Friday, November 18, 2011, 09:00 AM - Understanding the CA WC systemIn several recent posts I discussed workers' comp premiums and the new methodology adopted by Insurance Commissioner Dave Jones.
I noted that the recently recommended rates continue a pattern of workers' comp rates that have been quite stable for California employers for the last five years.
Last weekend I had the pleasure of discussing this with insurance consultant Mark Gerlach. Gerlach serves as a consultant to CAAA and is widely respected in the industry for his knowledge on insurance issues.
I asked Gerlach what he thought. Here's what he offered:
"Your two posts last week regarding pure premium rates highlighted the primary problem with those rates. Specifically, the problem is that the "approved" pure premium rates don’t seem to mean anything.
As you noted, the average "charged" rate in 2011 was $2.38 while the average "filed" pure premium rate was $2.37. But what you didn’t say was that the average "approved" pure premium rate was actually quite a bit less than the average "filed" pure premium rate of $2.37. In fact, the Commissioner's Decision denying the WCIRB’s request for 2011 noted that the average "filed" rates at that time were 36% higher than the "approved" pure premium rates."
"What this means is that insurers make independent decisions regarding rates, and movement – or the lack of movement – of the "approved" pure premium rates doesn’t have much impact on their decisions. Consequently, even if the "approved" 2012 pure premium rates were higher than the previous "approved" rates, assertions that this change in pure premium rates will lead to a major increase in employers’ insurance costs are wrong. The SCIF action – dropping its average rates by 1% – is further confirmation that changes in the approved pure premium rates just don’t impact the market."
According to Gerlach:
"So, why is this a problem? A review of the industry’s combined ratios over the 16 years since adoption of competitive rating shows a disastrous pattern of extreme fluctuation. The combined ratio rose from 95% in 2004 – the last year under the Minimum Rate Law – to 128% in 1995. That was probably a reasonable combined ratio (128%) given that this ratio does not consider investment income. But insurers instigated a price war over the next several years and the average rate consistently dropped while the combined ratio soared to 184% by 1999. Rates then began a swift climb, almost tripling between 1999 and 2003, while the combined ratio fell to a disgracefully low 55% in 2005. Rates then dropped by two-thirds by 2008, while the combined ratio rose again, reaching 128% by 2010."
Moreover, Gerlach says:
"By any measure this dismal record signifies that the system of uregulated competitive rating introduced in 1995 has been an unmitigated disaster. Several dozen insurance companies became bankrupt, wiping out a large segment of the independent California insurance market. Employers were subject to huge price swings, paying rates that swung from grossly inadequate to grossly excessive. And injured workers suffered a huge – and, in my opinion – unnecessary reduction in indemnity benefits; arbitrarily capping TTD benefits, cutting PPD benefits by almost 70%, and totally eliminating vocational rehabilitation benefits."
Concluding, Gerlach notes:
"Bottom line, the 2012 "approved" pure premium rates are higher than the previous "approved" rates, but because those rates are largely ignored by insurers that change has little or no impact on the ultimate rates that employers pay. That’s the good news. The bad news is that the unregulated pricing authority given to insurers has caused huge problems for all system participants over the past 15 years. Workers’ compensation insurance is the only Property/Casualty line of insurance that doesn’t give the Insurance Commissioner any effective regulatory authority over "charged" rates, and unless and until that is changed I believe we will inevitably experience similar problems in the future."
Gerlach makes good points. The benefits side of workers' comp is but one side of the industry equation. Policyholders need to keep that in focus as they move forward to consider further reforms.
Regulation has been a dirty word in some political circles. But at some point it may make sense to take another look at giving the Insurance Commissioner more power over rates rather than just an advisory role.
Here's the last post I did on the subject:
http://www.workerscompzone.com/index.ph ... 109-213717
Monday, November 14, 2011, 08:49 PM - Understanding the CA WC systemAnother interesting case has come out of the California Court of Appeals, 6th District.
The case, State Compensation Insurance Fund v. WCAB (Dorsett) was filed on 11/10/11 and is "not to be published in official reports", limiting its effect since it is not to be cited or relied upon under the California Rules of Court.
However, the case is worthy of discussion in the blogosphere.
In the case the 6th District wrestled with the concept of how to apply the Benson case where a physician opined that a period of cumulative trauma after a specific injury was a compensable consequence of the earlier injury.
Mr. Dorsett has sustained a specific injury to his neck which resulted in two spine surgeries, a discectomy and a fusion. Following the surgeries he eventually worked for another employer for almost two years.
