Thursday, February 1, 2018

Another Workers Comp Insurer Ponzi Scheme Collapses

So the final shoe has dropped for the Ponzi scheme that was Guarantee Insurance Company/Patriot Insurance. Insurance regulators finally figured out last year that this operation was, by all reports at least, a scam of the first order.

Anecdotal reports indicate unqualified personnel being hired for important positions and an utter lack of underwriting, along with absurd pricing discounting to shovel in as much premium as possible before the inevitable collapse.

But CEO Steve Mariano got over $15 million transferred directly from Guarantee to himself before the collapse. And now injured workers who were "insured" under policies issued by this outfit are waiting for their medical bills to be paid and their disability checks to arrive.

I remember a day when regulation of Workers Comp insurers was designed to prevent this kind of bullshit. It wasn't always completely successful, of course, but it made things a lot more difficult for the crooks and schemers.


Insurance Regulation Report Card From the Mirror Universe

So there's this "Insurance Regulation Report Card" put out annually by a partisan "Think Tank" called the R Street Institute that grades state insurance regulators. The 2017 "Report Card" just came out and gives Vermont an A+ but Delaware, Massachusetts, Louisiana and North Carolina got an F.

This R Street "Think Tank" was set up by a bunch of folks from the Heartland Institute, a conservative and libertarian "Think Tank" based in my home state of Illinois. So both institutions would seem to have a conservative bias. You might think that would make these organizations boosters for business, but this "Insurance Regulation Report Card" put out by R Street is kind of the polar opposite of that, for what would appear to be ideological reasons.

Y'see, this "Report Card" mainly measures how little insurance regulation exists in a state, consistent with conservative views that diminished government oversight is always desirable. So from the point of view of businesses who have to deal with the cost of Workers Comp insurance, this Report Card is like something from the Mirror Universe in Star Trek--good is bad, evil is virtue, up is down. The only advantage the Mirror Universe typically offers is better looking uniforms, so maybe the regulators up in Vermont get to wear kick-ass black leather. And goatees.  But I digress.

The R Street folks even specifically praise what happened here in Illinois last year, where efforts to create an alternative source for Workers Comp was shot down by Governor Rauner--a long time friend of the Heartland Institute, I believe.

Here's the gag, as my son and business partner likes to say: for most businesses, the cost of Workers Compensation is really the cost of Workers Compensation insurance. Which used to be the most highly regulated line of insurance. But folks like those at R Street and the Heartland Institute have changed that in most states. Now it's the Wild West, with no real regulation or oversight of Workers Compensation insurance rates or premiums or rating plans.

So some insurance companies have been coming up with insanely-complicated rating plans for Workers Comp insurance, rating plans that appear to have been designed to be impossible for those who purchase the insurance to ever understand.

And even when more traditional rating plans are used, insurers have plenty of room the manipulate the system to achieve higher premium charges, no matter if manual rates produced by NCCI have been declining. Those NCCI rates are the classic definition of "suggestions", nothing more.

And if an employer wants to dispute the premium charges made by a Workers Comp insurer, increasingly that dispute requires hiring a lawyer and going to court, because administrative remedies have been withered by reductions in staff and budgets in many states.

Now, the entire basis of the insurance industry being exempted from federal anti-trust statutes was the assertion that there was effective state regulation of the insurance industry. And that was once true, arguably. Nowadays, not so much.

R Street's rating criteria are focused on:

  1. How free are consumers to choose the insurance products they want?
  2. How free are insurers to provide the insurance products consumers want?
  3. How effectively are states discharging their duties to monitor insurer solvency and foster competitive, private insurance markets?
Now, that language is a little deceptive, I believe. Insurance involves unilateral contracts, contracts of adhesion that are drafted by insurance companies. Larger employers may get the benefit of a couple of competing proposals from different insurers, but that is a far cry from actually being able to "choose the insurance products they want". The truth is that, in the best of situations, employers may be able to choose among a couple of proposals that differ in some details but all of which are likely to be difficult to truly understand.

So for example, for many employers with premium size over $200,000, it is likely that the only proposals offered will be some kind of "loss sensitive' program--and nowadays, that means a complicated rating plan that combines Large Deductible features and Retrospective Rating using a non-standard pricing formula. A more traditional type of Guaranteed Cost policy will likely not be offered, not by anyone.

So that's not really the same thing as choosing the insurance products they want.

As far as the second point, how free are insurers to provide the insurance products consumers want, what that really means is how free are insurers to provide only insurance products they want to provide.

And there are some insurance companies out there offering insurance products that many employers would not wish to actually purchase if they truly understood the terms of those policies. But because in many states insurance companies can now do whatever the hell they want, including offering Workers Comp programs that don't disclose all the really important terms in the proposal, employers are learning the hard way what caveat emptor really means.

So bottom line, I give the R Street "Insurance Regulation Report Card" an F.

