Workers' compensation insurance prices should be determined by the free market instead of the Compensation Insurance Rating Board–the insurer association that now proposes rates–New York State Insurance Superintendent Eric Dinallo recommended last week.
While Mr. Dinallo urged that rates be determined by open competition among insurance carriers, and said the CIRB should no longer file rates, he added that CIRB should continue to collect and analyze the underlying data necessary for the rate-making process. CIRB is a private insurance carriers group.
Monte Almer, CIRB president, reacted positively to the recommendations. "We are pleased the department recognized we are the agency that will collect statistical data and develop lost costs," he said.
As Mr. Almer reads the report, it does not set the course for a phaseout of his operation. "The insurance department is just doing its job of reviewing the rating board," he said. "We are sure we can supply the department what they need in the short term and the long term to remain the rate service organization of New York State."
He said the board will work with the department to set up the new recommended rate-development process, adding that the suggested system–using the board to develop data–"is what 36 other states do."
Mr. Dinallo's recommendations are contained in a report that was required by the 2007 Workers' Compensation Reform Act, which the legislature passed in March. Copies of his findings were sent to the lawmakers and Gov. Eliot Spitzer.
"The workers' compensation reforms implemented by the insurance department already have saved New York State businesses more than $1 billion this fiscal year. Establishing a rate-making system that ensures openness and competition will allow us to achieve even greater savings," Mr. Dinallo said in a statement.
Currently, CIRB proposes rates on behalf of all insurance carriers after adding industry overhead and other factors into the rate-making process.
Under the proposed competition-based system, aggregate industrywide costs and associated expenses would be published.
Taking those factors into account, each insurance carrier would then set rates based on its individual risk, underwriting experience and expenses. However, rates would be subject to the prior approval of the insurance department.
"This will result in greater transparency in the rate-making process, increased price competition and lower premiums for employers because it will drive carriers to achieve greater efficiency. Fostering competition will also make the state more attractive to new insurers," Mr. Dinallo predicted.
While stripping CIRB of its rate-making authority, Mr. Dinallo recommended restructuring the board. Under the new governance structure, the legislature should allow CIRB to continue–at least in the short term–its role in collecting and analyzing the industrywide data that is required in the rate-making process, he said.
CIRB will not be authorized to perform its current functions as of Feb. 1, 2008 under the new workers' comp reform law.
"The absence of accurate industrywide claims data would lead to a disastrous situation for the workers' compensation insurance market because the health and stability of the system depends on the ability of insurers to accurately evaluate the cost of workers' compensation risks," Mr. Dinallo said.
The recommended governance structure for CIRB includes adding to its Governing Committee representatives of labor, employers and the insurance department. This will result in the added directors and the State Insurance Fund constituting a majority of the Governing Committee.
Mr. Dinallo said this would ensure "a truly independent CIRB that acts transparently from a public interest perspective."
The superintendent proposed that the department be allowed to continue to examine CIRB's performance to evaluate whether, in the long term, an orderly transition of CIRB's data-gathering duties should be transferred to another entity. CIRB has functioned as the system's rate-making and data-gathering entity for 90 years.
Mr. Dinallo said his department's evaluation of CIRB and recommendations for overhauling the rate-making process were developed after consulting with representatives from business, labor, private and state insurance carriers, regulators and rating boards in several states.
The new workers' comp law package included raising maximum weekly benefits paid to injured workers, imposing a 500-week cap on permanent partial disability benefits, an expedited claims hearing process and other reforms.
In July, Mr. Dinallo announced a 20.5 percent workers' comp rate cut.
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