October 19, 2009
Florida Insurance Consumer Advocate Sean Michael Shaw will begin looking for sponsors during the next few weeks to introduce legislation that would overhaul the state workers' compensation rate-making system and make Florida the 41st state to use loss costs and loss-cost multipliers.
But the proposed reform, if approved by the Florida Legislature next year, will add a new twist, according to staffers working on the plan. Steve Alexander, Shaw's actuary, and Terry Butler, senior attorney for Shaw's office, said in an interview Friday they will include a new, third component to the loss-cost system used in 40 states.
Under the plan, the Florida Office of Insurance Regulation (OIR) would approve overall loss costs filed by the National Council on Compensation Insurance (NCCI). Then OIR would approve traditional loss-cost multipliers filed by individual carriers to reflect profit and expenses.
But each carrier also could choose to file a separate modifier based on the cumulative loss experience of its policyholders and adjust NCCI's loss costs.
The Florida Legislature convenes for its next regular session in March. Pre-filing of bills began this month.
Initial discussions about the proposed bill call for applying the new "experience modifier" to loss costs based upon the experience within job classifications. Alexander said the third component will give carriers with lower losses a second competitive edge.
The plan has the backing of Florida Workers' Advocates (FWA), the injured workers' bar. FWA has received similar recommendations from Martin Simons, the South Carolina actuary FWA hired to help the attorneys draft a rate-making overhaul.
"We're really in a legacy system here," Alexander said. "We're way behind the times in comparison to all of the other states."
Last Thursday, McCarty approved the 6.8% rate cut. He rejected calls by Shaw to trim rates by 12.8% and from Simon to reduce them by 15%.
McCarty's order brings total reductions to 63.2% since a series of workers' compensation reforms became law on Oct. 1, 2003.
But McCarty stopped short of signing off on the rate cut.
Instead, he ordered NCCI to make internal changes in their methodology and come up with same bottom line.
McCarty ordered NCCI to make changes to the rate for roofers and the minimum premium multiplier.
But he also challenged NCCI's assumption of a 5.6% factor for dividends – saying that will create discriminatory rates. All employers would pay the same rate, but many of them don't get dividends, McCarty said.
Alexander and NCCI have wrangled for years over the surplus carriers have been building since the reforms took effect.
Alexander said he analyzed Florida's top 10 largest workers' compensation 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.
He said workers' compensation carriers spent just 43.7 cents of every premium dollar to pay workers' claims in Florida in 2008, while carriers across the nation spent 61.8 cents of every premium dollar on claims.
Shaw's staff says shifting to a loss-cost system will change the debate over profits and dividends. Those factors would be included in the loss-cost multipliers and not in the loss costs adopted statewide.
Alexander said the second modifier will reward efficient carriers that find ways to reduce losses. Experience modifiers are traditionally assigned to employers to reflect their individual losses.
Lori Lovgren, NCCI's state relations executive for Florida, said Friday she is unaware of any other states that have applied experience modifiers to carriers.
"This would be something new," Alexander said. "We've got several carriers in the state that are very efficient. It is highly probable that they will have loss ratios consistently below NCCI, because they're competitive."
Lovgren said Friday NCCI does not take positions on state policy matters, but questioned whether the factors used for the new modifier won't be reflected in the loss costs or the multipliers.
"We really don't take a position on policy matters. Carriers take different positions, but we'll do it however the policymakers want it done," she said. "We're prepared to do it either way."
NCCI recommends full rates in Arizona, Florida, Iowa and Idaho. It recommends both loss costs and rates in Illinois and Indiana.
Only three other states – Massachusetts, New Jersey and Massachusetts – still use rates instead of loss costs.
The Massachusetts General Court began legislative hearings on converting to a loss-cost system late last month.
The conversion to loss costs was a key component of former Gov. Eliot Spitzer's reforms in New York. Lawmakers adopted a new loss-cost system based on recommendations from the New York Compensation Insurance Rating Board (NYCIRB) in 2008.
McCarty hasn't weighed in on the proposal, although he suggested Florida look at the concept of loss costs following the 2003 reforms.
"We have not had an opportunity to review the consumer advocate’s proposal. Therefore, we cannot issue a statement at this time," Acting OIR Communications Director Jack McDermott said in an email Friday.
There is opposition.
Brett Stiegel, administrator of the Self Insurers Fund for the Florida Roofing, Sheet Metal and Air Conditioning Contractors Association (FRSA), said his group is opposing the plan and thinks the current system is working.
Stiegel's group convinced McCarty to order NCCI last week to reduce the cuts planned for roofing rates to 10.8% -- the average reduction for the construction trades. FRSA warned deeper reductions could trigger major fluctuations in future rates.
But Christopher J. Smith, a Tampa claimant's lawyer and former FWA president, said his group has been working with Shaw's office to develop the plan and will support it next session.
Smith's group lost a key legislative battle last session over the Florida Supreme Court's October 2008 ruling in Emma Murray v. Mariner Health/Ace USA. The court struck down a controversial cap on claimants' attorneys' fees included in the 2003 reforms.
But the Florida Legislature restored the cap based largely on the temporary rate increase McCarty ordered last April based on NCCI's recommendations.
"What happens, and what we've seen happening in the last 15 years is that, whenever there's legislation, NCCI is really the sole voice that speaks to why that legislation may be necessary," Smith said.
"And there have been questions raised for years by the Insurance Consumer Advocate and Marty Simons over differences of opinion concerning profits and contingencies," Smith said.
Butler, the attorney in the Consumer Advocate's Office, said the timing is right for a change. Florida, which once had some of the highest workers' compensation insurance rates in the country, is poised to fall somewhere in the bottom 10 states in next year's cost rankings.
"Everything is going well," Butler said. "It's time to be aggressive and move forward."