Hired additional claims administrators.

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Completed a specific case reserve study for all claims with injury dates 2012 and earlier (resulting in moving dollars from the general reserve of incurred but not reported claims and future loss development into specific case reserves for individual claims).

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Changed its individual claim handling practice by recording specific case reserves on new claims at amounts that include all anticipated future costs.

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Closed claims more quickly with the goal of reducing the ultimate cost of claims.

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Hired an actuarial consultant in May 2014 to study historical claims experience and the actuarial impact of the change in the Company’s claims handling process.

Based on analysis associated with the work performed above, management concluded that a significant increase in the estimate of workers’ compensation liability in 2014 was needed to reflect the potential adverse development of prior period claims. Management’s primary considerations in determining to record a large increase in the Company’s estimate of workers’ compensation liability in 2014 included the large increase in the Company’s business in recent years, the potential for large future adverse development of open claims, and the increasing complexity and uncertainty surrounding healthcare costs.

See Note 2. Restatement of Previously Issued Financial Statements for additional information regarding restatements related to workers’ compensation errors.

The states of California, Oregon, Maryland, Washington, Delaware and Colorado require us to maintain specified investment balances or other financial instruments, to cover potential workers compensation claims losses related to the Company’s current and former status as a self-insured employer. These investment balances were $156.8 million and $198.5 million at December 31, 2015 and 2014, respectively. In partial satisfaction of these requirements at December 31, 2015, we have provided surety bonds and standby letters of credit totaling $152.0 million, including the California requirement of $147.2 million. The Company satisfied the California requirement through the posting of third party issued surety bonds, backed by a total of $88.3 million in letters of credit. In conjunction with these letters of credit, the Company posted $92.4 million in restricted money market funds as collateral.

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):


	Year Ended December 31,
	2015			2014		2013
				(As Restated)		(As Restated)
Balance at January 1,
Workers’ compensation claims liabilities	$	225,278		$	121,056	$	78,511
Claims expense accrual:
Current year		122,740			104,314		69,708
Prior years		(13,683	)		66,719		22,457

		109,057			171,033		92,165

Claims payments related to:
Current year		17,517			15,243		12,418
Prior years		61,143			51,568		37,202

		78,660			66,811		49,620

Balance at December 31,
Workers’ compensation claims liabilities	$	255,675		$	225,278	$	121,056

Incurred but not reported (IBNR)	$	127,792		$	113,984	$	69,611