Posts Tagged ‘rate-making’

The Enigma Variations: Comp Rates in Connecticut and Massachusetts

Wednesday, October 17th, 2012

Today we examine two states, side by side on the map, going in opposite directions in their workers comp rates: Connecticut, which has the dubious distinction of being the second most expensive state (only Alaska is higher) and Massachusetts, ranked 44th for overall costs, with rates so low the market is beginning to implode. These states may be headed in opposite directions, but each faces a pending crisis.
Messing with the Miracle
We begin with Massachusetts, which my colleague Tom Lynch summarized brilliantly a few weeks ago. After nearly two decades of rate reductions, MA employers are now paying about the same rates as existed in the early 1980s. Compared to the other New England states, MA rates are consistently lower, some times one fourth that of their neighbors. So it is hardly surprising that the Workers Compensation Rating and Inspection Bureau (WCRIB) sought an increase in the rates: they initially requested 18 percent, with the realistic hope of ending up somewhere in the vicinity of 6 to 8 percent. A rate increase of this magnitude would maintain the state’s position as the lowest among the major industrial states, still far below its New England neighbors.
The response of the state’s Division of Insurance is, in its methodology and ultimate result, a public work that might make the infamous Big Dig seem prudent and reasonable. The Division dismantles the entire application, demeaning and ultimately dismissing virtually every data element supporting the rate increase. While it is true that some of the data was inconsistent – due largely to the idiosyncracies of insurer submissions – the report’s conclusion that no rate increase was merited defies common sense. Indeed, when the attorney general opines that higher rates “would greatly increase the cost of doing business in Massachusetts and have a deleterious effect on the overall employment level,” one can only wonder what they have been smoking – perhaps the substance on the ballot up for legalization next month.
One the mainstays of the Division’s argument is the fact that insurance carriers continue to offer rate deviations: proof, in the Division’s eyes, that the rates must be high enough. Perhaps it is time to remind the bureaucrats who administer this program that insurers always think they can defy the odds and find the optimum risks. Insurers sell insurance to the people and organizations least likely to use it – or so they hope. As Tom Lynch likes to say, “insurance companies are prone to eating their young.” Nonetheless, a glance across state lines and across the country reveals that Massachusetts is about to cook the golden goose: with the current unabated rate suppression, the assigned risk pool will continue to grow and savvy carriers will scale back their participation in the workers comp market.
Asleep at the Wheel
While Massachusetts’s inaction on rates jeopardizes the most successful comp reform program in the country, Connecticut meanders toward economic disaster. As recently as 2008, the state was ranked 20th for overall costs in the invaluable Oregon Rate Study. But in 2010 they rose to 6th, and the state now sits in the number two spot, ahead of such reliably high cost states as New York, California and Florida. The median cost of comp in CT has risen to $2.99, compared to the nation-wide average of $1.88. (MA comes in at a paltry $1.37.) CT suffers from a toxic combination of very high medical costs (doctors love it) and a worker-centric system that is extremely generous with benefits. To add insult to injury, NCCI is requesting an additional 7.1 percent increase in the already bloated rates. Costs are out of control and regulators are asleep at the wheel.
Surely it is time for business advocates in Connecticut to raise the red flag. The cost of comp has reached unacceptable levels. When business owners can move their operations to New York to lower the cost of workers comp, you are in deep, deep trouble.
Across the Rate Divide
MA and CT provide compelling examples of enigma variations: in the perpetual search for comp rates that are fair to both carriers and businesses alike, these states have drifted too far from the middle ground. How they reached this point may be an enigma, but what they need to do is clear: take immediate steps to extricate themselves from rate cycles that simply are not working. It will take leadership, vision, and courage to confront these reverse-image crises.

In MA, regulators must stop playing political games – no easy task in a hyper-political state – and allow rates to begin a long overdue, moderated rise.

In CT, regulators must confront entrenched stake holders and begin to exert control over runaway costs.

With rates either much too low or much too high, state leaders and regulators are mired in swamps of their own making. If the current inertia is allowed to continue, the two states may eventually end up in the same place: with dysfunctional comp systems incapable of serving the needs of injured workers and employers alike.

