We’ve been monitoring the rate setting drama in New York, one of the big four in overall costs of workers compensation (along with California, Texas and Florida). New York rates dropped dramatically in the mid 1990s and then held pretty steady for the remainder of the decade. As in many states, the rates have sharply declined from those of the early 1990s — in New York the overall decline was about 30 per cent, which is pretty good, but still well below the Massachusetts benchmark of over 60 per cent.
When we blogged the rate debate in May, the state rating bureau was looking for a 16 percent increase — which would have been the first increase of any kind in 10 years. Rest assured, rate setting is a hot political issue: any request to raise the rates is countered by intense pressures to lower them. At one point in the recent Massachusetts debate, there was more than a 30 point spread between requested rate reductions and rate increases. As for double digit rate increase requests, forget about it.
Do it for Hank?
Viewed politically, it’s hard to generate support for rate increases. Insurance companies do not generally enjoy widespread public support. Does anyone really want to “do it for Hank” (Greenberg, formerly the head of AIG)? Insurers might have marginal profits or even losses, but the real bottom line is the cost of doing business in the state. Workers comp is mandatory, a fundamental cost of business. No governor wants to make business more expensive. Indeed, with the price of real estate and the overall tax structure, not to mention the onerous New York Labor Law, the cost of doing business in New York is already painfully high. So it’s no surprise that after looking at the numbers, the state would only approve a token 5 per cent increase in the comp rates.
For a primer on rate setting and other comp essentials, NCCI has a nice outline here. One of things you learn is that a 5% rate increase does not mean that all classes rise by 5%. Rates will rise an average of 5%. The final rates are based upon losses within individual classes. The rates for some classes will go up 5% or even more and rates for other classes might actually go down. Insurance companies will thoroughly analyze the data, in order to determine which classes have the most potential for profit in New York.
Is the System Working?
What is perhaps lost in the rate debate is the quality of a given state’s workers comp program. Too often, rate setters and politicians lose sight of the program’s real goals. Does the system fairly balance the interests of employers and injured workers? Have reforms and lower costs come at the expense of injured workers? Are the incentives for employers to operate safe workplaces and to return injured workers to productive employment properly aligned? Does enforcement focus relentlessly on the potential fraud: not just the occasional employee fraud, but the big bucks generated by unscrupulous attorneys, health providers and employers?
Lurking beneath every rate setting debate is dark and intricate landscape full of fear and hope, greed and exploitation, dreams and nightmares. From our perspective, in the world of comp there’s rarely a dull moment.