The AME noted that had Dorsett not had the earlier injury "and had he not had the subsequent surgery that was indicated as a result of that injury and had he not had the unfortunate result of the surgery with subsequent ongoing neck symptoms, the cumulative trauma activities would not be an issue", noting that "The simple fact of the matter is that had the March 2000 injury not occurred, the cumulative trauma injury would not have occurred".
In a deposition the AME did apportion one half to the specific injury against the earlier employer and one half to the cumulative trauma at the later employer.
After a trial, the workers' comp judge ruled that the injuries created 100% permanent disability and that "the permanent disability caused by each is not reasonably capable of separation or apportionment from the combined permanent disability". The WCJ noted that :
"Though Dr. Izzo also indicates that he would apportion permanent disability equally between the two injuries, since he indicated that the cumulative injury is a compensable consequence of the first specific injury, in essence there is only one injury, with the specific and subsequent cumulative trauma injury being inextricably intertwined to the extent that there can be no apportionment under Benson".
Based on this analysis, the WCJ made a joint and several finding of 100% against the two employers.
The creative representation by legendary San Jose attorney Arthur Johnson had borne fruit.
The WCAB panel denied reconsideration. Thereafter, the matter was appealed to the 6th District.
In a decision by Justices Bamattre-Manoukian, Elia, and Duffy, the court reversed. Under Labor Code 4663 and 4664 and the Benson doctrine, each injury must be rated separately.
Alas, for Dorsett there would be no 100% award on a theory that would combine a c/t with an earlier specific so as to defeat the Benson doctrine. Two 50% awards amount to way less money than one 100% award.
Yes, the 6th District panel did note that:
"There may be limited circumstances, not present here, when the evaluating physician cannot parcel out, with reasonable medical probability, the approximate percentages to which each distinct industrial injury causally contributed to the employee's overall permanent disability. In such limited circumstances, when the employer has failed to meet its burden of proof, a combined award of disability may still be justified (citing the Kopping case)."
Brushing aside the argument that the subsequent cumulative trauma injury against another employer was a compensable consequence of the original injury at the first employer, the court noted that the AME had referenced a 50-50 causation split between the injuries.
According to the court:
"Therefore, based on the testimony of the AME, the successive injuries can be rated separately and Dorsett's joint and several award of 100 percent permanent disability must be annulled."
The decision concludes with a remand to the WCJ to make an apportionment determination. Why that is necessary if the court was convinced that the AME indicated a 50/50 split is not clear.
Sunday, November 13, 2011, 09:38 PM - Political developmentsLast Thursday the heads of the California Department of Industrial Relations and the Division of Workers' Compensation, Christine Baker and Rosa Moran, appeared at the California Applicant Attorneys planning conference in San Francisco.
Baker and Moran both reiterated that they were open to ideas about how to make the system more effective and efficient.
Areas of concern include such issues as the costs of liens, UR , the QME system and EAMS.
It's clear that they are interested in looking at a PD benefits increase, but the mantra is that there must be system savings to finance an increase.
This is not really big news, since both have made the rounds of various industry conferences and stakeholder groups this summer and fall.
And I understand that meetings with them will continue soon.
What is not clear, however, is whether the Administration is really committed to undertaking an omnibus reform or whether at the end of the day they will prefer to attack various problems areas to squeeze additional savings.
Baker so much as acknowledged the possible approaches, noting that the decision on that might be made up the ladder from her pay grade.
Doing a big reform deal has potential risks and rewards for many stakeholders.
Employers seek to keep comp costs low. At the moment it would appear that they have little to complain about though comp costs could rise depending on medical usage trends and depending on whether Almaraz-Guzman and Ogilvie are really that big of a deal (which is not necessarily that clear). Another round of comprehensive reform might keep rates stable or it might unleash a round of unintended consequences.
Union groups (which include the Cal Fed and various other unions that tend to operate independently of the Cal Fed in Sacramento) want a benefit increase. But achieving a one-time benefit increase through further take aways could be flirting with disaster. And rank and file union members have been very unhappy with many of the details of the 2003/2004 reforms.
Insurers probably would like to see an increase in premium volume, particularly as claim frequency is down due to the economy. Reform that is poorly thought out could further squeeze insurer profit margins.
Attorneys want to see a benefit increase, but only if it will be sustainable.
And not if it is done by sleight of hand, i.e. "raising benefits" but making it almost impossible to help workers recover a fair settlement.
Doctors and medical providers may be vulnerable, since medical costs have been increasing more than other components of the system. But squeezing doctors can result in access to treatment problems which can make the system unworkable.
And for the Brown Administration itself, comprehensive reform may not make that much sense right now.