New York: Workers Comp Smoke and Mirrors

Monday, July 23rd, 2012

Anyone involved with policy making knows that insurance rate filings can have, how best to put this, political dimensions.
Case in point: Last week, New York Governor Andrew Cuomo and his Insurance Department of Financial Services stuck their collective fingers into the holes in the dike holding back a workers’ compensation cost Tsunami.
Here’s what happened and what we think it means for the future. The New York Compensation Insurance Rating Board (NYCIRB), which in New York functions much like the National Council on Compensation Insurance (NCCI) functions in most other states, had filed a loss cost rate increase request of 11.5% to be effective 1 October 2012 (we’ll come back to that in a bit). After due consideration, the Department of Financial Services rejected the Rating Board’s filing, ruling that there would be no increase in loss costs. Result: status quo.
In his remarks about the decision, Governor Cuomo said, essentially, that the last thing New York’s employers needed, given the economy in which they are forced to exist, was an increase in the cost of workers compensation. Amen to that. The Governor also said that the insurance industry had not taken fully into consideration the decrease in costs associated with reforms enacted in 2007 under the Spitzer administration.
It’s a great picture – reforms enacted, costs go down, everybody’s happy. If only that were true. There are a number of fact-based reasons why it’s not.
We talked with Consulting Actuary Scott Lefkowitz, FCAS, MAAA, FCA (Lefkowitz has more initials than I have fingers), a partner at Oliver Wyman, a leading global management consulting firm with offices in more than 50 cities across 25 countries and a member of the Marsh & McLennan companies. Mr. Lefkowitz specializes in workers’ compensation and operates from Oliver Wyman’s Melville, NY, offices. In addition to consulting to many of New York’s employers and reviewing loss cost filings for numerous regulators, he offers expert testimony in many jurisdictions. His testimony with respect to the Rating Board’s filing and his comments following the Department of Financial Services’s rate request rejection offer a stark contrast to the optimistic (perhaps a better word might be “hopeful”) remarks of the policy makers and politicians. His public comments and testimony are here: NYCIRB Hearing 2012 Comments with Cover Letter (PDF).
In the first place, there is the indisputable fact that the 2007 reform has just about doubled the maximum indemnity benefits paid to injured workers, from a pre-reform maximum of $400 per week (which had been the maximum since the early 1990s) to $792, effective 1 July 2012. That maximum is still lower than most all of the industrialized states. Even so, consider this – according to the recently released 2012 Edition of NCCI’s Annual Statistical Bulletin, the average cost of a lost time claim across all NCCI administered states for 2008 adjusted to a final cost basis is $47,800. However, when the NYCIRB publishes data claim costs, it projects only to what is called a 9th report, a subtle, but important, distinction. For 2008, the NYCIRB-published average cost of a lost time claim in New York is $61,700, which is nearly 30% higher than NCCI’s all-state average. But this is not even at a final cost basis. When Oliver Wyman’s Lefkowitz analyzed New York’s data and projected to ultimate, the 2008 figure was $73,000, making it one of the highest in the nation. And he projects 2012’s ultimate cost to be about $100,000. Wow! (Oliver Wyman’s and Lefkowitz’s analysis of New York’s costs and trends) (PDF).
Employer Assessments
Then there are the employer assessments, and there are five of them. We’ll just mention the big three, and look at them relative to indemnity dollars paid. These include:

  • The slowly winding down Special Disability Fund (the SDF is New York’s version of the 2nd Injury Fund), currently assessed at 21.8%
  • The Reopened Case Fund, which since reform has grown from 3.5% to 13%
  • The funding of the Workers’ Compensation Board at 6.5% (not to be confused with the New York Compensation Insurance Rating Board).

Taken together, in 2012, New York’s assessments equate to 51% of every indemnity dollar paid in the state, or about 21% of premium. New York’s self-insured employers are assessed based on indemnity dollars paid. Employers purchasing insurance are assessed based on premium. Either way, no employer can escape from these extraordinarily large additional charges. The hope of the 2007 reform was that, by closing down the SDF, costs would decline significantly, but that hasn’t happened yet, and it won’t for a few more years. Meanwhile, New York’s employers are stuck with the highest claim costs and the highest assessments in the nation.
Next, one of the major pieces of the 2007 reform was the elimination of lifetime benefits for permanent partial disabilities. These were to be capped at 10 years, which, on its face, could save significant money for the system. However, there is what is called a “hardship” provision as part of the 2007 reform, open to claimants with at least an 80% impairment rating. They can appeal the 10 year cap based on hardship, and it’s not a wild stretch to suggest that the Board will approve a majority of these appeals, leading to lifetime benefits for the most seriously impaired and much less cost saving than the reform predicted.
So, back to the NYCIRB’s 11.5% loss cost increase request. Built into the filing was a somewhat unusual qualitative adjustment downward because the Rating Board believed, without stipulating evidence, that New York’s insurance carriers were over-reserving lost time claims. Without that highly questionable downward adjustment Mr. Lefkowitz wrote that the increase would have been not 11.5%, but 28%.
With the now 0.0% rate increase, Lefkowitz and Oliver Wyman contend that costs in New York today are just slightly less than costs prior to reform, before consideration of assessments. With consideration of assessments, which have grown from about 30% of every indemnity dollar paid in 2007 to over 50% of every indemnity dollar paid in 2012, workers compensation costs in New York today are even greater than they were prior to the 2007 law change. He compares this with post reform costs in other highly expensive states, such as Florida and California. Florida’s reforms have decreased costs by about 60%, California’s by 66% (in fact, California’s costs are at a level not seen since 1999). However, Florida, California and other reform states will have to go some to beat the decline in Massachusetts, where, due to reforms enacted in 1992, rates are now equal to what they were in the mid-1980s.
We will continue to watch events unfold in New York.

