Question: When is a joint underwriting association not a joint underwriter? Answer: When it is the Florida Workers' Compensation Joint Underwriting Association (FWCJUA). Unlike virtually every other workers' compensation market of last resort in the United States, insurance companies are not the ultimate financial guarantors of the Sunshine State's FWCJUA. Yet, despite the lack of state-mandated financial subsidies by the insurance industry — many would say precisely because it is not subsidized by the industry — the FWCJUA is undoubtedly one of the most successful residual market mechanisms in the country.
Since its inception in 1994, the FWCJUA has provided a market of last resort to hundreds of thousands of Florida employers unable to obtain workers' compensation coverage from private insurers. The FWCJUA has expanded and contracted as market conditions dictated. It has provided a reliable market to thousands of insurance agents. Its existence has encouraged many workers' compensation carriers to commit more underwriting capacity to Florida, thereby helping create the state's healthy workers' compensation insurance market. Moreoever, although historically many of its insurance policies have been issued on an assessable basis, the FWCJUA has never assessed a single policyholder.
Oh, and one more thing — the FWCJUA has paid cash dividends to policyholders who were insured in a year in which loss reserves were more than adequate to pay anticipated losses. How many residual markets can say that?
To what do we owe the success of Florida's workers' compensation residual market? Sound fiscal management, prudent regulatory oversight, consistent underwriting discipline, and good claim practices have all played important roles. Undoubtedly, however, the single most important factor was the Florida Legislature's foresight to require the FWCJUA to charge actuarially sound rates. With the exception of a brief period between 2003 and 2004, when the Legislature experimented with artificially restricted rates, the FWCJUA has succeeded by adopting rates that were actuarially indicated.
The residual market model common in most states often results in policyholders paying inadequate rates. This inevitably leads to deficit assessments levied on a proportionate market-share basis against insurance carriers writing business in those states. If onerous enough, this so-called "residual market burden" can discourage carriers from committing as much underwriting capacity to a particular state as they might otherwise. Inadequate rate structures often provide implicit disincentives for policyholders to seek workers' compensation insurance in the voluntary market, when there is little price difference between residual market and voluntary market coverage.
While common in the private market, policyholder dividends are rarely paid to employers in residual markets. However, some former FWCJUA policyholders received unexpected good news earlier this year when the FWCJUA's Board of Governors announced that policyholder dividends totaling over $800,000 would be paid to 446 employers who were insured by the association in 2001. This is the first time the FWCJUA has paid policyholder dividends. However, the FWCJUA will continue to evaluate the results of other policy years, and additional dividend payments are possible in the future.
Going into the dividend distribution process, FWCJUA Executive Director Laura Torrence expressed concern that the organization might find it difficult to locate all the eligible employers. Many of them were start-up "mom and pop" businesses that may not have been around eight years after buying their FWCJUA policies. Anticipating the potential problem, the FWCJUA implemented an aggressive strategy to locate as many dividend recipients as possible, and the association's efforts paid off. By the end of November 2009, nearly 92 percent of the dividend checks had been cashed by employers.
For current FWCJUA policyholders, the good news comes in the form of yet another decrease in FWCJUA rates. Following the approval of NCCI's voluntary market rate filing in November, the FWCJUA announced that it would file rates reflecting an overall decrease of 4.6 percent. Since Oct. 1, 2003, Florida's workers' compensation private market has experienced an overall average rate decline of 63.2 percent. FWCJUA policyholders have enjoyed declining rates as well.
The FWCJUA annually reviews its rates, using NCCI's voluntary market filing, as approved by the Office of Insurance Regulation, as its starting point. From there, the FWCJUA considers its own loss experience and expenses to develop actuarially sound rates. Although the FWCJUA's rates have declined appreciably over the past six years, they have not declined as sharply as Florida's voluntary market rates. This is largely because the association currently insures so few policyholders. With its relatively small premium base — less than $6 million in 2009 — the FWCJUA's fixed operating expenses unavoidably consume a greater share of earned premium than is the case with voluntary market carriers.
Premiums paid by FWCJUA policyholders differ by rating tier. The three tiers are defined by law, and the rates in each tier are based on surcharges applied to approved voluntary market rates. Under the rating plan effective Jan. 1, 2010, Tier One rates will be surcharged 28 percent of voluntary market rates, while Tier Two rates will be surcharged 124 percent. Tier Three rates will also receive an 124-percent surcharge, but Tier Three policyholders will pay more than Tier Two policyholders because the Assigned Risk Adjustment Program — commonly known as ARAP — will also be applied in most instances to Tier Three employers.
Tier One employers, who pay the lowest FWCJUA rates, typically include employers who are relatively good risks but are unable to find voluntary market coverage because of their small size or the types of businesses they operate. Employers may qualify for Tier One rating under one of two sets of criteria. First, employers will be assigned to Tier One if they have an experience modification factor less than 1.00, they had no lost-time claims following the applicable experience modification rating period, and their medical-only claims subsequent to receiving their experience modification did not exceed 20 percent of their premiums. A second set of Tier One criteria can be applied to employers who are so small that they did not qualify to receive an experience modification factor. This second set of employers qualify for Tier One rating if they had no lost-time claims for the three-year period immediately preceding the inception or renewal date of FWCJUA coverage, their medical-only claims during the same three-year period did not exceed 20 percent of premium, and they actually had workers' compensation insurance coverage during the entire three-year period.
Employers qualifying for Tier Two are either those employers whose experience modification factors are somewhat higher than what is needed to qualify for Tier One or they have no experience modification because they are new businesses. (Employers need a minimum of three years of loss experience to receive an experience modification.) Tier Two employers who have experience modification factors must have factors equal to or greater than 1.00, but no more than 1.10. They cannot have lost-time claims following the applicable experience modification rating period, and their medical-only claims subsequent to receiving their experience modification cannot exceed 20 percent of their premiums. Relatively new employers who do not have three years of loss experience will qualify for Tier Two if they had no lost time claims for the three-year period immediately preceding the inception or renewal date of FWCJUA coverage and their medical-only claims during the same three-year period did not exceed 20 percent of premium.
Employers who do not qualify for either Tier One or Tier Two are placed in Tier Three. Because of higher losses in the tier, Tier Three rate surcharges have usually been higher than those applied to Tier Two. However, effective Jan. 1, 2010, the surcharge will be the same for both tiers, although most Tier Three employers will pay higher premiums due to the application of the ARAP.
Thomas J. Maida is the managing partner of the Tallahassee office of Foley & Lardner LLP and general counsel to the FWCJUA. He may be reached at tmaida@foley.com.
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