The Florida Workers' Compensation Statute has had a long andstoried history since it first appeared in 1935. Every decade orso, we can count on some major changes to the structure, process,or benefit components of this far-reaching and complicated statute.In 1979, changes abounded. One in particular — Florida Statute627.215 — continues to frustrate many.

The statute, passed during the 1979 legislative session andeffective July 1, 1979, addresses excessive profits for workers'compensation, employer's liability, commercial property andcommercial casualty insurance, and says, in part, that each insurergroup writing workers' compensation and employer's liability “shallfile with the office prior to July 1st of each year…the followingdata:

Calendar-year earned premiums
Accident-year incurred losses and loss adjustment expenses
Administrative and selling expenses incurred in this state orallocated to this state for the calendar year
Policyholder dividends applicable to the calendar year.”

The statute was amended in 1988 to add commercial property andcasualty insurance. In 1995, the Legislature added a section thatstated that the statute no longer applied to commercial propertyand casualty as of Jan. 1, 1997. Also in 1997, the Legislature madeit clear that property and casualty included commercial umbrellaliability.

A review of the May 1, 1979, staff report regarding this statutedoes not provide any legislative intent. However, the report statesthat, “… an excessive profits provision similar to that of autoinsurance is another regulatory tool designed to curb windfallprofits.”

This is a very interesting statement when you recognize thatFlorida is a National Council on Compensation Insurance (NCCI)“gross rate” state. That is, Florida is a state where the grossrates charged for workers' compensation are submitted by NCCI tothe Florida Office of Insurance Regulation (OIR) and, when theprocess is completed, the rates that are approved are the ratesthat must be charged. Therefore, in theory and practice, the manualrates as authorized are not inadequate or excessive.

However, according to the Florida statute, a company isgenerally considered to have an excessive profit if theunderwriting gain is greater than the anticipated profit, plus fivepercent. The calculation is clearly defined: A carrier takes theearned premiums, subtracts dividends, expenses and losses anddevelops its underwriting profit. It then subtracts five percent ofthe earned premiums for the three years involved (I will explainthis more fully later). The carrier is deemed to have an excessiveprofit if this number is greater than zero.

We are fortunate to have more than 300 companies writingworkers' compensation in Florida with market shares of 15 percentor less. If one of these organizations — with luck and greatattention to the core disciplines of marketing, underwriting, losscontrol, claim handling, payroll audits, and fraud detection — hasa great outcome, the “excessive profits” go back to thepolicyholders, who are not necessarily the individuals and ownersproviding the capital and surplus that is at risk. So, theExcessive Profits statute presents a potential loss of all of acarrier's equity to a gain of five percent of its gross premiumswritten.

Florida Underwriter's October 2009 issue included a great coverstory titled “Workers' Compensation Today-New Rates, New Reckoning”by Rick Hodges, then president of Summit Holdings. In the article,Hodges mentioned this excess profits law for workers' compensation.He wrote about how carriers share profits with policyholders bypaying dividends, and that these dividends are not included in therate calculation formula. The fact that these dividend payments arenot included as an expense in the approved rates is, in my opinion,likely wrong. Excess profits distributions are also excluded, andthis is clearly wrong. These distributions are statutorily mandatedbenefits and must be considered in the rate calculation as long asthe excess profits statute is a part of the system.

How It Works

The annual excess profits filing involves a five-year cycle. Asan example, the filing that will be due prior to July 1, 2010,involves the results for workers' compensation written in Floridafor the three calendar years 2006, 2007 and 2008, with the primaryvaluation being as of Dec. 31, 2009.

There are four major components within the filing: premiumsearned on a direct basis, dividends incurred, expenses incurred,and the losses incurred for the three calendar years involved.

If your company is only writing workers' compensation inFlorida, then the expense allocation process is reasonablystraightforward. However, if your company is writing multipleproducts in multiple states, the allocation process of items to thestate is more complicated. Companies, as a general rule, utilizemanual premiums or earned premiums. But you should not limit yourthought process to just a premium allocation approach. Your companyshould determine for each item involved whether alternativeallocations might be appropriate.

If you have excessive profit, you are required to make a refundto policyholders of record as of December 31 of the finalcompilation year. In the example above (a July 1, 2010, filing),the final compilation year is 2008. The amount of the refund thateach eligible policyholder is to receive is determined by hisindividual earned premiums during that calendar year. (It should benoted that this amount for a given policyholder can involve morethan one policy.)

Each policyholder receives his pro-rata portion, determined bydividing his earned premium during the year by the total earnedpremium for this specific set of policyholders, multiplied by thetotal excessive profit to be distributed. It is very important thatthis process is followed exactly as outlined in the Statue 627.215to avoid penalties.

As to the completion of the form, the filing is for each insurergroup writing workers' compensation insurance in Florida. Thestatute gives the company the choice of filing for each individualinsurer in its family or filing as a group. Your individualcircumstances will dictate which approach to utilize.

Premiums are direct and in most cases should agree with theannual statement. If your premiums on the form do not agree withthe annual statement, you must explain the difference.

Policyholder dividends are calculated as policyholder dividendspaid during the year, plus the reserve for policyholder dividendsdeclared and unpaid at the end of the year, minus reserve forpolicyholder dividends declared and unpaid at the beginning of theyear. If you have any policyholder dividend reserves shown at theend of the year, you will need to include within your filing anexplanation of how this amount was developed.

Your expenses include acquisition costs, other actual costs suchas field supervision and collection expense, general and otherexpenses, and taxes, licenses and fees. For each of these expenseitems, you must provide an explanation of the methodology used inderiving the expense.

In determining losses and loss adjustment expense, companies inthe past needed to include the insurer's share of the Floridaresidual market. Since the Florida Workers' Compensation JointUnderwriting Association replaced the Florida residual market,there are no premiums, expenses, or losses being allocated to thevoluntary market.

The instructions are quite incomplete, and it is not the faultof anyone or their team that valid deductions are overlooked. Thisis not the standard process where you generally reach a uniqueconclusion. With this form there is a family of outcomes, andseveral of these outcomes are acceptable.

Do not make the mistake or the assumption that all of yourentries that are included in your filing must agree with yourannual statement. Utilize the six-month period between year-end andthe report due date to gather data, perform an evaluation, and then(and only then) complete and file your form.

Editor's Note: In late January, the OIR agreed to beginproceedings to adopt a new rule to implement the workers'compensation excess profits law. The action followed a challengerelated to the current rule from FFVA Mutual Insurance Co.

Ray Neff, MAAA, is president of NeffConsulting, which provides insurance and management consultingservices to the insurance industry. He may be reached at941-388-0611 or [email protected].