Wednesday, April 19, 2017

70 Point Reduction in X-Mod for California Client

Just got word from my son (and business partner) Scott that he has gotten the X-Mod (also known as the Experience Modification Factor) reduced by 70 (yes, 70!) points for a California client.

Well done, my boy. The client is, needless to say, rather happy.

Friday, March 31, 2017

Another Headline About Lower Workers Comp Rates...

 Just saw today a news item about Pennsylvania announcing lower Workers Comp rates that they say will save PA employers $150 million in premiums next year. This is good news, as it may reduce costs somewhat, for some employers. But I strongly suspect the actual impact for employers will be substantially less than advertised.
Here's why. A lot of states in recent years have been announcing reductions in what are known as "manual rates". My home state of Illinois has pronounced this kind of reductions for employers multiple times over the course of the past ten years or so. But overall premiums tend to keep going up. And what I observe by working with employers is that their Workers Comp premium charges generally aren't really declining.
This is because these "manual rates" are just the starting point in the computation of Workers Comp insurance premiums. And even when these manual rates decline, as was just announced in Pennsylvania, other elements of the Workers Comp pricing system change and more than offset those rate declines.
For instance, NCCI and some other rating bureaus have been busy in recent years tinkering with the formulas for experience modification factors. Those changes in the experience mod formulas translate to higher mods, and thus higher premium charges, for a lot of employers. For a lot of employers with a few costly claims in their recent history, the new mod formula more than offsets any reduction in manual rates.
Yet these changes in mod formula were not proclaimed loudly in press releases by governors and insurance regulators. They were quietly approved behind the scenes, briefly written about in the insurance trade publications, and then they became part of the complicated system of Workers Comp insurance pricing that is rarely, if ever, well understood by most employers.
Recent years have also seen the increasing use of "Large Deductible" Workers Comp policies for more employers. And it's not generally the case that employers clamored for these kinds of policies and the insurance industry responded by providing what was asked for. No, the insurance industry developed these plans for their own business needs and then gradually forced more and more employers onto them by not giving those employers Guaranteed Cost proposals any more.
If you think the standardized Workers Comp pricing rules were complicated, just try reading one of the convoluted "Side Agreements" that insurance companies use with these Large Deductible policies. Werner Heisenberg himself couldn't have done a better job of introducing the uncertainty principle into insurance pricing.
With Large Deductible policies, employers often have no damned way of really anticipating what their cost of Workers Comp insurance will ultimately be. Most of the agents and brokers who sell these programs can't really explain them well, because the programs are so complicated and jargon-laden that the people selling them don't really understand the details all that well.
But because these Large Deductible policies transform Workers Comp insurance pricing from being a function of payroll to being a function of claims (and not just paid claims but claims reserves, too) that employers can't, by definition, reliably know what their cost of Workers Comp insurance will really be, because the cost of the insurance will be determined by what the claims costs are.
So lower manual rates don't really make all that much difference in Large Deductible policies.
And of course, the premium shown on the policies is just an initial estimated premium. The real cost of the insurance is only determined after the policy ends, when the insurer does an audit. And again, any reduction in manual rates can be easily offset by just cracking down when the audit is done, enforcing obscure rules that were never clearly explained (if mentioned at all) when the policy was begun. Shock Audits, we like to call 'em.
And that doesn't even take into account Schedule Rating. This is a system of discretionary premium adjustments insurers tell regulators that they will apply based on certain objective criteria. They tell insurance regulators that, and then typically just use them as a way of manipulating premium charges to either discount accounts they're eager to acquire or to surcharge accounts when they think they can get away with it.
Again, a ten percent reduction in manual rates can get washed away pretty easily when you can switch from a twenty percent discount one year to a forty percent surcharge the next. And Schedule Rating allows insurers to do that kind of presto-chango magic trick with premiums pretty much at will.
So color me skeptical about these announced rate reductions. They're real, don't get me wrong. They just don't tend to actually reduce premiums for most employers.

Happy Client!

We just got an email from a happy client. Refund checks totally $19,912 just arrived from their past insurer for policies going back to 2003. This is on top of the earlier $39,470 in refunds we had obtained for them back in December of 2016. It's Miller Time, I guess. But I don't drink beer. So, Macallan Time will do just fine. Neat, even.

Keep Up the Bad Work, I Guess..

Just talked by phone to an old friend that I used to work with at another shop, where we had started this whole premium review and recovery thing back in the early 1980s. His shop, which is part of a larger insurance agency, no longer does this kind of work but he keeps his eyes and ears open, and he mentioned that he hears a lot of field auditors nowadays are under such tight time constraints when doing premium audits that they can't really do some audits properly, which can be another source for erroneous overcharges. As I often like to say, the insurance industry sometimes seems to be concerned about whether or not we have enough work around here. And they appear determined to make sure we never run out of desperate employers who are being put through the wringer over a Shock Audit.