Wednesday, January 24, 2018

An Open Letter To All Illinois Candidates For Governor (including the incumbent)

So Illinois is going to have an election this fall for governor, and one of the issues this time (as has often been the case) is likely to be Workers Compensation. Our incumbent governor has been raising what, to this observer, seem to be rather tired and doctrinaire points about how the cost of Workers Comp in Illinois is higher than in neighboring states (Indiana in particular). But Governor Rauner's prescriptions always seem to be limited to doing things to reduce benefits to injured workers or limit the incentives for attorneys to help injured workers obtain fair benefits.

And so I want to make my recurring suggestions that this is not the only way (or even a good way) to reduce the cost of Workers Compensation for many Illinois employers.

As I have testified before the Illinois legislature on more than one occasion, for most Illinois employers the real cost of Workers Compensation is the cost of Workers Compensation insurance.
Only very large employers can qualify to be truly self-insured (and even many of those employers find that large deductible insurance policies may be better suited to their needs.)

Most employers have to purchase an insurance policy from a private insurance company to meet their statutory requirements under the Workers Compensation Act. And in Illinois, insurers have a free hand to charge what the market will bear--and then some, in many cases.

Some reasonable insurance reforms could help to significantly reduce the cost of Workers Compensation insurance for many employers, without further reducing the benefits paid to injured workers.

Right now, many smaller employers end up in the Assigned Risk Plan, where manual rates and premium charges are much, much higher, and service from insurers and agents are much, much lower (often non-existent.)

There are existing mechanisms that Illinois government could utilize to provide a lower cost alternative for many employers who suffer the costs of Assigned Risk coverage even though their loss record is good. The State of Illinois could create a PEO.

The existing insurance system already allows PEOs (Professional Employer Organizations) to offer Workers Compensation coverage to companies in Illinois. Currently, these are all private companies of varying size and reliability. But there is nothing to prevent the state of Illinois from establishing its own PEO and then offering coverage at something less than Assigned Risk rates to employers who meet reasonable criteria.

Some care and effort would have to be exercised to prevent poor underwriting from destroying such a PEO a few years down the road, but a PEO would be able to achieve exactly the same results as the government-sponsored insurance fund that was proposed by the legislature last year (and which Governor Rauner vetoed) but would be much easier to establish and implement because it would involve a working partnership with an already-existing insurance company. (That's how PEOs work-they obtain coverage at lower cost for their clients by negotiating what amount to volume discounts with an insurance company.)

The state could even target certain economically distressed areas, through this PEO mechanism, with some discounts on Workers Compensation rates based on geography (along with the aforesaid underwriting practices.)

So if you wanted to encourage manufacturers to return to Chicago, or Cairo, you could offer additional discounts to such companies who set up shop there. There is tremendous flexibility within the existing insurance rating regulations (for all practical purposes, there are no limitations on rating and pricing flexibility) so such things would be completely possible.

By partnering with a responsible and experienced insurance company through a PEO mechanism, Illinois could provide a significant reduction in Workers Compensation cost for many employers, without having to reinvent the wheel and without the potential temptations of a government-run insurance fund (politicians in other states have sometimes found claims reserves from such funds to be a very tempting target to be siphoned for other uses.)

It's a modest proposal, as they say--but one that could be done and which would create a tool for economic development in Illinois without hurting workers.

If I could only get someone to listen.

Tuesday, January 2, 2018

Roofing Salespeople--the Disputes Continue

One of my first emails of the New Year involves proper classification of salespeople/estimators for a roofing company. In the past, it was common for such workers to be assigned to the outside sales class, Code 8742, at a relatively inexpensive rate. But in recent years, insurance companies have increasingly insisted that, because such workers must, at least occasionally, go up on a roof to inspect it, their payroll belongs in the roofing code (at a vastly higher rate.)

It's a tricky issue, complicated by some unique rules that apply. One might think that, as long as the roofing company kept track of specific time such workers spent up on the roofs, then only a small percentage of the payroll would go into the more expensive class. But Code 8742 is non-premium divisible--that means it's an all or nothing classification, and the moment a workers spends any time whatsoever doing something that doesn't qualify for 8742, all of the payroll must be placed into the more expensive class.

This is different than the rules that usually apply to construction type classifications, which usually allow for such premium division (as long as the specific hours spent in each are recorded properly.)

Insurers often don't explain these find points very well when the coverage begins, so this can become a sore point after an audit is done and the insurer moves payroll out of the outside sales class and into the roofing class (at a substantial increase in premium.)

Rules on this can vary. California rules developed by WCIRB specifically say outside sales people for roofing companies belong in Code 8742, but the NCCI rules don't have such specific language.

Certainly, workers who are routinely going up on roofs represent a work exposure that would appear to be greater than the typical outside salesperson. But with advances in technology, not all salespeople/estimators have to physically go up on a roof.

With satellite photos, drones, and sophisticated estimating software, it is possible for roofing salespeople/estimators to do their work without going up on a roof. In such cases, the application of the roofing classification would not be warranted--but resolving that point may take some time and effort with a stubborn insurer.

In cases where estimators must still occasionally physically go up on a roof, perhaps a more reasonable accommodation would be to change the rules so that premium would be divisible between occasional roofing exposure and outside sales. But in our current age of Workers Comp deregulation, I don't get the impression that the insurance industry is in a hurry to address this problem.