Workers Comp Market a Boom For Carriers and Employers

That rates are heading down is no surprise. McCarty first ordered all policyholders' rates cut by 14 percent when the reforms took effect in Oct. 2003. The 14 percent figure was based on NCCI's projected estimate of the foreseeable savings from the new law. He later approved a statewide average 5.1 percent rate reduction that applied to all new and renewal policies as of Jan. 1, 2005, which was subsequently followed by a statewide average 13.5 percent rate decrease that took effect as of Jan.1, 2006. The OIR is expected to hold a public hearing on the latest proposed rate change sometime this month and any changes in premiums will apply to all new and renewal policies as of Jan.1, 2007.

William Stander, representing the Property Casualty Insurers Association of America, said the latest recommended rate change validates the reforms supported by the industry. He cautioned, however, that instead of taking a victory lap, the industry needed to remain vigilant so as not to allow any of the savings to be eroded by the legislature. "The rate filing proves we were right, but we need to defend these reforms and not accidentally go backwards," he said.

Paul Hughes, president of the Orlando-based Risk Transfer, which brokers insurance contracts for a wide variety of professional employment organization, said that NCCI's rate filing shows that Florida has once again become a profitable market for workers' comp insurers. "People are watching property insurance more closely," he said. "I've heard less about this proposed rate reduction that I've had in nearly any year."

Employers' Benefits

If there has been little written or said about the proposed 13.3 percent rate cut it is partly attributable to the fact that, arguably, no class of insureds in recent years have benefited more from an act of the legislature than workers' compensation policyholders. Pre-2003, employers faced double-digit increases and small and new employers were lucky to find coverage at all. Since then, however, employers have seen an increase in available and affordable coverage the likes of which policyholders in other classes of insurance can only dream.

Another contributing fact is that the rate decreases have been spread fairly evenly among the five major industrial classes. Factoring in this year's proposed rate change, manufacturing classes will have fallen by a total 34.8 percent and contracting classes by an overall 40 percent. Office and clerical classes would see a total 35.7 percent decrease while goods and services would dropped by 38.6 percent and miscellaneous classes by 43 percent.

In the current rate filing, the same economic pattern is discernable when looking at the proposed rate changes. In addition to the five industry groups, there are also over 600 job classifications. A summary of the changes per industrial category is as follows, along with the maximum and minimum changes per classification. It should be noted that Individual employers' premiums would vary by class code, experience modification factors, and any discounts, deductibles, or other credits. Under the law, employers can receive a five percent discount for implementing a drug-free workplace and/or a two percent credit for instituting a safe workplace program. Premium changes are as follows:

Manufacturing–an overall change of minus 13 percent with a maximum increase per classification of two percent and decrease of 28 percent.

Miscellaneous–an overall reduction of 13.3 percent with a maximum increase per class of two percent and decrease of 28 percent.

Contracting–an overall reduction of 13.6 percent with a maximum increase per class of 0.8 percent and decrease of 30 percent.

Goods and services–an overall change of minus 12.9 percent with a maximum increase per class of two percent and decrease of 28 percent.

Office and clerical–a minus 12.9 percent overall change and a maximum increase of one percent and decrease of 29 percent.

There is also anecdotal evidence that the 2003 reforms are working, which is bringing a measure of confidence to the market. Earlier this year, NCCI released the findings of a survey of 11 of the top Florida insurers, which represent 69 percent of the total market. Among other things, seven of the insurers reported having fewer permanent total disability claims. Before the reforms, the state's permanent total disability claims was roughly 27 per 100 workers, which represented a figure five times higher than the countrywide average at an average cost of four times higher. Additionally, three out of the 11 insurers surveyed reported that medical costs are down because there are fewer permanent disability claims and the claims require less litigation. There has also been a drop off in requests for psychiatric impairment benefits and independent medical exams.

One area where the evidence is supported by actual figures is the reduction in litigation cases and costs. Prior to the 2003 reforms, claimant attorneys could collect hourly fees, which was based on a court ruling and not sanctioned by law. Critics argued that the ruling created an environment that led to attorneys filing multiple petitions for benefits and prolonging cases to earn higher fees–a condition made worse by what some considered a low threshold for injured workers to qualify for permanent total disability benefits.

Under the 2003 law, lawmakers retained the current statutory fee schedule, which calls for claimant attorneys to receive 20 percent of the first $5,000 in benefits, 15 percent of the next $5,000, and 10 percent of the remaining benefits awarded in the 10-year period following the date of accident. For any subsequent benefits, the attorney would collect five percent. Claimant attorneys' hourly fees were restricted to $150 per hour, up to a maximum of $1,500 for one medical claim per accident. The Division of Administrative Hearings reported that in fiscal year 2002-2003, claimant attorneys filed 155,000 petitions and opened 127,000 new cases. The number of new cases dropped by half in fiscal year 2003-2004 and fell even further to 36,800 in fiscal year 2005-2006.

Trends Favorable

The component of the filing that has the most impact on rates is insurers' experience, trends, and benefits. NCCI's annual filing is based on the two most recent calendar-accident years, which for the current filing includes 2004 and 2005. Calendar-accident years include the premiums collected in that year along with insurers' losses. For the purposes of the filing, NCCI actuaries examine the losses from two perspectives. First, losses are looked at from a paid basis, meaning the dollar amount insurers pay out in benefits and expenses paid in that year. Also, the losses are also looked at from a paid-plus case basis, which not only includes the amount of benefits and expenses paid out in that year, but also the financial reserves set aside by insurers to pay future benefits. NCCI then averages the two methodologies to project the premiums needed to be collect by insurers to pay 2007 claims. NCCI has used this methodology over the past three years.

When calculating the experience, trend, and benefit component, NCCI looks at lost-time claims, which are defined as claims where a worker must miss seven days or more of work, and, therefore, is eligible for indemnity benefits. Then the council looks at both medical trends and indemnity trends. On the indemnity side of the equation, the average cost per case has remained fairly stable since 2001. Last year, the average indemnity costs ran just over $15,000. However, over the same period of time, the loss ratio trended down sharply. Looking at medical costs, the average medical cost per case has been driven up sharply over the last five years. These costs, however, have been more than offset by a sharp decline in claims frequency.

The filing also calls for a change to NCCI's Premium Discount Program by raising the premium level an employer must reach to qualify for the program. The program is designed to more equitably spread the cost of policy administration based on what the employer pays in premiums. Set in the 1980s, Florida employers currently receive the discounts if their manual premium exceeds $5,000. NCCI says the premium level should be increased to reflect changes in the market. The council is calling for the program to be revised so that in order to qualify for the program discounts, an employer must have a manual premium level of at least $10,000. If approved, some employers would no longer qualify for the discounts while other larger employers may receive lower discounts. However, the change in the program would translate into 2.6 percent rate reduction for all employers.