New York Update: CIRB Kicked to the Curb?

Tuesday, September 11th, 2007

That reverberant thud we hear coming out of Albany, NY, is the sound of the other shoe landing. And it’s dropped straight on top of the New York Compensation Insurance Rating Board (CIRB).
In early March of this year, New York Governor Eliot Spitzer signed into law a major and much needed workers’ compensation legislative reform. In February we had discussed New York’s urgent need for reform, and, immediately following the Governor’s signing, we analyzed New York’s reform measure.
There’s no need to rehash the reform here, except to say that the Insider was generally quite supportive of it. We were happy that a number of our suggestions wound up in the reform. However, two sections of the new law carried huge implications and consequences for the Property and Casualty (P & C) insurance industry in New York, and each took dead aim at the future of the CIRB. A reading of these sections suggested that the CIRB’s future may actually be behind it.
The first of the two sections required that the Superintendent of Insurance report on the performance of the CIRB to the Governor, the Speaker of the Assembly and the Majority Leader of the Senate by 1 September 2007.

“Such report shall address, among other matters the Superintendent may deem relevant to the compensation insurance rating board including: (1) the manner in which the insurance compensation rating board has performed those tasks delegated to it by statute or regulation; (2) whether any of those tasks would more appropriately be performed by any other entity, including any governmental agency; and (3) the rate-making process for workers’ compensation.”

Then Section 2313, subparagraph S, contained these two gems:

“The workers’ compensation rating board of New York… shall mean the compensation insurance rating board until February first, 2008, and thereafter such entity as is designated by law.”
“…no rate service organization may file rates, rating plans or other statistical information for workers’ compensation insurance after February first, 2008.”

Well, here we are in September and Superintendent Eric Dinallo has issued a whomping, 56-page report (PDF) that, while not killing the CIRB, certainly eviscerates it.
The Current System – Nearly Everywhere
In 39 states, the National Council on Compensation Insurance (NCCI) gathers loss and premium data, calculates experience modifications, and files rate proposals on behalf of the P & C industry. A few states, such as Massachusetts, Michigan, Pennsylvania and New York, have independent Bureaus that do the same thing. These Bureaus are funded by the insurance carriers doing business in the states and are governed by committees elected by those insurers. The Bureaus gather and analyze loss data, both current and historic, and file rate proposals with their respective insurance commissioners. Actuaries from both sides testify at public hearings, after which insurance commissioners render decisions about the appropriateness of what the insurers want and establish new rates, which can be higher, lower or, occasionally, exactly what was proposed. Theoretically, this is a system with built in checks and balances where math and science should rule, and it is the way New York’s workers’ compensation system operated until the recent reform.
The Dinallo Report
Superintendent Dinallo proposes scrapping this concept in New York in two ways, one of which we think is fine, the other we find fraught with danger.
First, the Superintendent proposes, quite rightly, we believe, to move to a loss cost system, where insurers, based on their own experience, would file loss cost multipliers that would be applied to the classification rates established by the Superintendent. This would introduce a competitive system already in place in all NCCI states. He proposes that the CIRB continue to gather loss data and calculate mods, because, first, it’s been doing it for more than 90 years and he thinks by now they have the hang of it; and, second, because between now and the sunset date of February 1, 2008 (just a little more than 4 months), there isn’t enough time to bring a new Rate Service Organization (RSO) on line. In short, Dinallo says New York’s stuck with the CIRB at least, in his words, “for the short term.”
Second, Superintendent Dinallo wants to take over the CIRB’s governing committee. This, in my view, is the biggie. Dinallo recommends that the governing committee be reconstituted to include representatives from labor, employers, the State Insurance Fund, and the Insurance Department. Yes, insurers would be on the committee, too, but they would be in the minority. Further, the Superintendent would require that the carriers continue to fund the CIRB, even though they would have little or no control over it. Sort of like the Russian model of requiring the condemned man to pay for the bullets.
Potential Adverse Consequences
This second proposal would eliminate the checks and balances from the system. Further, it could also eliminate actuarial science. New York could wind up with rates being determined by committee, and a politically charged one, at that. Finally, one last elimination might occur: insurers, themselves, who, after attending (in small numbers) that first committee meeting may decide to hop the next train out of town. After all, what member of the reconstituted committee, except for insurers, would ever want to see a rate increase?
In this affair the CIRB has not covered itself with glory. It has shown itself to be politically deficient, and its public relations efforts have been woeful. It has allowed itself and, by extension, the insurance industry, to be maneuvered into playing the role of the villain in this melodrama, and it is now squarely in the cross hairs. Nonetheless, even Superintendent Dinallo grudgingly admits that his every-three-year reviews show that the Board is performing satisfactorily. We believe that the prudent course is for New York to let insurers govern their own Board and to require the Superintendent of Insurance to continue to oversee performance.
We urge that Governor Spitzer and Superintendent Dinallo assure that the New York workers’ compensation playing field remains level and the goalposts where they are.