Florida Reforms Keep The Heat On WC Rates

Florida Insurance Commissioner Kevin McCarty’s move to reduce workers’ compensation rates by a statewide average of 5.1 percent hardly came as a surprise. After all, with the passage of reforms in 2003, the market is showing many signs of once again becoming competitive following several years of being in a downward cycle.

Still, the market is highly sensitive to any rate changes that might upset the delicate balance between profits and losses. And while employers celebrate a welcomed reduction in premiums, those risk managers in the places where the cuts run the deepest may still find coverage elusive.

Mr. McCarty’s decision to reduce rates bore out the old adage that actuarial decisions are equal parts science and art. It was just a little over a year ago when the commissioner approved a statewide average 14 percent rate cut, which applied to all new and renewal policies as of Oct. 1, 2003.

Based on the projected savings from the 2003 comp reforms, the 14 percent rate cut was not without controversy as some insurance executives privately said savings estimates were too optimistic. Additionally, there was a widespread attitude among insurers that the market needed more time to stabilize after several years of poor financial results.

For those reasons and more, the consensus among industry analysts was that any rate change for 2005 needed to be modest or it would threaten the market’s nascent recovery.

When the National Council on Compensation Insurance initially filed for a 0.9 percent premium decrease, William Stander, lobbyist for the Property Casualty Insurers Association of America, expressed hope that regulators would not seriously modify the proposed rate.

“It proves the continuing value of the hard-won reforms,” he said of the filing, “but at the same time we don’t want to see pricing tighten to such a degree that it discourages carrier participation in the market.”

While Mr. McCarty was sensitive to existing market conditions, he nonetheless took the position that employers should continue to benefit from the 2003 reforms. “After years of paying among the highest comp rates in the country and having workers receive among the lowest benefits, we are finally seeing substantial improvements to the system,” he said in a statement announcing his decision to approve the 5.1 percent rate cut.

“These are the results we had hoped the reforms would produce, and while we are not totally out of the woods, we have come a long way from where we started,” he added.

Mr. McCarty’s decision likely will mean good news for most employers. Of the five major industrial groups, only the office and clerical classifications will see an overall increase posting a relatively minor 1.4 percent average hike.

Miscellaneous classes will see an overall average 7.7 percent reduction, which is followed by cuts for goods and services classes of 4.4 percent and manufacturing of 2.4 percent. An individual employer’s premiums will depend on the employer’s class codes, experience modification factor and any discount programs.

While many insurers are taking those changes in stride, there are still concerns about how the rate cut will affect some sectors of the market, especially in the construction industry.

Construction classes are slated to see premiums cut by an overall average 8.8 percent, which, when combined with last year’s 14 percent increase, represents a substantial reduction in premiums in an industry where employers are most likely to not comply with the law.

“The biggest problem we face is not capturing the true payroll,” said Tom Stahl, executive director of FUBA Workers Comp, which primarily covers small contractors. “While the rates are good news for employers, it is going to make us look at our underwriting, and we already have been looking hard.”

NCCI initially filed for a 2.2 percent premium decrease, which was later amended downward to 0.9 percent based on an expected increase in the Florida Workers’ Compensation Insurance Guaranty Fund assessment. NCCI State Relations Executive Lori Lovgren noted that while Mr. McCarty did agree with many elements in the filing, his decision still left open the possibility that rates could be somewhat inadequate.

She pointed out that while the filing was based on the insurers’ calendar-year 2002-2003 data, it did not reflect insurers’ loss experience from the 2003 reforms the majority of which did not take effect until Oct. 1, 2003. Additionally, comprehensive changes in the construction exemption law did not take effect until last January. “We’re disappointed that the ruling was not closer to the minus-1 percent that was filed,” she said.

More so than in other years, Mr. McCarty did in fact approve many of the filing’s components and came closer to approving the main elements of the filing than in previous years.

Given the statutory changes that took effect this year, the expectation is that insurers’ experience in 2005 will decrease.

NCCI’s data shows that the state’s indemnity loss ratio has held fairly steady from 1999 to 2003. The state’s medical loss trend, however, has risen substantially especially from 2001 to 2003. Based on those factors, NCCI calculated that the experience, trend and benefit component should be set at minus-1.9 percent, which was based on a zero percent trend for indemnity benefits and 1.5 percent growth for medical costs.

Mr. McCarty, however, said NCCI’s findings showed lower loss trends. Then, in what was largely a judgment call, he said the expected drop in claims frequency and severity in 2005 would produce even greater savings than those underlying the previous 14 percent rate cut. Therefore, he signed off on a minus-2 percent indemnity trend and plus-1 percent medical trend.

“The reforms passed by the legislature have reduced the high rates Florida’s businesses pay to protect their employees,” Mr. McCarty said. “I have to make sure all the savings and costs are properly reflected in this filing, and I just do not believe they have been.”

Another major filing component that regulators rejected was a 1 percent increase that reflected insurer reinsurance costs. Ever since the terrorist attacks of Sept. 11, 2001, the cost of reinsurance has dramatically risen even as reinsurers have restricted their coverage.

The changes in the reinsurance market are partly to blame for the lack of workers’ comp coverage in some sectors of the market. NCCI surveyed 17 insurers that represented 70 percent of the market, which found the majority had seen some change in their reinsurance treaties.

On the basis of those findings, NCCI requested a 1 percent reinsurance component, but regulators rejected the proposed component on the basis that it was not backed by sufficient supporting data. Mr. Lovgren said this was the first year NCCI requested a specific reinsurance component, which has yet to be approved in any state.

However, Mr. McCarty did approve a profit and contingency factor of plus-1.4 percent, reflecting the rate of return carriers need to earn on investments to be profitable and maintain their solvency in the case of major losses. Under the law, carriers are allowed to earn a return on capital that is “adequate, fair and not excessive.”

Traditionally, regulators have either disallowed or reduced the profit component. In approving the rate component, regulators recognize that the volatility of the capital markets combined with low interest rates have severely reduced carriers’ investment income, industry officials say.

Michael Adams is the Editor of Florida Underwriter in Tallahassee.

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.