It shouldn't be that way. As I like to say, in a perfect world I shouldn't be able to make my living fixing all these mistakes by insurance companies. But it's not a perfect world. And I truly enjoy my work.

So I guess I can only say, "Keep up the bad work, guys," and soldier on, catching and correcting the mistakes insurance companies make when calculating Workers Comp premiums for employers.

Thursday, March 2, 2017

Twin Traps For a Small Employer

Got a call from a local small business who has already stumbled into a classic small business Workers Comp trap, and who was about to stumble into another. The first one was a $6,000 fine from the Illinois Workers Comp Commission for running a biz without Workers Comp insurance. Since their only worker was the owner of the company, they thought they didn't need a WC policy. They did not realize that the 1099 workers they used were counted the same as W-2 type workers, so when the WCC came checking they had a little bit of trouble on their hands.

But the second trap, the one they didn't realize they were about to step in until we talked, was that they were now insisting these 1099 people obtain their own WC policies--without realizing that those 1099 people were being sold "Ghost" policies.

A Ghost policy is where the 1099 worker excludes himself or herself from coverage. So technically, the policy only covers any possible other workers this individual might hire. But with the Ghost policy, there aren't any workers, so the policy actually covers...no one. But for a minimum premium of around $1,000 it allows a Certificate of Insurance to be issued. And some unscrupulous agents don't bother to fill in the information on that Cert that would identify it as a Ghost policy.

The trap gets sprung when the insurance company audits the company that uses those 1099 people and figures out that these Certificates are really for Ghost policies. Major insurers, especially the ones writing Assigned Risk business, are getting really good at spotting Ghost policy Certificates (mainly because they themselves write those policies, through the Assigned Risk Plan.)

Now, the poor small business that relied upon these Ghost Certificates doesn't realize the Certs are misleading. And the insurance companies don't explain these little details until after the audit is done (that is, at the end of the policy, when it's too late to do anything about it.) And then the insurance company charges additional premium for these Ghosts, premium the small business didn't anticipate because they relied on those Certificates.

I was able to warm this particular small business about the perils of this second trap, so he can take action to avoid getting caught on his next audit. I wasn't consulted in time to help a different small business last year, though, and he suffered the full financial impact of this trap.

He had relied upon Ghost Certificates without ever being told the limitations of those Certificates (and the Certs in question made no mention of the limitations of the policies, even though they should have.) So when his major Assigned Risk insurer did the audit, they billed him an unexpected $20,000 additional premium for those 1099 people who produced Certificates of Insurance that didn't really cover anyone.

We tried to get help from the Illinois Department of Insurance, but all they would do was suggest this poor sap should request a legal hearing at the Department. And since this small biz couldn't afford the five grand or so it would cost for an attorney, he elected to not pursue that option. And thus died a small business, squeezed out of existence by a classic Workers Comp Premium Trap.






Friday, December 2, 2016

Calling B.S. On The Illinois Policy Article on Illinois Workers Comp

So an outfit called "Illinois Policy" just posted an article on Illinois Workers Comp that is rather pungent, I fear. This article, by one Michael Lucci, purports to call B.S. on one Steve Brown, spokesman for Illinois House Speaker Michael Madigan. Mr. Lucci then proceeds to sling his own bovine byproducts in an attempt to show how Mr. Brown is full of, errr, brown stuff.
But the "facts" that Mr. Lucci cites simply aren't facts at all. They are, to put it diplomatically, B.S.
Lucci has written that "The workers’ compensation insurance market is worth nearly $3 billion per year in Illinois. Meanwhile, persons and companies harmed by federal anti-trust violations, including price-fixing, can seek triple damages on the economic harm they experience."
These two independent facts are true. They just have nothing to do with each other, and when placed together foster the impression that the Workers Compensation insurance industry could be a tempting target for attorneys citing federal anti-trust statutes. This is a lie, because the McCarran-Ferguson Act exempts the business of insurance from federal anti-trust regulations and statutes, as long as the state regulates said insurance business. Illinois does still, at least on paper, regulate Workers Compensation insurance, so the Workers Compensation insurance business is not subject to the federal anti-trust statutes that apply to most other businesses.
Lucci also writes that since the Workers Comp insurance market has a record number of insurers and is competitive, "it is simply unbelievable that 332 rivals would collude to fix prices." Ummm, no.
Workers Compensation insurers share data on claims and premiums routinely, through the operation of the National Council on Compensation Insurance. NCCI is a sanctioned "rating bureau" whose job it is to gather such data from all insurers operating in Illinois and use that data to develop advisory rates and loss costs that are then shared with all the insurers. So collusion is cooked into the system.
And while it is true that all these insurance companies are competing for accounts, they tend to be competing only for a certain sub-set of Illinois business. If, for example, your business is in a construction related field, you will find that there are only a handful of insurers interested in even considering you. If your business is brand new, or very small, no insurance company at all may be interested in your business, which means you go into the Assigned Risk Plan--where premiums are automatically doubled and service is non-existent.
And it's not like the typical business can easily access all those hundreds of insurers. A typical insurance agent may have access to only a handful of insurance companies. But said insurance agents are not always forthcoming with these limitations. They are, after all, salesmen, and good salesmen (or women) tend to find ways to obscure or talk past the deficiencies in their proposals. For a small business, an agent with limited markets will sometimes place the account in the Assigned Risk Plan without ever explicitly explaining that this coverage source comes with much higher costs and much lower service.
So the actual reason so many insurance companies are in Illinois is that the pickings are good here, precisely because they can be picky. There are still a lot of businesses here, and they are required to have Workers Comp insurance. Insurance companies are free to cherry pick and compete on the accounts they really want, and only on those accounts. For everyone else, the Workers Comp market is far, far from truly competitive.
Remember, all the insurance companies use the same manuals of rules regarding how they compute premiums, they all use the same experience rating plans developed by NCCI, and they all share underwriting data by means of NCCI.
So, again, I believe the key points raised by Lucci in this article are, as I said pungent. As in, the opposite of true.

