The state Department of Business Regulation has heard a national trade group’s arguments for cutting Rhode Island workers’ compensation rates dramatically, by an average of 18.3 percent.
But while The Beacon Mutual Insurance Company, which had objected to the filing as “premature and incorrect,” stayed out of the official proceedings, the attorney general’s office has offered a critique and alternate proposal to cut rates by an average of 27.5 percent.
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The DBR took testimony from both sides the week of Dec. 13, and a decision is expected within days. Possible outcomes are acceptance of either proposal, rejection of both, or a compromise devised by the DBR hearing officers.
Workers’ compensation insurers across the U.S. often base their rates not just on their own loss experience, but on global data for each specific market gathered and analyzed by an independent trade group.
In the last year alone, the National Council on Compensation Insurance, whose clients include the top workers’ comp carriers in Rhode Island, has filed its analyses with insurance commissioners in 21 states.
What the NCCI files is a look at the “loss cost” part of premiums – how much needs to be collected in each state to pay expected claims. Once the NCCI’s proposal has been approved in each state, carriers can set new rates by factoring in administrative expenses, taxes, contingencies, profit margin, etc.
When rates are adequate, loss costs account for about 85 cents of each premium dollar, according to Laura Backus Hall, state relations executive for the NCCI. In Rhode Island now, she said, it’s about 70 cents – meaning local employers are paying too much.
Overall, the NCCI recommended an 18.3-percent rate cut, but broken down by industry class, the plan would produce rate cuts of as much as 48.4 percent (for certain goods and services providers), but also some increases, of up to 13.7 percent (for some clerical jobs). Most employers, however, would see rate decreases.
Rhode Island’s loss cost analysis hasn’t been updated since 1998, because a change in state law prevented consideration in 2001 of a proposal to cut rates by 8.7 percent.
Beacon Mutual, which subscribes to NCCI services, but is not a full member, promptly objected to the filing, saying it didn’t in fact include the “relevant data” required by the law.
Beacon CEO Joseph A. Solomon wrote to DBR Director Marilyn Shannon McConaghy noting that employers with one to three workers had only been required to carry workers’ comp since 1999, and data from that population wouldn’t be fully “matured” for analysis until 2005. In addition, after the fire at The Station, an additional 1,000 or so employers signed up for workers’ comp, mostly with Beacon Mutual, Solomon noted, and there is virtually no loss experience information for that population.
“The Rhode Island worker’s compensation market is stable and reasonable,” Solomon wrote. “The potential financial impact a premature and incorrect filing could have on our system and Beacon is very concerning to me.”
As of June 2003, Beacon held 76 percent of the Rhode Island workers’ comp market (up from 58.6 percent in 1999), 19 times the market share of its nearest competitor, The Hartford. An NCCI chart shows since 1999, even though rates have held steady, the total premium written has increased by about 55 percent, to $203 million in 2003. As of Dec. 31, 2003, Beacon had a surplus of nearly $110 million.
After having its own actuary review the NCCI proposal, the DBR dismissed Beacon’s objections and scheduled a hearing. It was then that Assistant Attorney General Genevieve M. Martin, who serves as a consumer advocate in insurance matters, stepped in. And the actuary she hired, Anthony J. Grippa, questioned the NCCI analysis for different reasons.
Grippa objected to three major factors in the NCCI calculations:
– The NCCI based its analysis only on paid claims, extrapolated to predict future payments, rather than on a combination of paid claims and the reserves insurers have set aside to pay pending claims, which Grippa said would’ve provided a more complete picture.
– The NCCI excluded large losses – to avoid unduly skewing the data – using a method that, when applied to Grippa’s paid-plus-reserves calculations, came up with higher numbers than when large losses were included.
– The NCCI estimated that indemnity losses would grow 0.5 percent faster than wage growth, and medical losses would grow 1 percent faster, even though the historical data, as Grippa read it, showed no discernible trend at all.
The latter two factors alone would push the premium decrease to 20.6 percent, Grippa said. And both paid claims and reserves were considered, the decrease would be 34.4 percent. Martin proposed to split the difference, and cut rates by 27.5 percent.
The NCCI’s lawyers and actuary, and the DBR hearing officers and their actuary, all questioned Grippa’s reasoning on all three points, and the NCCI suggested the reason claim reserves couldn’t be used is that The Beacon isn’t setting aside big enough claim reserves. On the large loss exclusion method, NCCI officials noted that 21 other states had accepted it.
Should the DBR accept Martin’s proposal, the NCCI team suggested, Rhode Island could end up with excessively low – and thus inadequate – workers’ comp rates.
