Regulator: Actuary Rate Estimates Mystify

His remarks were made in relation to the sweeping workers' compensation reforms recently enacted in his state, which he said challenge actuaries to effectively communicate the extent of projected savings.

Mr. White said that the reform experience placed a special burden on actuaries who were needed to communicate with people who are not comfortable with numbers.

He cited the reaction to the California Workers Compensation Insurance Rating Bureau's announcement of its 2003 estimate of the rate reduction warranted by legislative reforms last year. Mr. White said the announcement of a pure premium 2.9 percent cut was met with surprise and ridicule by the political class and media which had anticipated a sizeable rate reduction based on significant system savings.

The confusion, he said, stemmed from the bureau's use of policy years. "They had no idea what you're talking about."

Mr. White said other examples of confusion over savings resulting from a lack of understanding of how actuaries make their calculations.

"It's not just the number that counts," he observed. "It's the perception of the numbers, particularly when you're in a highly visible place."

David Bellusci, senior vice president and chief actuary of the California rating bureau, explained that the state's workers' compensation system has been in crisis, deplored by workers, employers and insurers as costly and ineffective.

Mr. Bellusci said that the system was not working for any of its stakeholders. Injured workers received low benefits and had to deal with a system riddled with delay and litigation. Employers faced skyrocketing workers' compensation premiums. Insurers were confronted with combined ratios as high as 180 percent.

He pointed out that the crisis was caused not by increasing accident frequency, but by the increasing cost of benefits?in particular the utilization rate of medical services.

"The workers' compensation inflation rate in California was increasing four-to-five times the general medical inflation rate," he said. "This was driven by utilization of medical services."

Mr. Bellusci outlined a number of system reforms passed by the legislature in 2003 and 2004. Measures passed in 2003 included increases in disability benefits, repeal of the primary treating physician presumption, fee schedule changes, and caps on physical therapy and chiropractic visits.

The 2004 legislation includes caps on the duration of temporary disability, changes in the scheduled number of weeks for permanent disability, creation of medical provider networks and changes to the dispute resolution system.

Combined savings from these reform measures are estimated at $7.5 billion by the rating bureau, he said. In its latest pure premium rate filing for 2004 the rating bureau called for cuts of 13-to-15 percent. California Insurance Commissioner John Garamendi, however, said he would lower the advisory pure premium rate for workers' comp insurance by 20.9 percent.

Alex Swedlow, executive vice president of the non-profit California Workers Compensation Institute, the insurers group that researches and analyzes the state's comp system, observed that the system had evolved to create an incentive to provide a lot of different kinds of medical treatments.

This phenomenon, he said, was in some ways disconnected from the laws of supply and demand.

With the passage of reforms, "we've completely changed the rules of the game," said Mr. Swedlow. "There is now an emphasis on evidence-based medicine with a new definition of ?reasonable care' to cure and relieve."

According to Mr. Swedlow, with reasonable care now in lock step with evidence-based medicine, physicians have the best screen to make good decisions.

He reviewed the work of the American College of Occupational and Environmental Medicine which developed guidelines for treatment that provide good care at less cost. In some cases, he said, "they provide a great opportunity to kick bills back for a better definition of injury."

Physicians critical of the guidelines have not established that the additional procedures they perform produce better outcomes in terms of return to work, Mr. Swedlow said.

He remarked that it is difficult to estimate the savings that would result from the application of the guideline, the use of networks and other changes in the law.

Mr. Swedlow also noted that many rules and regulations to implement the legislative reforms have yet to be written and legal interpretations have yet to be seen. This, he said "gives us pause before we try to put too many big numbers up on the board."

Chuck Bryan, president of CAB Consulting told his colleaguesthat actuaries also need to do a better job of explaining the actuary's role in loss reserving to key external audiences, such as the Securities and Exchange Commission and rating firms such as Standard and Poor's.

"We need to keep reminding ourselves that the focus has to be on organizations and people outside of our profession," he said.