Insurance Commissioner Kevin McCarty was in a good mood. Facedwith a slate of controversial homeowners' rate filings and otherissues that are stacked up like planes circling Chicago's O'Hareairport waiting to land, he was finally faced with a piece of goodnews in the form of the National Council on CompensationInsurance's relatively non-controversial call for a 16.5 percentworkers' compensation rate decrease. Setting the tone for theannual public hearing, McCarty emphasized the improvements in theindustry that have succeeded far beyond what anyone could haveanticipated.

Speaking of the 2003 reforms, he said, “The legislature took thecourageous and necessary step to solve the problems for employers.It is significant to point out that the current filing would be asavings of $650 million for employers and would be the fifthconsecutive decrease resulting in a total 50.4 percent statewidedecrease since the reforms.”

Traditionally, any rate reduction is seen as good news for theindustry and employers. However, this year's filing, and theprospect of rates being sliced in half over a five-year period, hasbrought a slight sense of unease to the market. It is purely afinancial question that goes to the heart of the intersectionbetween regulators and the economic factors that are beyond theircontrol. As a regulated line of insurance, lawmakers and regulatorscan affect issues such as benefit schedules, medicalreimbursements, and attorneys' fees. But they cannot influencefactors such as the ongoing downward trend in claim frequency andthe pullback in construction due to the reversal in the housingmarket.

These types of economic phenomena have led to the question ofwhether rates can fall so far that any changes in the economy couldresult in the rate cuts becoming inadequate on the low side,forcing regulators to do an about face and start approvingincreases. No better example of this concern can be found than inthe roofing industry that has benefited greatly from the rate cuts.Due to the hurricane damage during the 2004 and 2005 hurricaneseason and the boom in housing, the roofing industry andconstruction as a whole saw a major expansion. Between 2003 and2005, the construction industry's payroll increased by 38.2 percentand the number of covered employers by 23.8 percent. That is onereason the state's total direct written premiums have jumped from$3.1 billion in 2003 to $3.3 billion.

Billy Cone, president of the Florida Roofing, Sheet Metal, andAir Conditioning Contractors Association that also sponsors aself-insurance fund, pointed out that the industry's expansion andthe lower rates have led to an optimum financial position. “Withthe NCCI decrease of 16.5 percent, roofers would see the lowestrates in 25 years at $22.7 per $100 of payroll,” he said.

But along with the good news, Cone sounded a note of cautionsaying that with the bursting of the housing bubble, residentialconstruction is expected to decline by 50 percent. As a result, hesaid, contractors might see smaller claims from employees whopreviously kept working with a minor injury because they wereearning higher wages and overtime pay. “Trust us, we like payingless money,” he said of the proposed rate cut. “But if we see moreclaims, the rate cuts could come to haunt us and we don't want tosee you come back in a couple of years and half to raiserates.”

Even with those cautionary notes, however, employer/carriers aresupporting the proposed rate change. “When you look at the workdone in 2003, to imagine then that rates would be reduced by 50percent is astonishing and unbelievable,” said Tami Perdue,representing the Associated Industries of Florida InsuranceCompany. “We support NCCI's findings and are pleasantly surprised.Workers' compensation is one of those lines that is working verywell.”

Rankings Improve

One statistic that was behind the movement that led to the 2003reforms was Florida's workers' compensation rates as compared toother states. The Oregon Department of Consumer and BusinessServices, which conducts one of the most well known surveys,consistently ranked Florida among the highest states in the yearsbefore the reforms. In January 2006, the state ranked 46 out the 51states with a loss cost premium rate of $3.32 per $100 of premiums.NCCI calculated that if the current rate filing were approved asfiled, Florida's ranking would drop to 22 out the 51 states at$2.34 per $100 of premiums before other states incorporated theirrate changes.

Another study shows the drop in the state's ranking when itcomes to manufacturing classes and office and clerical categories.According to the workers' compensation state rankings conducted byActuarial & Technical Solutions, Inc., the state previouslyranked 29 out of 45 states when it came to manufacturing classes.With NCCI's proposed rate cut, the state would fall to 19 out of45. Similarly, the state ranked 34 out of 45 states as of January2007 when it came to office and clerical services, a number thatwould fall to 24 as of January 2008.

When it comes to Florida's rates as compared to neighboringstates the same trends hold true. In 2003, Florida's average pureloss cost based on the state's payroll distribution stood at 2.62percent, as compared to the 1.69 percent posted by Alabama and the1.30 percent in Georgia. As of 2007, the state's pure loss costfell below Alabama and came within striking distance ofGeorgia.

NCCI Government Relations Executive Lori Lovgren noted that thishas stemmed the flow of out-of-state companies coming acrossFlorida's border with a competitive advantage since they paid lowerworkers' compensation rates. This was viewed as a particularproblem in the construction industry where contractors from Alabamaand Georgia routinely outbid their Florida competitors. “The issueof contractors crossing the state line is less of a concern becauseFlorida's rates are now a disincentive,” she said.

