A Tale of Two Cases

Perhaps you can also file this under "American Horror Story". Let me tell you about two cases of mine. The names have been changed because they are both still ongoing cases, but I can share enough detail to explain my point without violating any confidentiality.

In one case, the employer has been criminally charged because he put down the wrong classification code on the application and the insurance company didn't catch it for several years. By the time the insurance company got around to figuring out that they didn't think the policyholder's expertise in classifications was very good, the insured company had gone out of business and the insurer couldn't get the money they felt they were owed.

So they got their friendly neighborhood prosecutor to file criminal charges. And now, as part of the negotiations to try and avoid a criminal trial, the insurer has suggested "restitution"--that is, pay them their money and they will arrange to have the criminal prosecution dropped.

My second case involves a major property/casualty insurance company that has just billed a policyholder for audited premium in excess of $700,000--from a policy that had an original premium of only around $1,500.00.  Yes, this employer bought a policy that he thought was going to cost $1,500--but the insurance company has retroactively sent a bill for more than $700,000.00 for that same policy.

And the galling thing is that this $700,000 bill is based on the insurance company ignoring the well-established rules that govern premiums in the particular state involved.

When this problem was brought to the attention to state insurance regulators, and NCCI, they all agreed it seemed to be wrong--and then collectively washed their hands and said there was nothing they could do. The policyholder should go to court, they helpfully suggested.

So, when the insurance industry feels an employer has based premium on a faulty or incorrect understanding of their arcane rules, and then can't pay what the insurance company feels is the proper premium, they get criminal charges filed.

But when an insurance company comes up with an outrageously inflated premium bill that is based on a clear and flagrant disregard for the rules that apply in a particular state, though, the insurance regulatory system shrugs and suggests the policyholder consult an attorney.

Does anyone else feel like something is wrong here?

Hysterical Over Reaction from Insurance Industry About Filing Rates

So, the American Insurance Association has just thrown a public hissy fit over new proposed legislation here in Illinois, legislation that would require insurance companies to file with state regulators their rates for Workers Compensation insurance before said insurance companies could use those rates on policies. Theoretically, insurance regulators could then object to rates they found objectionable.

“It's the harshest and most opposed regulatory type of structure that I have ever seen because we are going to have to seek permission from the government to charge a final price on the workers compensation insurance that we provide to our customers,” Steve Schneider, Chicago-based vice president for state affairs for the Midwest region for the American Insurance Association, said in published reports.

Holy Cow? Really? Mind you, the new laws would not really prevent insurers from using whatever rates they want, because the Illinois Department of Insurance is pretty understaffed, thanks to the deliberate behind-scenes lobbying by the insurance industry years ago.

And actually regulating Workers Compensation insurance rates was the norm, the standard practice, for many decades. To quote one of my older insurance textbooks (from 1986):

"the regulatory review process verifies that insurance rates are adequate, not excessive, and not unfairly discriminatory."

Until the late 1970's and early 1980's, all insurance companies had to use the same exact damned rate schedule, which had to be approved in advance by insurance regulators who, you know, actually regulated insurance. To make sure that rates were adequate, not excessive, and not unfairly discriminatory. What a quaint idea!

Even once so-called "competitive rating" began, insurance companies had to still submit their rating plans for approval. So this ridiculously over-the-top response by the insurance industry to these new Illinois regulations strike this observer as, well, ridiculous. This new legislation would merely return, on paper, the conceptual framework that governed Workers Compensation from its earliest days

Relax, boys, you'll still be able to get away with charging whatever you think the market will bear. This new legislation provides merely the smallest fig leaf on the current unregulated status of Workers Compensation. It doesn't really do anything meaningful, more's the pity. But even a tiny fig leaf is enough for the insurance industry to react like someone's proposing to erect a monument to Joe Stalin in Hartford, Connecticut and send their underwriters to re-education camps.

