When the National Council on Compensation Insurance recently submitted its annual rate filing calling for a statewide average 16.5 percent rate decrease, it was a shot heard round the world in the workers' compensation market. After all, since lawmakers rewrote the workers' compensation law in 2003, rates have already been reduced by roughly 40 percent. And based on the depth of those reductions, the conventional wisdom coming into this year's filing is that the savings from the reforms had likely bottomed out and that any rate change would be modest, with many in the industry predicting that NCCI's recommendation would fall somewhere in the low single digits.
But those predictions have now been shattered as insurers face another double-digit rate cut and an almost unimaginable scenario where rates have been sliced in half just four years after lawmakers signed off on a reform bill that was virtually handwritten by the industry. While the latest impending rate change is a boon for employers, the industry finds itself facing a quandary. For even as the leading market trends continue to improve, a wary industry is left wondering if it is becoming a victim of its own successes as it questions how far and fast rates could continue to fall.
That rates have fallen is no surprise since the whole purpose of a three-year battle to change the workers' compensation system was to alleviate the pressure on employers that were facing rising premiums and a scarcity of coverage. After Insurance Commissioner Kevin McCarty signed off on a 13.2 percent rate increase, lawmakers came down firmly on the side of insurers who argued that, until they stopped hemorrhaging money due to rising medical costs, litigation, and some benefits, employers would continue to pay the price for a broken system.
With restoring competition as its goal, the legislature followed the blueprint put forward by the industry and made a number of changes designed to rein in costs. Those changes included a revamping of the litigation process, restructuring injured workers' wage-loss benefits, and eliminating exemptions in the construction industry. As a result of those and other changes, lawmakers were able to immediately deliver on their promise of rate relief.
When the reforms took effect in Oct. 2003, Insurance Commissioner Kevin McCarty ordered a 14 percent across-the-board rate cut that was applied to all new and renewal policies. The 14 percent rate figure was based on NCCI's projected savings due to the law changes. That rate decrease was quickly followed by a statewide average 5.2 percent rate cut, which took effect as of Jan. 2005. This was followed by a statewide 13.5 average percent decrease that went into effect in Jan. 2006, and another 15.7 percent decrease implemented at the first of this year.
Employers Benefit
From the employers' points of view, the sharp downward turn in rates is a much-welcomed piece of good news, especially given other insurance costs. Florida Chamber spokesperson Jennifer Davis said that the association's members are pleased with the proposed decrease and contrasted the success of the workers' compensation reforms with continued concerns over the rising cost of health-care insurance, property taxes, and property insurance. She pointed to the latest rate request as a model of how public policymakers and the business community can work together to solve problems. "Watching the changes in workers' comp rates is a great example of how reforms can work to benefit businesses," she said.
One thing working to employers' benefit is that the rate reductions have been spread out fairly evenly among the five major industrial classes. Factoring in this year's proposed rate change, manufacturing classes rates will have fallen by a total 46.4 percent and contracting classes by an overall 50.9 percent since 2003. Office and clerical classes will see a total rate cut of 49.6 percent, while goods and services will have dropped by 50.4 percent, and miscellaneous classes by 51.8 percent.
Looking at the current filing, the rate changes within the five industrial classifications range from an average -19.4 for office and clerical classes to 13.2 percent for miscellaneous classes. Goods and services have the second-highest average rate change at -17.1 percent, which is followed by contracting at -16 percent and manufacturing at -15.6 percent. Similar changes also can be found in the maximum rate increases or decreases per classification group.
A summary of the maximum and minimum rate changes in the five major industry groups are as follows:
Manufacturing: a maximum increase of four percent and decrease of -36 percent.
Miscellaneous: a maximum increase of seven percent and decrease of -33 percent.
Contracting: a maximum increase of four percent and decrease of minus 36 percent.
Office and Clerical: a maximum increase of one percent and decrease of -39 percent.
Goods and Services: a maximum increase of 3 percent and decrease of -37 percent.
A Profitable Market
Even as employer groups are praising the next round of rate cuts, there is an undercurrent of concern among insurers and trade groups even though the evidence shows that nationally the market has become profitable and competitive. NCCI's national report on the state of the market found that the combined ratio for 2006 measured 96.5 percent, which is the best underwriting result in at least 30 years. The 96.5 figure was a 6.5 percent improvement over 2005 levels and a 25.5 percent drop since 2001. The accident-year combined ratio showed more than a 50 percent improvement since 1999.
Florida's combined ratio has also substantially declined. Pre-reform, the state's combined ratio equaled a 101 percent. In the year after the reform, that figure dropped to 93 percent. And even though the 2005 combined ratio climbed upwards to 99 percent, NCCI is projecting that in 2006 the combined ratio has declined to an almost unheard of figure of 81 percent.
Insurance Information Institute President Robert Hartwig projected that the market would remain profitable for the foreseeable future. As a result, he said that even with rate reductions, the market would remain highly competitive. "I think prices will continue to fall and carriers will sacrifice some profits," he said. And although he pointed out that no reforms last forever, he said until there is a significant change in the market conditions, employers will continue to benefit. "It's definitely a buyer's market," he said.
