Tuesday, November 10, 2009

FLASH REPORT!

Insurance Commissioner's Rate Decision Ignores Own Actuaries...Again

That California Insurance Commissioner Steve Poizner rejected the Workers' Compensation Insurance Rating Bureau of California's request for a double-digit hike in the pure premium rate probably shouldn't be a surprise in light of his past actions and future aspirations. It was just four months ago that a request for an even larger increase was reduced to zero and before that he trimmed the WCIRB's request by two-thirds when he begrudgingly granted the first increase in the workers' comp claims cost benchmark since the reforms were enacted.

Still, many in the industry are denouncing the Commissioner's latest decision as an abdication of responsibility.

"To just completely ignore the mountain of evidence regarding increasing medical costs coming from the WCIRB, self-insurers and the California Workers' Comp Institute...it's baffling that the Commissioner would essentially just step out of the process and not be a part of it any longer," says Ken Gibson, vice president of the American Insurance Association's western region. "At this point carriers are pretty much on their own from the standpoint of a pure premium advisory rate process."

Gibson and others are quick to note that the Commissioner is going against the recommendations of his own staff when ordering no increase in the pure premium rate. Whereas the WCIRB was seeking 22.8% hike, including 5.8% for the impact of the Workers' Compensation Appeals Board's decisions in Almaraz/Guzman and Ogilvie, the department's own hearing officer and actuaries too saw the need for a double-digit increase.

In the proposed decision, California Department of Insurance senior staff counsel Christopher Citko recommended a 15.4% increase in the benchmark, including 10.4% for higher losses from indemnity and medical benefits. Citko also included 4.6 points for the WCAB's decisions, but rejected the WCIRB's request for a 1 point experience rating off-balance factor. CDI actuaries Ron Dahlquist and Eric Johnson came in even higher at a 16.5% increase.

The Commissioner's actions mirror his decision in July when he rejected in its entirety the WCIRB's request for a 23.7% hike. At the time, CDI actuaries recommended a 13.5% increase and Citko as the hearing officer came in at 7.3% after tossing out the impact of the WCAB decisions.

It's not to say that department's actuaries didn't find fault with the WCIRB's numbers and its methodologies, just that they couldn't discount the data entirely.

At one point in the proposed decision, CDI's actuaries dinged the WCIRB for failing to update its estimated cost impact for the WCAB cases. They noted the original estimate was based on "sweeping assumptions" and "arbitrary tempering" and was essentially included whole cloth in the latest recommendation.

"The WCIRB defends its method by saying that it took a similar approach during the reform years, when costs were going in the other direction. We were critical of the WCIRB's approach then and we do not find it any more acceptable now," the actuaries noted in the proposed decision.

The end result, however, was largely the same-- that the cases would drive up costs. The WCIRB came in at 5.8%, while CDI's actuaries settled on 4.6%.

No Easy Way Out

While the industry may see it as abandonment of responsibility, Poizner maintains that the decision to grant a zero increase is intended to hold the industry accountable for its role in controlling costs.

"My work here is only advisory and insurance companies can price workers' comp insurance any way they see fit, but the purpose of me being so firm with regards to the benchmark is that I don't want to give insurance companies an easy way out. It would be easy just to raise rates and then the whole industry has this benchmark to follow," Poizner said during a conference call with the media. "There are costs that are going up, there's no question about that...but there are avoidable costs that are due to inefficiencies, costs due to lack of implementation of some of the cost containment measures in the workers' comp reforms of 2003 and 2004."

While the Commissioner does not set the pure premium rate, one CDI staffer noted that the rate decision process does offer some political clout.

"We realize that the rate is advisory. However, the Commissioner realizes he has a bully pulpit to browbeat the companies into using the cost containment tools. Rubber stamping any increase takes the pressure off them to become more efficient."

But some in the field are concerned that the continued denial of any rate increase could have unintended consequences.

"I sure as hell hope he's right," says Scott Hauge, a broker and small business advocate. "While I certainly want to keep the rates as low as possible, I'm concerned that we don't get caught into a spiral like we did before where you start to see [carrier] insolvencies."

He maintains that the most important thing for employers is some consistency and predictability in rates, which may be undermined in the long-term by the Commissioner's actions.

"If rates are going to go up a little bit, down a little bit, employers will deal with that as long as they can plan for it. But the drastic jumps that occurred early in the 2000's and then the drastic reductions after the reforms...how do you plan for that if you're a contractor?"

Exception Taken

Others in the community took issue with the Commissioner's assertion that the industry was colluding to keep costs and therefore premiums at an artificially high rate.

In his release announcing the decision, Poizner took aim at the overall process.

"These increases requested by the WCIRB give insurers an excuse to raise rates in concert without fully utilizing all of their cost containment tools or increasing efficiency. I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency."

That didn't sit well in some corners.

"It is absolutely incorrect to suggest that this market is driven by anything other than aggressive competition by insurers and the agents and brokers who serve California's business community," says Mark Webb, vice president and general counsel at Employers Direct Insurance Company. "To make a blanket allegation of even the potential of impermissible conduct does a disservice to the thousands of Californian's who work in this industry."

A copy of the Department's proposed decision is available by clicking here and the final decision and order is available here. Both are also available in our Resources section