More Thoughts On Proposed Not-For Profit Workers Comp Insurer in Illinois

Now, one of the things that opponents of this new bill have been tossing around is that Illinois is a very competitive state for Workers Compensation insurance. And it is. On paper. In practice, not always so much.

Oh yeah, insurance companies have pretty much a free hand in pricing Workers Comp insurance in Illinois, and there are hundreds of insurers licensed to write Workers Comp insurance in the Land of Lincoln. Over three hundred different insurers, I understand.

Here's the gag, as my son likes to say: these insurers don't all compete for the same accounts, and many Illinois businesses can't, as a practical matter, get access to all these hundreds of insurers.

For the most part, a business has to go through a licensed insurance agent or broker. And any given agency might have contracts with only a handful of different insurance companies who write Workers Comp. But said agents all too often give the impression they can (and do) blanket the market in their search for coverage for a particular insured employer. Such impressions are often exaggerations, at best.

And if an employer is small, or new, or located somewhere away from major metropolitan areas, it can be difficult to get more than one or two insurers interested in proposing coverage in the "voluntary market". Of course, that still leaves the Assigned Risk Plan, a source of insurance that would be familiar in management style to Soviet-era bureaucrats. With pricing to match.

Insurance companies tend to compete for the sub-set of accounts that are deemed particularly attractive because of size, type of business, loss history, and sometimes, how well connected a particular agency may be with an insurer's underwriters.

But for many other businesses, the same deregulated rules that allow insurers to compete for desirable accounts on price allows insurers to sock it to employers who aren't on this year's list of desirable accounts.

And it also opens the door for some agents and insurers to low ball initial proposed Workers Comp pricing, only to hit the employer with a Shock Audit from Hell after the policy ends. When that happens, deregulation ain't so much fun.

Illinois Legislature Okays Non-Profit Workers Comp Insurer

The Illinois legislature has approved a law that creates a not for profit Workers Compensation insurer, to compete with for-profit insurance companies. The bill now goes before Republican Governor Bruce Rauner, and whether or not that governor will sign said bill is something beyond this writer's ability to predict.

If anyone were to ask me (and one of the lobbyists for this bill did, just the other day) I would say it's an idea that could significantly benefit a number of Illinois employers, if done right. Right now, too many employers are in the ultra-expensive Assigned Risk Plan just because they're small, or new, or located away from metropolitan areas. If this not-for-profit insurer were to helps such employers escape the Assigned Risk Plan's excessive rates, it could be a huge help to small business.

But governance will also be key to the potential success of such a venture. Underwriting standards would have to be reasonable, fair, and and yet not give away the store. Audit standards would also have to be similarly fair, to spare employers the terrors of Shock Audits, as I've written about so many times before. Of course, doing a better job with underwriting would go a long way towards reducing Shock Audits, as employers would be advised of the actual cost of coverage at the outset rather than after the policy has expired.

The other potential pitfall of such an entity, if it isn't strangled in the crib by Rauner, would be to make sure it isn't used as some kind of emergency piggy bank by ambitious or unscrupulous politicians. Part of the reason the Illinois Department of Insurance had its budget and staff gutted was that then Governor Blajojevich raided the funds generated by that agency (funds that didn't come from taxpayers but from fees and taxes paid by insurers) to pay for other pet projects.

Letting politicians have access or control to an entity that is banking considerable dollar amounts of reserves for future claims has often been a recipe for disaster. Similarly, some government sponsored Workers Comp funds have sometimes fallen prey to political favoritism and cronyism in underwriting practices. Again, for this proposed entity to really accomplish what sponsors hope it can accomplish, the crooks and cronies will need to be kept at bay. No easy task in a state like Illinois.

But I think it's worth a try. Illinois employers, especially small business employers, desperately need some relief from the excesses of existing insurance companies. Now let's see what Governor Rauner thinks. He may not like this, because it isn't part of the standard GOP playbook of cut benefits for workers and reduce payments to medical providers. But we shall see.

