Rare is the moment when Insurance Commissioner Kevin McCarty hasthe opportunity to hand down the largest workers' compensation ratedecrease in the state's history while getting high marks forshowing an admirable measure of restraint. But that was preciselythe position McCarty found himself in as he signed off on astatewide average 18.4 percent rate cut, which fell close to themark set by the National Council on Compensation Insurance that hadrecommended a 16.5 percent rate decrease. In fact, the commissionerpublicly endorsed NCCI's findings and methodology, a rare eventconsidering the long history of rate disputes in past years.

“The extra reduction in rates will mean a significant amount ofadded savings to be passed on to Florida's employers,” said McCartyas he handed down his decision. “The National Council onCompensation Insurance has recognized that the cost of doingbusiness in Florida has become less expensive and has filedappropriate rates to reflect those savings.”

Just how impressive has been the market's performance since theenactment of 2003 reforms? Consider this: McCarty's decision meansthat employers will see more than $700 million in total savingswhen the new rates take effect in January, and rates will have beencut by more than 50 percent since 2003. When the reforms tookeffect, McCarty ordered an immediate 14 percent across-the-boardrate cut that was based on NCCI's estimate of the savings thatwould be derived from the law changes. That decrease was quicklyfollowed by a statewide average 5.1 percent rate cut in 2005, whichwas followed by a 13.5 percent reduction in 2006, and a further13.5 percent cut in 2007.

Tami Perdue, representing the Associated Industries of Florida,remarked last month that the market's performance has far exceededanyone's expectations. “When you look at the work done in 2003, toimagine then that rates would be reduced by 50 percent isastonishing and unbelievable,” she said. “Workers' compensation isone of those lines that is working very well.”

Another feature of the falling rates is how well it has beendistributed among the five industrial classifications. Factoring inthe latest rate change, manufacturing classes will have fallen by acumulative average 47.6 percent and office and clerical classes by50.8 percent. Goods and services classes will see a total 51.5percent decrease and miscellaneous classes will experience a dropof 53 percent. Another highlight is that contracting classes willhave fallen by a total of 52 percent, this coming after lawmakersmade numerous changes, including placing tighter restrictions onthe ability of contractors to secure an exemption.

In 2008, contracting classes will fall by 17.9 percent andmanufacturing classes by 17.5 percent. Office and clerical classeswill see an average 21.3 percent rate decrease and goods andservices 19 percent. Finally, miscellaneous classes will see anaverage 15.2 percent rate cut.

Claim Frequency Is Key

While the success of the 2003 reforms is justifiably celebrated,it would be wrong to attribute the continual drop in rates solelyto the law changes. In fact, NCCI makes the case that the reforms'savings have pretty well hit the target of 14 percent. Instead, thecouncil said that this year's rate reduction is almost entirely dueto a decline in claim frequency, a national phenomenon that has noclear explanation. Most experts point to the emphasis on safety,changes in business practices, and the shift in heavy industry frommanpower to advances in such things as robotic technology. Be thatas it may, the change in claim frequency is impacting rates acrossthe county. In a recent national study, NCCI found in 2006 thatindemnity costs per claim dropped by 5.6 percent while medicalcosts per claim grew by 7.5 percent. During the same time period,however, claim frequency dropped by 6.8 percent. More to the point,claim frequency declined from 1.7 claims per 100,000 workers in1997 to just 1.1 workers in 2006. The decline has also been evenlydistributed among large claims and small claims and across allinjury types and geographic regions.

NCCI Actuary Tony DiDonato explained to regulators that due tothe claim frequency trend, the trend numbers in the filing were“mechanical,” meaning that they were solely based on the datawithout many types of judgments made by actuaries to projectpremium needs going forward. Looking back over an eight-yearperiod, he noted indemnity rates have stayed relatively stablewhile medical trends continue to climb. Even so, over the lastthree years, the state's claim frequency rate has dropped by anaverage 10 percent, more than offsetting any changes in indemnityand medical trends. Looking specifically at the indemnity trend,DiDonato stressed just how much impact the change in claimfrequency has had on rates. “It's the most negative trend I've everfiled in Florida, and the lowest trend I've ever made in mycareer,” he said.

