Archive for September, 2008

Florida: Punishing Profitable Carriers

Monday, September 8th, 2008

When it comes to insurance, Florida is the land of Oz. You might think you know what risk transfer is, or how insurance companies operate, but the rules change as soon as you enter the Sunshine State. We already described Florida’s strange approach to property coverage, where the state has pretty much self-insured for the inevitable catatrophe (which may be approaching, as we write, in the form of Hurricane Ike). Whereas the state has taken on too much risk in the property line, they have severely hobbled the ability of carriers to function in commercial lines.
Under the guise of eliminating “excessive profits” in workers compensation, employer liability, commercial property and umbrella coverages, Florida allows insurance companies an underwriting profit of no more than 5 percent over a three year year period. Anything above that amount must be returned to policy holders. (You can find the statute, 627.215, here.)
Florida Insurance Commissioner Kevin McCarty recently ordered six workers’ compensation insurance companies to return $4.2 million in these “excessive profits” to their policyholders.
“This is further evidence that the workers’ compensation insurance reforms implemented by the Florida Legislature in 2003 are working,” said McCarty. “These policyholders are businesses that will get back some of the premium they’ve been paying for the past three years.”
The six companies that have been ordered to return premiums to policyholders are: Alaska National Insurance Co. ($144,488), American Interstate Insurance Co. ($3,027,030), Church Mutual Insurance Co. ($768,259), Harco National Insurance Company ($4,819), Midwest Employers Casualty Co. ($218,337) and Petroleum Casualty Co. ($94,329).
Those mandated refunds look like chump change compared to the bill for The Chubb Group: McCarty issued a Consent Order requiring Chubb to refund over $13 million in excess profits to its customers. What was Chubb’s sinful three-year loss ratio? An admirable thirty three percent.
Insurance Basics
Florida could use a little education in the basics of insurance. Yes, insurance companies seek to make a profit – we call this capitalism: like it or not, it’s the way this country functions. Insurers make money by operating in the following manner:
1. Rate setting (where permitted by state law): carriers charge premiums that are likely to result in profit. Because the market is competitive, they cannot charge whatever they feel like. In fact, most rates for workers comp are significantly deflated by state regulation and local market competition.
2. Underwriting: carriers try to select only the best risks. Insurance companies want to sell insurance to people least likely to need it. It’s a crap shoot at best, but some companies have a real knack for it.
3. Claims management: ideally, insurers try minimize comp costs by speeding recovery and getting people back to work; they might also arbitrarily deny claims, restrict treatment and make life difficult for claimants.
4. Claims reserving: by setting accurate reserves, carriers balance the books and avoid the future shock of under-reserved claims.
Insurers have good years and bad years. The problem with the “excessive profits” approach is that it severely limits profits in good years, which are required to offset losses in bad years. Florida does not care if a carrier loses money: when it comes to underwriting losses in the Sunshine State, the free market prevails! Thus Guard Insurance, running a five year loss ratio of 115 percent, and Safety National Group, with a whopping 184 percent, simply have to absorb the losses on their own. NOTE: Data provided by AM Best.
One final irony in Florida’s approach: carriers must return “excessive profits” to all insureds, even those who have incurred substantial losses. So an employer with a three figure loss ratio (losses exceed premiums paid) actually gets money back. Isn’t that sweet!
For many years, Florida’s “excessive profits” statute has been dormant, as most carriers were losing money or barely breaking even. Now that changes in the comp statute have helped carriers turn the corner on profits, the day of reckoning is at hand. The carriers who have done the best job of pricing insurance, screening risks and managing claims are going to be hammered the most. Sometimes trouble comes in dramatic form, as with Hurricane Ike. Sometimes, it sneaks in through the back door, in the Ozian legislative kibosh entitled “excessive profits.”

Health Wonk Review and other bloggy news notes

Thursday, September 4th, 2008

Hank Stern has posted a fresh roundup of news from the health wonkosphere over at InsureBlog – check it out: Health Wonk Review: Early September Edition.
ADA update – The folks at George’s Employment Blog has been keeping an eye on changes to the ADA. In July, George Lenard posted on what the ADA amendments will mean if they become law, and more recently, Karen Tofte has posted a second part in the series. She examines how the substantial limitation of major life activities element of the ADA’s definition of disability would be altered.
MA health care – Bob Laszewski of Health Care Policy and Marketplace Review comments on a recent NY Times editorial that looks at the Massachusetts health insurance experience and finds it less costly than expected. Bob points to some problems that must be factored in when assessing the program.
Technology risksErgonomics in the News points us to the article The Downside of Mobility: Injury: “As Wi-Fi–and laptops and mobile devices–become more ubiquitous, users from kids to adults find themselves suffering from injuries ranging from carpel tunnel syndrome to “BlackBerry thumb.” The first in a series of features and reviews on the ergonomics of Wi-Fi-induced mobility, this article offers tips on how to prevent injuries.”
Going and coming – Judge Robert Vonada of Pennsylvania Workers’ Compensation Journal reports that PA courts upheld compensability in the case of a home health nurse injured while traveling to her patient’s home. The case was complicated by the fact that she provided services to several employers in the course of her day.
Safety – BLR’s Daily Safety Advisor offers tips on Getting the most from your safety committee.

Grappling with the Independent Contractor Problem

Wednesday, September 3rd, 2008

I’m feeling Vince McMahon’s pain. It’s as if someone picked me up, body slammed me and then whacked me with a folding chair. Talk about ingratitude!
Three wrestlers affiliated with McMahon’s colorful World Wrestling Enterprises (WWE) are suing the muscled entrepreneur. Scott Levy (AKA Raven), Christopher Klucsarits (Chris Kanyon) and Michael Sanders say they are WWE employees. McMahon says they are independent contractors. Maybe Raven, Kanyon and Sanders should dress up in FedEx uniforms and pile drive the haughty McMahon into the canvas.
As with FedEx drivers, the wrestlers have a pretty strong case. After all, I am shocked (shocked!) to report that wrestling matches are scripted. The “independent contractor” work is totally controlled by the writers at WWE: the wrestlers fall and rise on cue. They win when they are supposed to win and lose when they are supposed to lose. The remarkably ineffective officiating is also fixed. Given that the primary work of the WWE is wrestling, it’s pretty tough to make a case that the wrestlers themselves are independent contractors. Without the work of the wrestlers, WWE ceases to exist (as FedEx disappears without its “contractor” drivers). Vince is going to lose this one.
I do have a suggestion for McMahon. Hold a mock trial in the ring: dress the wrestlers up as a judge and a bunch of lawyers. They could shout their speeches into a microphone and then pummel each other into submission. Under the script, of course, McMahon, bloodied and defiant, his fancy silk tie ripped to shreds, would ultimately prevail.
In the real courts of Connecticut, the procedure will be quite civilized and the outcome will likely go the other way. Given the scripted nature of the entertainment, it will prove very difficult, if not impossible, to demonstrate true independence for the wrestlers. While they do provide their own tools (costumes and make up, along with an occasional 2 x 4), every move is dictated by management. Wrestling is “entertainment” and the participants are actors.
This particular form of entertainment may seem far-removed from the traditional stage, where an actor is:

… a poor player
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

We might well argue that life in general has more meaning than this despairing assessment by a beleaguered MacBeth. But in the case of the WWE, it’s spot on.
Thanks to Overlawyered and Daniel Schwartz for a heads up on this irresistable item.