Insurance Commissioner Kevin McCarty was in a good mood. Faced with a slate of controversial homeowners' rate filings and other issues that are stacked up like planes circling Chicago's O'Hare airport waiting to land, he was finally faced with a piece of good news in the form of the National Council on Compensation Insurance's relatively non-controversial call for a 16.5 percent workers' compensation rate decrease. Setting the tone for the annual public hearing, McCarty emphasized the improvements in the industry that have succeeded far beyond what anyone could have anticipated.

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

Traditionally, any rate reduction is seen as good news for the industry and employers. However, this year's filing, and the prospect of rates being sliced in half over a five-year period, has brought a slight sense of unease to the market. It is purely a financial question that goes to the heart of the intersection between regulators and the economic factors that are beyond their control. As a regulated line of insurance, lawmakers and regulators can affect issues such as benefit schedules, medical reimbursements, and attorneys' fees. But they cannot influence factors such as the ongoing downward trend in claim frequency and the pullback in construction due to the reversal in the housing market.

These types of economic phenomena have led to the question of whether rates can fall so far that any changes in the economy could result in the rate cuts becoming inadequate on the low side, forcing regulators to do an about face and start approving increases. No better example of this concern can be found than in the roofing industry that has benefited greatly from the rate cuts. Due to the hurricane damage during the 2004 and 2005 hurricane season and the boom in housing, the roofing industry and construction as a whole saw a major expansion. Between 2003 and 2005, the construction industry's payroll increased by 38.2 percent and the number of covered employers by 23.8 percent. That is one reason 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, and Air Conditioning Contractors Association that also sponsors a self-insurance fund, pointed out that the industry's expansion and the lower rates have led to an optimum financial position. “With the NCCI decrease of 16.5 percent, roofers would see the lowest rates in 25 years at $22.7 per $100 of payroll,” he said.

But along with the good news, Cone sounded a note of caution saying that with the bursting of the housing bubble, residential construction is expected to decline by 50 percent. As a result, he said, contractors might see smaller claims from employees who previously kept working with a minor injury because they were earning higher wages and overtime pay. “Trust us, we like paying less money,” he said of the proposed rate cut. “But if we see more claims, the rate cuts could come to haunt us and we don't want to see you come back in a couple of years and half to raise rates.”

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

Rankings Improve

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

Another study shows the drop in the state's ranking when it comes to manufacturing classes and office and clerical categories. According to the workers' compensation state rankings conducted by Actuarial & Technical Solutions, Inc., the state previously ranked 29 out of 45 states when it came to manufacturing classes. With NCCI's proposed rate cut, the state would fall to 19 out of 45. Similarly, the state ranked 34 out of 45 states as of January 2007 when it came to office and clerical services, a number that would fall to 24 as of January 2008.

When it comes to Florida's rates as compared to neighboring states the same trends hold true. In 2003, Florida's average pure loss cost based on the state's payroll distribution stood at 2.62 percent, as compared to the 1.69 percent posted by Alabama and the 1.30 percent in Georgia. As of 2007, the state's pure loss cost fell below Alabama and came within striking distance of Georgia.

NCCI Government Relations Executive Lori Lovgren noted that this has stemmed the flow of out-of-state companies coming across Florida's border with a competitive advantage since they paid lower workers' compensation rates. This was viewed as a particular problem in the construction industry where contractors from Alabama and Georgia routinely outbid their Florida competitors. “The issue of contractors crossing the state line is less of a concern because Florida's rates are now a disincentive,” she said.

Lovgren noted that even with the deep cuts in rates, there is no doubt the market is competitive and that more insurers are seeing workers' compensation as an alternative to writing property insurance, which for now is a losing proposition. One measure of this trend is the number of insurers that have become affiliated with NCCI. All carriers writing workers' compensation in the state must become affiliated with NCCI for purposes of developing the statewide data necessary to calculate rates. That includes new carriers or carriers that currently provide other lines of insurance in the state and have added workers' compensation insurance to their list of products. In 2002, the number of carriers writing workers' compensation insurance equaled 235, a number that has now grown to over 270. The increase in the number of insurers combined with the elimination of construction exemptions has also pushed up the state's direct written premiums even with the lineup of rate reductions. In 2003, carriers collected a total of $3.2 billion in premiums, and just two years later that number grew to $3.7 billion before leveling off last year.

In terms of marketshare, the top companies have significantly expanded their piece of the market over the past six years. Liberty Mutual Insurance Group has increased their premiums by 23.7 percent between 2000 and 2006. Likewise, AIG Insurance has grown by 14.7 percent and Zenith Insurance Company by 5.3 percent. The top ten carriers now account for 68 percent of the market. In addition to the carriers mentioned above, the carriers rounding out the top ten include FCCI Insurance Group (5.4 percent), Hartford Insurance Company (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), and AMComp Insurance Company (2.7 percent).

Trends and Frequency

The traditional battle between NCCI and regulators over the rate filing focuses on the indemnity and medical trends, which are used to estimate the amount of premiums needed to pay benefits going forward. Like all actuarial estimates, setting trends is part science and part informed judgment of the actuary. This leads to any number of assumptions that within reason are open to disagreements and are the main reasons why NCCI's filed rates never match up with the rates approved by regulators. This year, however, that could be different.

The reason for this change is the sharp decline in claim frequency that is having as much, if not more impact on the numbers than the changes due to the reforms. As Lovgren noted, the reforms were designed to hold down losses by changes in indemnity and medical benefits, but not to decrease the number of claims. But the change in claim frequency has significantly changed the equation when it comes to projecting rates. Going back to 1999, claim frequency has dropped from around 17 per million of premium to 12.1.

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

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

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

A complete summary of the proposed rate change is as follows:

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 an even more drastic rate cut of 36.2 percent. His argument centered on two points. First, he disagreed with NCCI's indemnity trend, saying that until there is the evidence that shows a leveling off of claim frequency there is no reason not to assume it will continue downward. As a result, he called for a minus 10 percent indemnity trend. His other argument went to the amount of profits being earned by carriers. For example, he pointed out that of the 245 carriers currently providing workers' compensation coverage in the state, only three have filed for rate deviations. He also suggested that since the market was performing at its best level in 30 years, carriers could operate at a loss since amount of investment income would still yield a profit. Therefore, his analysis called for a minus 11 percent profit and contingency factor as opposed to the zero percent filed by NCCI.

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

Special Reports /

Workers' Comp Rates: Deep Cuts Signal a Note of Caution

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