PEOs Are Flexing Their Muscles

The recipient of public skepticism and unfavorable press in its infancy, the PEO industry, as it has grown, has become increasingly proactive in burnishing its image and flexing its muscles. It launched a workers' compensation "Best Practices" certification program in 2003, and more recently has sought a seat at the table during rule-making discussion between the National Council on Compensation Insurance (NCCI) and the Florida Office of Insurance Regulation. At issue are Multiple Coordinated Policies (MCP) and NCCI's November filing to provide additional rules to the NCCI basic manual.

The certification program has garnered praise from all quarters. The MCP discourse, on the other hand, has been problematic.

Lori Lovgren, state relations executive for NCCI, says NCCI made the filing "to provide some additional rules in our NCCI basic manual. MCPs already exist in Florida; there are carriers out there who write it now. Our filing just seeks to add some structure so that carriers who want to go that route will have the rules to do so. These rules are about how insurance companies will issue policies to their risks. In certain circumstances the terms of the policy are still up to negotiations between the carrier and the PEO that it is writing. We are not interfering with that. We are just offering options.

"NCCI is a membership organization of insurance companies. They are our constituents," Lovgren continues. "We try and craft rules that are appropriate for the insurance industry and that the regulators will approve. We appreciate the concerns of all the stakeholders and are doing our best to accommodate their concerns."

"We are going through an interrogatory process with OIR right now. The Florida Association of Professional Employer Organizations (FAPEO) and NAPEO have offered comments. We are trying to incorporate their suggestions where possible."

If so, NAPEO's Yager wonders why they haven't called.

"We gave them 26 pages of comments. They said it was all very helpful and 'we'll get back to you.' It's been two months. Nobody has called. My phone works pretty well."

Yager calls NCCI's actions "disappointing." "We are close friends, then out of the clear blue sky, last November they make this filing and don't consult with anyone. That is disconcerting. We met with them afterwards and raised our serious concerns and NCCI agreed that they would take our issues under consideration. They have not followed through on that. I thought we had a partnership here. Multiple parties have vested interests in making this work. We would like to know who the players are, why do they have problems, what the situation is.

"The state of Florida has been incredibly reasonable with the PEO industry. Many of the carriers are great partners and willing to have a dialog. NCCI is the only one who seems to have a problem, and is working behind closed doors. Let's find out how we can all work together on finding some way to fix this thing," Yager says.

It's All in the Details

Hughes of Risk Transfer Holdings outlines the situation: "NCCI likes the client as the named insured on a MCP because it allows them to collect the client-specific data outside of the PEO. Regulators like it that way also because the client company is noticed in the case of a regulatory event. However, PEOs are concerned that it does not offer any incentives to the PEO based on favorable loss history.

"Under a master policy, a $1 million premium with 50 accounts at $20,000 premium each can get a guaranteed policy with a high deductible, loss-sensitive programs, dividend plans, or retros. That is what gives a PEO the incentive to hire loss- control people and risk-management people. On the MCP platform proposed by NCCI, that would not be the case. Each and every client company would be charged based on their individual rating algorithm–what they would be charged in the open marketplace," Hughes says.

"NAPEO is not opposed to an MCP," Yager stresses. "I don't think it's necessary in Florida, but if that's the 'fix' we need to fix this problem, then we will work it out. We have done this in other states. Florida is a wonderful PEO market, but it's not perfect. There are some concerns. We stand ready to improve the system. There is no animosity here. Just disappointment.

"The MCP we like is used in many other states, and those models do not look anything like what NCCI is proposing. Right now in Florida, state law allows a PEO to have a policy in its name. The MCP model placed on the table by NCCI puts the client as the named insured," Yager continues. "Why would one business entity get a policy and pay for it, when it is in the name of another entity?"

Can We Talk?

Greg D'Amrbrosio, ARM, is a FAPEO director and senior vice president of risk management at Southeastern Companies of Tampa. Founded in 1987, Southeastern has more than 700 client companies and approximately 15,000 worksite employees.

"I actually set up a meeting with NCCI and OIR. 'Let's meet and discuss it.' Our general take is that anything that creates more options is fine," D'Ambrosio says. "We are just worried about some of the rules language. Arizona has a good working model. We would like language similar to theirs. We would prefer for a PEO to have the status as a named-insured on the policy."