Wednesday, May 25, 2016

How Ghost Policies Haunt Other Employers

So when is a Workers Comp policy not a policy? When it's a "Ghost Policy". And these ghosts can do more than just scare a business owner late at night--they can pick your pocket. Or rather, enable your insurance company to do so.
Perhaps some background info is in order, for those unfamiliar with this paranormal version of a Workers Comp insurance policy. A "Ghost Policy" is when a small business, usually a sole proprietor, buys a Workers Comp policy to satisfy the demands of some customer, but then excludes himself from the policy. Now, if that sole proprietor is the only person actually doing work for his company, the policy actually covers no one, since it would only cover for injuries sustained by employees of the sole proprietor, not the sole proprietor himself.
But--the Ghost Policy enables an agent to issue an all-important Certificate of Insurance for the sole proprietor, satisfying the request of a customer for evidence of WC coverage. Oftentimes, the sole proprietor is unaware that he or she is doing anything improper---agents often suggest that this is just standard operating procedure and a mere formality. 
But a recent case of mine illustrates how these Ghost Policies can haunt a company that relied upon such a Certificate of Insurance.
My client was a very small business and relatively unsophisticated when it comes to insurance. He used the services of a couple of independent contractors, and knew enough to request Certificates of Insurance from them.
But when my client's Workers Comp insurer performed the annual audit, and saw those Certificates, the insurer did a little cross checking with their own records. See, the large and well known insurer who wrote the policy for my client also wrote the policy for one of those independent contractors. So this large and well known insurer learned something that had been hidden from my client--the policy written by that same large and well known insurer for the independent contractor had been a Ghost Policy. So said large and well known insurer charged my client for these independent contractors, saying that since the Ghost Policy didn't actually cover the I/C, they were entitled to charge premium.
Now, my client didn't know this had been a Ghost Policy--The Certificate of Insurance that had been provided to him indicated it wasn't a Ghost Policy. But the insurer knew otherwise, because they had the benefit of being able to look up the details of this I/C's policy from their own records.
Nice work if you can get it. You provide a misleading (dare I say fraudulent?) Certificate of Insurance, and then, much later, you spring the trap for my client, based on the information that was withheld.
Now, we've referred this matter to the Illinois Department of Insurance, where we expected it to be a pretty open and shut case that would be resolved quickly for my client. Turns out, not so. Everybody from the department to the NCCI-sponsored appeal board has, so far, been frantically trying to pass the buck. Everybody was eager to suggest my poor little Lithuanian-born small business owner would need to hire an attorney (at considerable expense) if he wanted to pursue this dispute. I didn't like that answer.
It looks like the department is reconsidering this matter now, after I helped my client arrange a few phone calls from his state legislators. But it's still far from settled.
But this case is an abject lesson in how Ghost Policies can leave unsuspecting business owners exposed to a Shock Audit (as I like to call them), because the insurers sometimes have information that has been withheld on the Certificate of Insurance.
This isn't the first time I've seen a large insurer play this game. And it does make me wonder just how widespread this practice may be. This is an issue I'm currently researching, and I would love to hear from anyone with information on this subject.
To protect yourself from being victimized by a Ghost Policy by one of your independent contractors, you must first realize a painful truth about the insurance industry: Certificates of Insurance have been designed by the insurance industry to be essentially unreliable. When push comes to shove, the fine print says that the insurer really doesn't stand behind the information provided by a Certificate, so more fool you if you believe them.
If desiring evidence of coverage from a very small business, like a sole proprietor, you need a copy of the policy itself. And maybe, just to be sure, insist on something in writing from the agent or broker that states that the policy in question doesn't exclude anyone. If you don't, you may be setting yourself up for a haunting. Not to mention a drive-by Shock Audit.