Why? It's early in his term, and there are huge other fights that beckon. Budgetary disaster. Problems with social services. School funding. University funding (note the spread of Occupy to university campuses). The monetary shortfall in the unemployment system. Water policy. The list of pressing and nasty issues goes on and on.
Further, there will be lots of turnover in the legislature next year.
I could well be wrong. Comprehensive reform proposals could be ready to go into print.
But if I was sitting in Brown's chair, I'd probably just as soon keep comp on the back burner for now. Comp is out of the headlines at the moment, which is where Brown wants it. If I were Brown I'd do some incremental things, largely through regulation.
Workers' comp is known as a tar pit for California politicians, so why rock that boat now?
Wednesday, November 9, 2011, 09:37 PM - Understanding the CA WC systemThe State Compensation Insurance Fund announced this week that it expects a 1% average decrease in its workers' comp premiums.
According to a SCIF statement, although some accounts will see a rate hike and although SCIF will adopt some "rate relativity" adjustments, overall employer policyholders will see a slight decrease in workers' comp premiums.
That's good news for California employers and for the California economy.
And it would seem that it's a confirmation of the rate finding adopted last week by Insurance Commissioner Dave Jones.
Let's look at some quick history on rates.
In 2003, average charged comp rates were $6.29 per $100 of payroll. In the latter part of 2004 that came down to $5.49.It decreased in 2005 to $4.36 per $100. During the early years after the 2004 reforms it appeared that although comp costs were coming down, they were still at a level where insurers were reaping record profits.
By the second half of 2006, industry average charged rates were $2.85 per $100 of payroll.
Since then, average charged rates have been steady as the following indicate:
What a particular business may actually pay depends on a number of variables which include risk classification codes, discounts and other factors.
The "average filed pure premium rate" in early 2011 is $2.37 per $100 of payroll, close to the average charged rate.
For years the WCIRB and the Insurance Commissioner focused on an advisory benchmark, the "pure premium rate".
But now the California Department of Insurance has done a reset. There will still be an advisory "pure premium rate", but the focus will be on comparing rates to what the marketplace is actually charging.
Now Insurance Commissioner Dave Jones has adopted $2.33 as an advisory pure premium rate. Again, this is not binding on insurers and depending on various factors, including the risk associated with the industry and their loss experience, rates can vary greatly.
What's up here?
Part of the confusion is over the whole concept of rates. Manual rates, average rates, pure premium rates, filed rates, discounted rates, classification codes, X-mods.
Enough to make your head spin.
While most comp system stakeholders appear to be happy with the new measurement methodology reset, there are some who have been wary (as I noted in my last post). After all, the WCIRB repeatedly asked for whopping increases in the "pure premium rate"(requesting increases of 23.7% in 2009, 22.85 in 2010, and 27.7% in early 2011, all of which were rejected by then- Insurance Commissioner Poizner. And the WCIRB was on the verge of filing for another large increase this year before they elected to not file for an increase.
But measuring by comparison to average rates filed and average rates charged employers by insurers seems to make sense. I have no reason to question the WCIRB or Department of Insurance data based on documents I've seen.
Stated another way, what the marketplace is actually doing seems to be the important yardstick rather than comparing against past WCIRB rate requests and recommendations.
That's not to say that some employers won't see comp premium increases.
In a WCIRB recommendation and proposal filed August 22,2011 with Dave Jones, the WCIRB noted that "Of the 491 standard classifications which have been in effect and for which an industry average filed pure premium rate can be computed, the proposed January 1, 2012 pure premium rates are lower than the industry average filed pure premium rates as of July 1, 2011 for 319 classifications, higher for 168 classifications, and the same for 4 classifications".
So while some industries could see upward shifts in comp premiums, the average comp premium seems to have decreased. Again, this week's SCIF announcement would seem to buttress that finding.
Looking back to average rates, for $2.30 per $100 payroll in 2007 to $2.38 per $100 of payroll in 2011, workers' comp rates in California have been incredibly stable.
Since the Brown Administration is concerned about growing the California economy, perceptions matter.
Sunday, November 6, 2011, 08:49 PM - Political developmentsAre California workers' comp benchmark rates stable or even decreasing?
Or does the new methodology suggested by former Insurance Commissioner Poizner and used by current Insurance Commissioner Dave Jones actually mask a significant rate increase?
This is a story that has received lots of attention in the workers' compensation press, particularly in the Workers Comp Executive (www.wcexec.com).
In a late October edition of the Workers' Comp Executive, several insurance brokers are quoted as questioning the reported 1.8% decrease in rates and noting that rates in many categories are substantially increased.
