Workers' Comp Today: New Rates, New Reckoning

Tuesday, December 8, 2009 | 0

By Rick Hodges

The repressed economy, record unemployment, and a polarizing health-care debate have pushed workers’ compensation insurance off the radar screen in Florida — perhaps too soon. Although the legislative reforms enacted in 2003 brought stability to the state’s once-chaotic workers’ compensation system, it is still a work in progress. Today, sweeping rate cuts and premium contraction driven by the recession have combined to reduce premium volumes to an unforeseen low.

In this climate, survival will go to the fittest. Well-run workers’ compensation companies will use these difficult times to get better. They will continue to invest in areas that improve their operations and help them remain fiscally responsible for the long term. Carriers willing to do the hard work now to reduce claims costs — without sacrificing service — will continue to prosper.

The Reform That Worked

It is important to note that Florida’s 2003 legislative workers’ compensation reform did exactly what it was supposed to do. The overhaul gave employers a desperately needed respite from costs that were among the highest in the nation — and that was only the beginning. Since the reform, six consecutive cuts have dropped rates by an average of 60.5 percent. In August, the National Council on Compensation Insurance (NCCI) filed a rate decrease request of  6.8 percent with the Office of Insurance Regulation (OIR). If approved, that would bring the total average rate decrease since 2003 to 63.2 percent. Clearly, the reform was effective, with billions of dollars of cumulative benefit going to policyholders.

A vital component of the overhaul was the reduction of attorney fee schedules — a key driver of claim costs prior to the reforms. In addition, the reform updated the medical fee schedule, revised eligibility standards for permanent total and permanent partial disability benefits, and reinforced government vigilance and penalties for fraud. It was a carefully constructed reform, and it was good for business.

The reform helped injured workers by establishing new requirements for timely claim settlement and created a separate workers’ compensation judicial process to encourage mediation and to streamline dispute resolution. The reform sparked intense competition that further encouraged employers, carriers, and government agencies such as OSHA to work together to maximize safety efforts. The result has been a significant reduction in the frequency of injuries, thanks to increased training, advanced technology, and improved awareness of accident prevention.

Then Came the Economic Downturn

Workers’ compensation is affected by many factors, but none as significant as the economy. Almost 280,000 nonagricultural jobs were created in Florida in 2005, but the rate of increase slowed to 137,000 in 2006, and employment decreased by almost 22,000 jobs in 2007. During 2008, statewide employment declined by more than 255,000 jobs, affecting all aspects of employment (except education and health services). Florida’s unemployment rate jumped from four percent in 2007 to10.7 percent in August. Since unemployment is typically a lagging economic indicator, it will probably continue to rise even as the economy begins to rebound. When Mark Zandi, chief economist and co-founder of Moody’s Economy.com, told an audience in January 2009 that, “The first six months of 2009 will be very painful, the second six months will just be painful, and 2010 will be just uncomfortable,” he was, unfortunately, accurate. Employment will rise once again, but exactly when remains an open question.

According to A.M. Best data, the total Florida workers’ compensation premium written by insurance companies declined by a combined 38.3% during 2007 and 2008. This decrease affects every aspect of carrier service offerings. Whether the cause is less commerce, fewer employees, or more carrier competition, the simple truth is that fewer insureds mean fewer claims, which equals less demand for claims intake, claim management, primary medical care, diagnostic testing, medical case management, and utilization review. The fixed costs that make these services possible have not declined, but thanks to the economic slump piled on top of lower rates, significant premium revenue has disappeared. The result is a balance sheet that cannot be sustained long-term without careful fiscal management.

More Federal Intervention?

Smack in the midst of a local, state, and even global economic recession, some lawmakers are discussing the federalization of workers’ compensation. There is a resolution before the U.S. House of Representatives (H.R. 635) to establish The National Commission on State Workers’ Compensation Laws to study the feasibility of nationalizing workers’ compensation insurance and to evaluate equity and fairness. Former Florida State Rep. Dennis Ross, instrumental in crafting Florida’s 2003 reform bill and currently a candidate for the District 12 congressional house seat, is adamant about the folly of this approach. “A national workers’ compensation system would take away the autonomy of each state and, worse, ignore their unique needs,” he said. “Any uniformity gained would be offset by the desecration of each state’s ability to meet the variable needs of its own workers. The class code that covers a roofer in Florida would, and should, have significantly different risks from that code in Alaska. Federalizing our workers’ comp system is not good for injured workers, employers or the states themselves.” While this proposed commission is not yet front-page news, it bears watching.

