Falling Workers' Compensation Rates Worry Insurers

While workers' compensation rates have been falling nationwide, the drops in Florida have been precipitous largely due to legislative reforms adopted in 2003. Those cuts have made Florida one of the most affordable places for employers to buy workers' compensation insurance — the state now ranks fifth nationwide in terms of lowest average premiums.

Florida's business community has been the prime beneficiary of the falling rates. If the latest rate rollback is approved, NCCI estimates that employers would save $465 million in premium expenses next year.

"The industry is concerned that rates are dropping at a rate that outpaces overall claims and the severity of claims," said Tom Kovall, senior vice president and general counsel at Sarasota-based FCCI Insurance and a spokesman for the Florida Insurance Council. "At the end of the day, our rates have to be sufficient enough for us to keep up with claims and experience."

Kovall said that the industry believed rates had "hit bottom" earlier in 2008. "We thought that was pretty much the bottom of the barrel," he said.

But NCCI had other ideas.

NCCI: Deeper Cuts Justified

NCCI attributes three factors behind the need for deeper cuts:

Fewer claims: Claim frequency fell by 13 percent in 2007. That drop in claims is due partly to efforts to promote safer working conditions, NCCI said. The drop is also due to fewer attorneys in Florida handling workers' compensation cases because of the limits on attorneys' fees that was required as part of the 2003 reforms. The limits have had a chilling effect on many lawsuits and reduced the number of lawyers taking workers' compensation cases.

Lower average claim costs: This is also largely a result of the restriction on attorneys' fees. The reforms established guidelines for attorneys' fees based upon a percentage of the benefits obtained by the claimant in a workers' compensation case and eliminating fee awards based upon an hourly rate.

Profits: Workers' compensation company profits rose nearly five percent in fiscal 2008.

Emma Murray v. Mariner Health, a case pending before the Florida Supreme Court involving a claimant's attorneys' fees, holds the possibility of reversing some of the 2003 reforms. If the court overturns part or all of the changes, it could lead to higher insurance rates.

The injured worker in the case was awarded benefits of $3,224. Her attorney spent 84.4 hours on the case, which under the existing fee system resulted in a total fee of $649 or $7.69 an hour, according to briefs and oral arguments.

In contrast, the attorney representing the employer and insurance carrier in defending the claim worked 135 hours on the case and was paid $16,050, or $119 an hour.

That doesn't seem fair, according to the Florida Bar. The plaintiff's attorney contends that by eliminating attorneys' hourly fees for representing claimants and instituting payment on a contingency basis, injured workers are denied adequate representation and access to courts.

Lori Lovgren, state relations executive of NCCI, said that if the law is overturned, there's little doubt rates would go up.

Associated Industries of Florida, the giant business lobby, said the exposure will certainly be tens of millions of dollars that has not been considered in the premium rates. This could mean that "an extraordinary rate increase" will occur as well as a potential retroactive assessment on all employers to cover such unforeseen increased costs.

Insurance industry experts point out that the Supreme Court had five or six previous chances to review the 2003 law, but demurred. The state appeals court has consistently upheld the attorney fee restriction; a ruling is expected this fall.

Trouble All Around

The court case is not the only uncertainty that has the insurance industry on edge.

The faltering economy has meant that carriers are writing policies for fewer employees, particularly in the construction industry, which has been battered by layoffs. The combination of lower prices and fewer employees means companies are taking in fewer premium dollars.

Also of concern are rising medical costs, which continue to increase at or near double-digit rates, pushing health care to nearly 60 percent of the total losses in the workers' compensation market.

In addition, insurers are dealing with low investment yields, due to a combination of low interest rates and a stagnant stock market. That means combined ratios need to be at or near historic lows for insurers to earn an adequate return on capital.

"Even in this time of excellent underwriting results and good financial performance, areas of concern remain," said Stephen J. Klingel, president and chief executive officer of NCCI. "The long-term outlook for workers' compensation remains cautionary, due to a collection of uncertainties that continue to confront the market," he said.

Terri Stevens, senior vice president of marketing for Majestic Insurance in Sarasota, said that the latest rate drop proposal could have unintended side effects. "The pending rate decrease for workers' compensation will perpetuate the soft market for Florida employers," she said. "In today's economy, insurers are struggling with a decreased revenue base and increased pressure to provide levels of service that will support pricing commitments."

The ruling in the case currently before the Florida Supreme Court will have further implications on carrier claim handling and expense load, Stevens said. "Consumers need to be mindful of selecting the right carrier partner, those with financial strength, emphasis on prudent underwriting and conscientious claim management, and above all, a commitment to the state of Florida," she said.

Many Options for Employers

Kovall agrees with Stevens about the soft market. "We have a very healthy market with a ton of availability," he said.

There are 244 companies writing workers' compensation business in the state of Florida, including self-insured funds and the Joint Underwriting Association. That's up from 230 companies in 2004.

NCCI's estimates of the reserve positions of private carriers improved to about a $2 billion deficiency at year-end 2007. This is in sharp contrast to the $21 billion deficiency at the end of 2001. Achieving reserve adequacy is one of the major accomplishments for the industry in the last five years, NCCI said.

Insurers also may benefit from the economic slowdown because it tends to place downward pressure on claim frequency due to a decrease in the number of workers in the labor force. In fact, in the most recent recessions, frequency dips noticeably, NCCI said.

Not all insurers think rates are out of line. Vince Donnelly, CEO of Blue Bell, Pa.-based PMA Capital Corp., told investors this summer that Florida's rates are fine. The company's PMA Insurance Group specializes in workers' compensation.

"Florida had the benefit of reform a number of years ago. I think the market there, the rates are basically continuing to catch up with what's happened in terms of the effects of that reform. So we still feel pretty comfortable in the state of Florida."

Whether PMA and other insurers will still feel comfortable in Florida after the next rate drop may be another story.