Florida -- Actuaries Call For Deeper Cuts in Comp Rates
Michael Whiteley, Eastern Bureau Chief, Workers' Comp Central
10/02/09
Florida Insurance Consumer Advocate Sean Michael Shaw and a veteran actuary hired by the claimants' bar are calling for much deeper cuts in state workers' compensation premiums than the 6.8% recommended by the National Council on Compensation Insurance (NCCI).
Based on copies of testimony filed in advance of next week's workers' compensation rate hearing in Tallahassee, both Stephen Alexander, Shaw's actuary, and South Carolina actuary Martin M. Simons will challenge NCCI's call to include a 2.5% profit factor in rate changes set to take effect on Jan. 1.
Alexander will call for cutting Florida's overall rates by 12.8% on Jan. 1, and Simons said in his testimony rates should drop by 15%.
The rate cuts follow reductions totaling 60.5% since Florida lawmakers passed sweeping reforms to the workers' compensation system that took effect on Oct. 1, 2003.
But both actuaries are challenging assumptions about how much surplus carriers need to reserve against claims in a state that has led the nation in the pace at which claims are declining.
Alexander says the flaw at the heart of NCCI's analysis is an assumption that Florida carriers need their entire accumulated surplus to reserve against claims when both employment and premiums are falling.
Florida's unemployment remained in the double digits as of June — driven by major declines in the construction industry. The impact of the recession has helped fuel drops in both premiums and losses.
Alexander pointed out that Florida's workers' compensation carriers spent just 43.7 cents of every premium dollar to pay workers' claims in 2008, while carriers across the nation spent 61.8 cents of every premium dollar on claims.
"To take an extreme example, if the current recession caused Florida's net written premiums to contract by 50% (all other factors unchanged), the NCCI would claim that its entire accumulated surplus is still at risk," Alexander says in the testimony.
Alexander challenged an assumption he said NCCI is making that the profit margin should be increased "so that insurers could still realize the same return on surplus."
Alexander cites estimates by credit ratings house Standard & Poor's in July that the nation's property and casualty carriers could safely operate with a net written premium-to-surplus ratio of 2-to-1. S&P estimates the industry nationwide had excess capital of about $238 billion as of July.
In May 2008, the Insurance Information Institute, an industry trade group, said the property and casualty industry may be overcapitalized by as much as $100 billion, Alexander said.
He analyzed Florida' top 10 largest workers' compenaton insurers as of last Dec. 31 and found them holding an average surplus of more than 300% of the risk-based capital required by Florida law.
Based on existing surplus and anticipated gains from investment, Alexander is calling on Insurance Commissioner Kevin McCarty to amend the rate filing to assume an underwriting loss of 2.26%.
Simons, is conservative by comparison. He will call on regulators to retain the 1% profit assumption included in NCCI's rates for 2009.
He is the former chief casualty actuary for the South Carolina Department of Insurance and has served as lead actuary for the Florida Commission on Hurricane Loss Protection Methodology since 1997.
In the prepared testimony, he also challenges NCCI's predictions that Florida will see a 7% drop in indemnity costs and a 4% drop in medical costs. Simons averaged two sets of data covering the past five years and eight years and predicts a 9.6% drop in indemnity costs and a 7% drop in medical costs.
In line with Alexander's analysis, Simons challenged NCCI's assumptions concerning profits but called for even deeper cuts.
"The analysis produced in this testimony provides the actuarial rationale behind a recommended rate change of 15%," Simons concluded.
On a deeper level, both actuaries are challenging Florida's method of setting rates. The state Office of Insurance Regulation (OIR) uses an administered pricing system in which all carriers use the rates approved by the insurance commissioner.
Alexander said workers' compensation insures nationwide has experienced underwriting losses in 9 of the past 10 years.
"Countrywide results probably reflect greater price competition than exists in Florida's administered pricing system," Alexander said.
Simons is calling for Florida to convert to the loss-cost system used in 40 other states. Those states approve annual loss-costs based on claims associated with individual job classifications.
Carriers then file individual rates using loss-cost modifiers based on overhead, dividends, profit, and other factors.
"A lost cost system minimizes perceived as well as actual price-fixing on the part of the Florida's workers' compensation insurance marketplace," Simons said in his testimony.
Simons said he has been hired by Florida Workers' Advocates, the claimants' bar, to help revamp the rating system through the Florida Legislature.
NCCI has not taken a position on changing the system.
But Lori Lovgren, NCCI's state relations executive for Florida, said Thursday the outside actuarial reports differ because Shaw's office isn't challenging NCCI's trend assumptions.
She said NCCI has commissioned its own independent review of the filing by the firm Actuarial and Technical Solutions, which concluded the Jan. 1 reduction should be held to 3.9%.
"So there are four opinions (on rate reductions), ranging from -3.9% to -15%," she said.
NCCI held its annual state advisory forum in Tampa on Thursday and warned the beneficial effects of Senate Bill 50A – the 2003 reform package – appear to have ended.
"Recession is now the Florida story," NCCI said in the forum materials.
On Thursday, OIR changed the location for next Tuesday's public hearing, which was scheduled at the Larson Building in downtown Tallahassee.
The hearing has been moved to Room 301 of the Senate Office Building at 404 S. Monroe St., in Tallahassee and will begin at 9 a.m. (EDT).
Alexander's testimony is at http://www.workcompcentral.com/pdf/2009/misc/AlexanderTestimony.pdf.
Simon's testimony is at http://www.workcompcentral.com/pdf/2009/misc/SimonsTestimony.pdf.
|