"Comparing Florida to other states with much fewer PEOs is not really fair," Lovgren replies. "For Arizona, we have to manually do the mods. We couldn't do that for Florida [because of the size].

"The policy should carry the name of the PEO client and not the PEO because it will aid in separating and tracking data for each of the individual clients, so that when clients come and go you can still have the experience rating for the individuals," continues Lovgren. "The only way to do that easily is if the policies are in the name of the client. Secondly, there are proof-of-coverage concerns. The state wants to know who the clients are. Florida has the greatest number of PEOs in the nation."

"I don't think there is as big a problem here as NCCI says about capturing experience rating data of employers," retorts Yager. "Maybe this is a software problem at NCCI. We can track the data, the insurance carriers can track data, and the regulator can track it."

"The approach PEOs are asking for is the minority approach," Lovgren says. "The great majority of states–30–use the client-policy approach. Out of those 30 states, only 6 use the PEO as the named insured. The rest all use the named insured as the client, without mention of the PEO.

"There are MCPs in the Florida Workers' Compensation JUA. And the approach they use is that the named insured is the client, not the PEO. We are being consistent with the FWCJUA. It would be highly inappropriate to do it one way in the voluntary market and another way in the residual market. They have had that filing approved for several years."

Lovgren says NCCI hopes to have the rules done, approved, and made available this year.

"If they are trying to establish something shortly, then we would like to have more dialog," says Yager. "Public policy is best developed when all parties are engaged. At the end of the day we all have to work together."

Best Practices Lauded

In happier news, the PEO Workers' Compensation Risk Management Certification Program, launched in 2003, has generated favorable responses.

Certification gives PEO client business owners assurance that their service provider has the capability to deliver important risk management results. It also provides workers' compensation insurance companies with ongoing assurance that a PEO is, in fact, implementing industry best practices in a consistent and effective manner.

NAPEO funded the independent non-profit Certification Institute that oversees the program.

Any PEO is eligible to apply for certification, but it is not for the faint-hearted.

An applicant submits an online application at www.CertificationInstitute.com, executes a Participation Agreement, pays the first-year Certification Fee, (fees range from $2,450 to $7,500) and provides the initial supporting information.

The certification officer reviews all materials and, using the client list submitted by the applicant, selects a sample of clients for verification of the appropriate implementation of each risk management best practice.

Results are sent to a three-member certification committee, which may either approve or change the certification recommendation made by the certification officer, or request that additional information be provided for evaluation.

The certification officer performs ongoing monitoring. If the participant is found to be "out of compliance," an audit is repeated approximately three months after written notice of non-compliance has been sent. Certification is terminated if the non-compliance is not corrected within 90 days of written notice.

Approximately 40 PEOs are currently certified, according to Yager. "The PEOs that have done it have done it because they want to be the best in the PEO industry," he says. Carriers have responded favorably, Yates says. "In the past several years we have developed a very close relationship with the insurance industry. We are all in the business of trying to keep workers safe. What they say [about the certification program] is, 'We love it.'"

A Bright Future

The MCP issue aside, it looks like blue sky ahead for PEOs.

The capacity problems of the past have vanished, and the industry itself continues to gain acceptance. Hughes reports that a recent renewal had six different options for workers' compensation. "Aetna, United, Blue Cross, and Humana are actively looking for PEO business," he says.

"The market has come around," D'Ambrosio agrees. "There is more availability that ever before, although auditing and underwriting guidelines have tightened up. It used to be that we could get endorsements. That's not the case so much any more. The carriers are offering more traditional insurance; they're not expanding any of the coverages."

The historic PEO client company prototype of 15 employees remains the norm, at least for the co-employment model. "PEOs that use the human resources model [such as industry leader Gevity] are going after the larger companies," reports D'Ambrosio.

The moneymen have taken note. "We're seeing money come in for acquisitions and roll-ups, some mergers–venture capitalists, banks looking around," Hughes says. "It has always been my humble thought, How great is this PEO business? We have access to all this employee data that banks, for one, could use to market to through this existing pipeline, I don't know why nobody is doing it yet. I sure hope I find out how to do it before someone else does!"