The "pure premium" rate set by the Insurance Commissioner (after feedback from the WCIRB) is advisory only.
But the WCExec piece included comments such as that of an Aon Risk Insurance Services executive, Jim Untiedt, who said "If we send a message that the average rates are going down 1.9% (actually 1.8%) rather than climbing 10-30%, businesses will not be prepared for these actual increases."
In the same WCExec piece another broker, Ron Srajer of Keenan & Associates, was noted to have referenced a 39% increase for hospital filed rates, a 44% increase for residential care and a 45% increase for homemaker service.
According to the WCExec the WCIRB and the California Department of Insurance "declined requests from Workers' Comp Executive to provide a cross-over comparison between the old and new benchmarks early on in this ratemaking process".
In a press release issued November 4, Insurance Commissioner Dave Jones issued approval of the advisory rate filing, issuing the following statement:
"Today, I am pleased to announce that the advisory rate filing proposed by the California Department of Insurance has been approved," said Insurance Commissioner Jones. "The advisory claims cost benchmark has been set at $2.30 per $100 of employer payroll. The advisory pure premium rate measures the cost of workers' compensation claims and the expenses to adjust those claims over the next policy year for workers' compensation insurance. It appears that current rate filings from insurers have slightly exceeded their cost estimates. The WCIRB filing provides greater information on current insurance company rates and pricing than previous filings. Insurers are charging employers insurance premiums close to the estimated cost of benefits and adjusting expenses. However, insurers filed much higher manual rates, the rates that could be charged to employers, and are substantially discounting those manual rates. This has helped to keep workers' compensation insurance prices generally stable despite increasing costs, particularly for medical care."
The text of the CDI decision and order (which is effective January 1, 2012) can be found here:
http://www.insurance.ca.gov/0400-news/0 ... nOrder.pdf
Not to be outdone, however, Workers' Comp Executive Dale Debber continues to challenge the validity of the CDI on these rate issues.
Debber's publication issued an e-blast on Friday, charging that "Workers' Comp Rates Increased 37% by Commissioner Jones". I'm told that Debber will soon be releasing more data on his number crunching.
But here's the text of what his e-blast charges:
"Against a backdrop of a horrid economy and small businesses in trouble, California Insurance Commissioner Dave Jones today effectively approved a 37% increase in workers' comp rates for 2012. The decision means California employers will pay a lot more for workers' comp next year than they did last year. But Democrat Jones tried using numerical trickery to couch his decision and make it a non-news worthy event."
According to Debber, "Couched as a flat rate of $2.30 it is just below the Workers' Compensation Insurance Rating Bureau's recommendation of a rate decrease of 1.8%. The 1.8% decrease used a calculation based on currently filed rates to recast a 39.9% increase as a decrease. Now, understanding the calculation is open to criticism, it has been further obfuscated into a blended rate for all employers which is essentially meaningless."
Continuing, Debber states that "Jones, in a written statement said, "Today, I am pleased to announce that the advisory rate filing proposed by the California Department of Insurance has been approved," said Insurance Commissioner Jones. The advisory claims cost benchmark has been set at $2.30 per $100 of employer payroll."
Moreover, Debber notes that "This past spring, Workers Compensation Insurance Rating Bureau, a private organization owned and run by insurance companies licensed and doing the work of the Insurance Department, filed and then withdrew a 39.9% increase for 2012. Then, Commissioner Jones ordered that WCIRB stop benchmarking the pure premium rates from the previous approved rate and instead benchmark it against the average pure premium rates that carriers have currently filed. That's how they arrived at the 1.8% decrease or a $2.33 average rate, which has been approved now as a $2.30 rate.The resultant recommendation from WCIRB - a small decrease - was an enormous swing from what was on the table. WCIRB admitted no change in the underlying methodology, but despite the huge disparity, refused to provide an-apples-to apples comparison to its previous filings. It was stuck between Commissioner Jones and reality, or more proverbially, between a rock and a hard place."
Continuing, Debber charges that "And neither the WCIRB nor the California Department of Insurance will answer questions concerning the difference. The end result is still largely the same--a huge increase.
You can fool some of the voters some of the time but when in the end they have to write bigger checks the truth becomes apparent. Workers' Comp Executive will have full coverage of Compline's analysis of the holes in the Department's explanation and calculations next week. There promises to be an explanatory tool which producers can use for employers to explain the subterfuge and resultant rate increase."
How this plays out-in dollars and in public perception- could be very important for California workers' comp. Already we have seen a reluctance by the Brown Administration to support any benefit increase which is not offset by cost savings. If comp rates are widely seen as increasing at double digit rates, the pressure to find cost savings would really intensify.