They Said It Couldn't Be Done...

Well, at least the insurance agent for a client of ours in Connecticut said their experience mod could not be reduced. Fortunately, the client had us work on it anyway, and we just got a 12 point reduction in experience modification factor approved by NCCI, along with a 13 point reduction in the mod for the following year.

See, there are some obscure rules that can impact these modifiers, rules that even experienced insurance agents aren't always knowledgeable about. Bottom line is that our client is now getting refunds totaling $40,000 for both years, thanks to our doing something that they said couldn't be done.

Black Lung Disease: Back, and Deadlier than Ever

So here's a damned frustrating and horrifying story, from National Geographic, concerning how Black Lung Disease has had a resurgence among miners. Reading some of the details in this story, about how non-unionized mines pressure miners into playing fast and loose with safety regulations, just gets me pissed off as hell.

And of course, there are larger lessons to be gleaned from this, for those willing to listen and think, about how economic incentive and self-interest, left unchecked, can lead to disease, agony, and death for the people who do the actual hard work in this world.

I tend to be deeply suspicious of those who advocate for reduced regulation and oversight in regards occupational safety, as I've been around long enough to know that those who typically advocate for such looser standards are not those who are actually at risk from said occupational dangers. The guys who denigrate workplace safety and independent oversight are typically at risk only from paper cuts and obesity. But human nature being what it is, those same guys will sometimes happily persuade themselves that it's okay to find short cuts around safety rules and regulations. Who needs all that damn red tape when there's money to be made.

Look, I love business. I love our free market, free wheeling version of capitalism--it's enabled me to create my own little consulting business from scratch and make my living successfully taking on huge insurance companies for fun and profit. But I also have worked with industrial concerns long enough (most of my adult life) to know that some business owners need a little independent oversight to keep from mangling and maiming workers as part of doing business.

Most business people, in my experience, want to do things the right way, they want to keep their people safe and productive. But in a competitive world, pressure from those who cut corners and operate in a less than safe manner can exert harmful influence over even those with good intentions.

In the long run, I think it's in everyone's interest to maintain effective and independent workplace safety regulations and incentives. And when you don't, you get this kind of horror.

About that 70 Point Mod Reduction

I recently wrote about a client for whom we were able to produce a 70 point reduction in Experience Modification Factor, also known as EMR, X-Mod, or just Mod. I thought I would expand a little bit on that, though, as it is a situation that I think will apply to other employers in similar circumstances.

This client was a California based company, which means their X-Mod was calculated by WCIRB, the California-only rating bureau (as opposed to NCCI, which handles most of the rest of the country.)

WCIRB has a special rule for when insurers can't complete the Workers Comp audit. This rule says insurance companies must then report whatever the claims were for that un-audited policy for use on the X-Mod, but no payroll at all. This clearly has a powerful upward impact on the Mod calculation.

That's what happened to this client. They didn't cooperate fast enough on the audit, so they got clobbered on their X-Mod. But the thing is, this client did subsequently cooperate with the audit. And in that case, the insurance company should have filed a corrected report with WCIRB.

And they overlooked that little detail. So the client's X-Mod continued to have that horrible penalty built into it, for several years, because the insurer failed to filed the corrected unit statistical report.

We got it fixed for this client. But methinks they can't have been the only client to whom this has happened.

And just this year, NCCI got approval to incorporate a somewhat similar rule for experience mods calculated in NCCI jurisdictions. The NCCI rule doesn't work the same as the WCIRB rule, but it will produce similar penalties in mods when audits aren't done fast enough to suit insurers, and those audits will need correction via corrected unit statistical reports.

Based on what we've learned in recent years consulting on a class action lawsuit, some insurance companies are incredibly lax about filing corrected unit statistical reports. So I very much expect that, in a couple of years, NCCI mods will also start having occasional big errors due to some insurers not filing these corrected reports.

We shall see.