Lovgren noted that even with the deep cuts in rates, there is nodoubt the market is competitive and that more insurers are seeingworkers' compensation as an alternative to writing propertyinsurance, which for now is a losing proposition. One measure ofthis trend is the number of insurers that have become affiliatedwith NCCI. All carriers writing workers' compensation in the statemust become affiliated with NCCI for purposes of developing thestatewide data necessary to calculate rates. That includes newcarriers or carriers that currently provide other lines ofinsurance in the state and have added workers' compensationinsurance to their list of products. In 2002, the number ofcarriers writing workers' compensation insurance equaled 235, anumber that has now grown to over 270. The increase in the numberof insurers combined with the elimination of constructionexemptions has also pushed up the state's direct written premiumseven with the lineup of rate reductions. In 2003, carrierscollected a total of $3.2 billion in premiums, and just two yearslater that number grew to $3.7 billion before leveling off lastyear.

In terms of marketshare, the top companies have significantlyexpanded their piece of the market over the past six years. LibertyMutual Insurance Group has increased their premiums by 23.7 percentbetween 2000 and 2006. Likewise, AIG Insurance has grown by 14.7percent and Zenith Insurance Company by 5.3 percent. The top tencarriers now account for 68 percent of the market. In addition tothe carriers mentioned above, the carriers rounding out the top teninclude FCCI Insurance Group (5.4 percent), Hartford InsuranceCompany (4.1 percent), Zurich Insurance Company (3.4 percent),Travelers Insurance Company (3.3 percent), CNA Insurance Company(3.1 percent), Amerisure Insurance Company (2.8 percent), andAMComp Insurance Company (2.7 percent).

Trends and Frequency

The traditional battle between NCCI and regulators over the ratefiling focuses on the indemnity and medical trends, which are usedto estimate the amount of premiums needed to pay benefits goingforward. Like all actuarial estimates, setting trends is partscience and part informed judgment of the actuary. This leads toany number of assumptions that within reason are open todisagreements and are the main reasons why NCCI's filed rates nevermatch up with the rates approved by regulators. This year, however,that could be different.

The reason for this change is the sharp decline in claimfrequency that is having as much, if not more impact on the numbersthan the changes due to the reforms. As Lovgren noted, the reformswere designed to hold down losses by changes in indemnity andmedical benefits, but not to decrease the number of claims. But thechange in claim frequency has significantly changed the equationwhen it comes to projecting rates. Going back to 1999, claimfrequency has dropped from around 17 per million of premium to12.1.

NCCI Actuary Tony DiDonato said that due to influence of claimfrequency, the trend numbers in the filing were “mechanical,”meaning they were based solely on the numbers and didn't involvethe type of judgments utilized by actuaries to project premiumneeds going forward. The only decision he faced was how far back togo to calculate the changes in trends.

DiDonato's first decision was to not utilize the results of thelast three years, which he considered an outlier due to the steepdrop in the claim frequency. “Nobody could have anticipatedfrequency would go down by an average 10 percent in the last threeyears and you can't expect a 10 percent decline in the next threeyears,” he said.

Instead, DiDonato's analysis changes in medical and indemnitytrends going back eight years. During that period indemnity rateshave stayed relatively stable while medical trends have continuedto climb. But those numbers computed against the backdrop of claimfrequency has lead to historically low numbers. As a result of hisanalysis, the filing calls for a minus 6 percent indemnity trendand a minus one percent medical trend. Looking specifically at theindemnity trend, DiDonato stressed just how significant it is. “Itis the most negative trend I've ever filed in Florida and thelowest trend I've ever made in my carrier,” he said.

A complete summary of the proposed rate change is asfollows:

Experience, trend, and benefits: minus 12.5 percent

Trend: minus 5.7 percent

Benefits: minus 0.6 percent

Loss Adjustment Expenses: plus 2.1 percent

Production and General: plus 0.1 percent

Taxes and Assessments: 0.0 percent

Profit and Contingencies: 0.0 percent

Overall Premium Level Change: minus 16.2 percent

Overall Rate Level Change Requested: minus 16.5 percent.

State Consumer Advocate Actuary Stephen Alexander recommended aneven more drastic rate cut of 36.2 percent. His argument centeredon two points. First, he disagreed with NCCI's indemnity trend,saying that until there is the evidence that shows a leveling offof claim frequency there is no reason not to assume it willcontinue downward. As a result, he called for a minus 10 percentindemnity trend. His other argument went to the amount of profitsbeing earned by carriers. For example, he pointed out that of the245 carriers currently providing workers' compensation coverage inthe state, only three have filed for rate deviations. He alsosuggested that since the market was performing at its best level in30 years, carriers could operate at a loss since amount ofinvestment income would still yield a profit. Therefore, hisanalysis called for a minus 11 percent profit and contingencyfactor as opposed to the zero percent filed by NCCI.

Regulators, however, indicated little support for some ofAlexander's findings, especially the prospect of carriersregistering an operating loss. They point out that under thestate's excess and profit law, regulators could always step in ifcarriers were making an unreasonable amount of income.