Unfunded Liabilities Continue

The effect of Emma Murray vs. Mariner Health, 994 So.2d 1051 (Fla. 2008), the case that tested the cap on attorney fees, continues to linger. In October 2008, the Florida Supreme Court struck down the cap on claimant attorney fees included in the 2003 reform bill. NCCI, acknowledging that the move would drive attorney fees up 38.9 percent, reacted with a rate increase recommendation of 18.6 percent to be spread over two years, starting Jan. 1, 2009. Three months later, Gov. Charlie Crist signed HB 903, restoring the cap on attorney fees and clarifying the statutory language. The OIR recalled the rate increase, but the retroactive impact of the Murray case remains.

Because workers’ compensation rates are prospective, there is no way for carriers to recoup premium from unpredicted jumps in claim costs — including the thousands of claims affected when Murray uncapped the attorney fees. NCCI itself estimates the industry’s unfunded liability at potentially $400 million, with no accurate way to predict the total. Only time will tell what the full cost of these unfunded expenses will be and whether future legal action will pile on additional unfunded liability.Keeping Excess Profit in Check

Florida is one of the few states with an excess profit law for workers’ compensation insurers. According to the OIR, more than 30 Florida carriers have returned nearly $100 million to their insureds this year alone.

In addition, carriers have also shared profits with their policyholders by paying dividends, which are voluntary and at the discretion of each carrier. These dividends typically reward efforts to keep workers safe, but the current rates mandated by the OIR must be considered because the formulas used by NCCI to file the rates do not include a provision for dividends or other returns of premium. Each carrier must fund those payouts based on their loss experience.

When loss ratios were lower than expected, dividends made sense. In fact, they were the responsible thing to do. Carriers jumped on board, offering dividend plans tied to safety records, payment history, and other good customer rankings. The dividend-centered business model offered a voluntary way to return profits to the customers who earned them. However, along with the rates, this model has changed significantly in the past several years.

Theoretically, as rates go down, loss ratios go up, allowing dividends to fade away — a self-correcting cycle. This time around, despite rates that have dramatically declined, dividends have actually grown. At this point, dividends seem to be driven more by competition than by actual loss experience. Given the depth of the 60.5 percent premium rate reduction over the past five years, along with the loss of investment returns and an unstable economy, excessive dividend offerings are ill-advised.

Fiscal Responsibility Remains Key

Kevin Campbell — principal of The Campbell Agency/Work Comp Specialists, with six office locations throughout Florida — believes that the end of dividends as competition for premium could be in sight. “With rates drastically lower than anyone ever predicted, carrier margins are squeezed,” he said. “It is possible there will be carriers that cannot pay a proposed dividend. Once that occurs, a flight to safety for their insureds will follow — toward carriers that fully accrue their proposed dividends.” He is succinct in his appraisal, saying “the tipping point has arrived. Carriers without a disciplined approach to proposing and accruing dividends will put their agents in the painful position of delivering disappointing news to clients. At best, an agent could lose that client. At worst, litigation could follow.”

The current low rates build in higher “dividends” than the industry could ever offer. For example, an employer today pays on average 60.5% less in premium than he paid for exactly the same workers’ compensation policy of five years ago — and gets the same services.

Greg Sale, managing partner with OMS Insurance of Lakeland, said, “Realistic rates are a good thing, but I cannot imagine what the state is thinking with rate cuts moving toward 70% to make sure I have the best deal for my clients, and they give my clients an incentive to really work to keep their employees safe — which is, after all, the whole point of workers’ compensation. This ‘slash and burn’ rate business may eliminate both the ability for carriers to reward great safety and the inducement for employers to put in extra effort.”

Reform has created a stronger, better system. Due to drastically reduced premium revenue, however, carriers need to be sure that they are marketing products that make sense in the current rate environment. Each carrier’s role is to underwrite with laser accuracy, adequately set aside the funds for claims, develop innovative safety programs, provide quality service to insureds, fund technology improvements to increase efficiency — and remain fiscally responsible throughout.

Long-term success will require insurers to take proactive steps to preserve the health of the workers’ compensation system.

Rick Hodges is president and chief executive officer of Summit Consulting, Inc., a monoline workers’ compensation insurance provider that operates in ten southeastern states. This column was reprinted with his permission from its original posting on the Florida Underwriter website.