McCarty and Office on Insurance Regulation actuaries agreed withDiDonato's analysis. Putting aside State Consumer Advocate ActuaryStephen Alexander's recommended rate cut of 36.2 percent, McCartyand company made few changes to NCCI's filing. The council filedfor a negative six percent indemnity trend and a 0.1 percentmedical trend. Regulators adjusted those numbers slightly downwardto a negative 6.5 percent indemnity trend and negative 1.5 percentmedical trend.

The two other areas where regulators disapproved NCCI's findingsare in the areas of the profit and contingency factor and theexpense constant. The profit factor is the amount of money carriersshould be allowed to earn that is adequate, fair, and notexcessive. NCCI proposed a factor of zero percent. Regulatorsapproved a factor of negative 0.8 percent, which reflects theexpectation that insurers will receive a slightly higher rate ofreturn on investment income.

The other factor under dispute was the expense constant, whichreflects a per-policy charge related to fixed administrative costsfor policy underwriting and issuance. NCCI proposed an increasefrom $200 to $240, while making other adjustments to ensure thechange was revenue neutral. However, regulators rejected thechange.

A following is a summary of the changes in the rate componentsbetween 2007 and 2008:

Experience, Trend, and Benefits: -19.3 percent.

Loss Adjustment Expenses: 2.1 percent.

Production and General Expenses: 0.1 percent

Taxes and Assessments: zero percent

Profit and Contingency: -1.1 percent.

Overall Rate Level Change: 18.4 percent.

Going Forward

In Florida, there is no doubt that the market is becomingincreasingly competitive and that more insurers are seeing workers'compensation as a profitable option when compared to more troubledlines, such as homeowners' insurance. One measure of this trend isthe number of insurers that have been added to NCCI's roster ofaffiliated carriers. By state law, all carriers writing workers'compensation in the state must become affiliated with NCCI forpurposes of developing the statewide loss data necessary tocalculate rates. That includes new carriers or carriers thatcurrently write other lines of business and have added workers'compensation products. Between July 1, 2003 and June 30, 2004, thenumber of NCCI member companies equaled 311. That number increasedto 334 between July 1, 2004 and June 30, 2005, and 358 between thesame time period between 2006 and 2007.

In terms of market share, the top companies have significantlyexpanded their piece of the market over the past six years. LibertyMutual Insurance Group has increased its 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 10carriers now account for 68 percent of the market. In addition tothe carriers mentioned above, the carriers rounding out the top 10include: FCCI Insurance Group (5.4 percent), Hartford InsuranceCompany (4.1 percent), Zurich Insurance Company (3.4 percent),Travelers Insurance Company (3.3 percent), and CNA InsuranceCompany (3.1 percent).

Those carriers are followed by Amerisure Insurance Company (2.8percent), and AMComp Insurance Company (2.7 percent).

Even as employers welcome the latest rate decrease, there aresome economic factors that are raising a measure of concern. Sinceworkers' compensation is a regulated line of insurance, lawmakersand regulators can affect issues such as wage-loss benefit, medicalreimbursements, and attorneys' fees. However, those actions cannotcontrol the ongoing downward trend in claim frequency or changes inthe economy as a whole. Speculatively, that has raised the questionof whether rates can fall so far that they eventually becomeinadequate, forcing regulators to do an about face and startapproving rate increases.

Billy Cone, president of the Florida Roofing, Sheet Metal, andAir Conditioning Contractors Association, raised this very point ata public hearing on the rate filing. He noted that due to thehurricane damage sustained by the state in 2004 and 2005, and theboom in housing, the roofing industry and the construction industrysaw a major expansion in business. Between 2003 and 2005, theconstruction industry's payroll increased by 38.2 percent and thenumber of covered employers by 23.8 percent. Cone, however, saidthat those trends are quickly reversing themselves, especially withthe bursting of the housing bubble, which is expected to reduceresidential construction by half in 2008.

As a result, Cone said contractors might see more small claimsfor employees who previously kept working because they weremotivated by higher wages and overtime pay. “Trust us, we likepaying less money,” he said. “But if we see more claims, the ratecuts could come back to haunt us and we don't want you to come backin a couple of years and have to raise rates.”

Even so, for now the market is seeing nothing but clearskies.