In Florida, there is no doubt that the market is competitive and that more insurers are seeing workers' compensation as an alternative to writing property insurance, which for now is a losing proposition. One measure of this trend is the number of insurers that have become affiliated with NCCI. All carriers writing workers' compensation in the state must become affiliated with NCCI for purposes of developing the statewide data necessary to calculate rates. That includes new carriers or carriers that currently provide other lines of insurance in the state and have added workers' compensation insurance to their list of products. Between July 1, 2003 and June 30, 2004, the number of NCCI affiliates was 311. That number increased to 334 between July 1, 2004 and June 30, 2005; and 358 between July 1, 2006 and June 30, 2007.
The increase in the number of insurers combined with the elimination of construction exemptions has also pushed up the state's direct written premiums, even with the lineup of rate reductions. In 2003, carriers collected a total of $3.2 billion in premiums, and just two years later that number grew to $3.7 billion before leveling off last year.
FCCI Insurance Group Senior Vice President Tom Koval said there is no doubt that the market hasn't been this strong in years and that even though NCCI's recommendation is a much deeper cut than anticipated, the market is unlikely to change. "Prior to this filing, the market has been really healthy and if you ask an agent, there is plenty of choice," he said.
One concern of insurers is what will McCarty do with the rate filing? Traditionally, regulators have not signed off on NCCI's rate filing without adjusting it downward. This raises the possibility that instead of a 16.5 percent rate decrease, insurers could see a 20 percent decrease or more. From an insurers' point of view, they hope regulators will keep in mind that the more rates change, the greater the chance of the market entering the typical cycle where a period of profitability is followed by a financial downturn.
Property Casualty Insurers' Association of America Vice President and Regional Manager William Stander said that rate stability is the key to maintaining the environment that employers are enjoying. "We don't want to help accelerate the natural business cycle," he said. "Along with competitive pricing, there needs to be the discipline to cushion any rate fluxuations and not squeeze out every nickel of savings."
2007 Filing
Looking at the rate filing, Koval and others are largely correct that the savings from the reforms have moved their way through the system. NCCI Government Relations Executive Lori Lovgren said that the council's initial estimate that the reforms would produce savings of around 14 percent was on target. However, she said that to attribute the entire rate reductions to the reforms would be a misconception. "It is unreasonable to suggest that any single reform is going to produce a 50-percent savings," she said.
The driving force behind this year's proposed rate reduction is due almost entirely to a decline in claim frequency. The change in claim frequency is a national trend extending back into the 1990s, and is one of the great mysteries in the workers' compensation industry. In a recent NCCI national study, the council found that in 2006, indemnity costs per claims increased an estimated 5.6 percent in 2006 and medical costs per claim grew by 7.5 percent. During the same time period, however, claim frequency dropped by 6.8 percent. More to the point, the claim frequency has steadily declined from 1.7 claims per 100,000 workers in 1997 to just 1.1 workers in 2006. The decline in claim frequency has also applied just as much to small claims as large claims. It also has been spread fairly evenly across all injury types and the geographic regions.
In Florida, these numbers are even more pronounced. Over the last three years, claim frequency has dropped between eight percent and 12.6 percent, which has more than offset any changes in medical or indemnity trends. Looking at all claims, including those that were medical-only, the state registered 5,164 claims per 100,000 workers. Isolating out the lost-time claims where injured workers are eligible for wage-loss benefits, the number of claims per 100,000 workers equaled 1,242.
Lovgren said this downward trend in claim frequency falls outside of the changes made in 2003. "The 2003 reforms were not designed to reduce the number of injuries," she said.
NCCI's annual filing is based on the two most recent calendar accident years, which for the current filing includes 2005 and 2006. Calendar accident years include the premiums collected in that year along with insurers' losses. For the purposes of the filing, NCCI actuaries examine lost-time claims, which are cases where a worker has been unable to work for at least seven days, making them eligible for wage-loss benefits. The claims are looked at from two perspectives. Losses are looked at from a paid basis, meaning the dollar amount insurers of benefits and expenses are paid in that calendar year. Then losses are also looked at from a paid plus case basis, which not only includes benefits and expenses paid out in that year but also the reserves set aside by insurers to pay future benefits. NCCI then averages the two methodologies to project the premiums needed to be collected by insurers to pay 2008 claims.
The main component of the filing covers insurers' experiences, trends, and losses. To arrive at that figure, actuaries look at claim trends and the indemnity and medical costs paid by insurers. Looking at the indemnity side of the equation, NCCI's data shows that while the cost per indemnity claim has risen slightly since 2002, the overall trend has been stable. On a paid basis, the indemnity cost per claim equaled $15,500 in 2006, which is a relatively small change from the $13,773 figure posted in 2003. That increase, however, has been more than offset in claim frequency and the benefit changes made in 2003. As a result, the indemnity loss trend has dropped markedly. The currently approved indemnity trend is minus four percent, but for the purposes of the latest filing, that number has been reduced to minus six percent.
On the medical side of the equation, the state's medical cost per case continues to increase, which remains a worry. On a paid basis, the average cost per medical claim reached $34,000 last year, which is an increase of $10,000 from what carriers paid out five years ago. Just as in the case of the indemnity equation, however, the reduction in claim frequency continues to help push the medical loss ratio down. The currently approved medical trend is 0.5 percent. The rate filing proposes that the trend factor be dropped to minus 0.1 percent. The filing also factors in changes in the Workers' Compensation Health Care Provider Reimbursement Manual and the Florida Hospital Workers' Compensation Reimbursement Manual.
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