WorkComp Watch

2011-12-01T14:40:00.001-08:00

I got an interesting call the other day from an insurance agent, who was trying to figure out how to help a client cover occasional Workers Compensation insurance exposures in other states. The client was based in Colorado, insured by Pinnacol Assurance.

Now, normally the way to handle occasional exposures in other states is to add them to the policy under Section 3C. But the agent said that he had gotten some written advice from Pinnacol indicating they couldn't do this.

Then it dawned on me: Pinnacol isn't a regular insurance company. It's the former Colorado State Fund, transmogrified into the form of an insurance company. But because of that, Pinnacol isn't approved to write Workers Compensation insurance in states other than Colorado.

It's not a problem limited to Pinnacol. Not all insurance companies are licensed to write Workers Compensation in all states. And there are also the group self-insurance trusts that operate in many states. Many employers have difficulty differentiating between such programs and an insurance policy (they are often marketed in ways that may obscure the important technical differences.)

In the case of the Colorado company that prompted the phone call, it appears their options are to purchase a non-Colorado policy for their incidental out of state exposures, or to replace the Pinnacol policy with a policy from a multi-state insurer who would be able to add other states to a single policy.

Employers need to keep an eye on their incidental out of state exposures, as it can lead to uninsured claims if one isn't careful.

I worked on another recent case where a Louisiana employer had coverage through a group self insurance trust that covered only Louisiana. When they took a new job in Texas, they ended up with an uninsured claim because they lacked Texas coverage.

Keeping an eye on what states are covered by your policy is an important detail that sometimes gets overlooked, especially by smaller employers. Since Workers Compensation liability is mainly a state-by-state matter, having coverage in one state does not help if you have workers who are eligible to make a claim under the laws of a different state.

Illinois WC Reforms Signed by Governor

2011-06-28T14:53:00.000-07:00

2011 is the one hundredth anniversary of the first U.S. Workers Comp statutes being enacted (first in Wisconsin, then elsewhere in fairly quick succession over the following years.) So it seems timely that, this year, significant Workers Comp reforms were enacted into law here in Illinois. While these changes were not all that some business groups wanted, they should have some noticeable impact on rates and premiums.
The biggest impact will likely be from the 30% reduction in the medical fee schedule.

The new law also introduces AMA guidelines for the first time in Illinois, for use in determining the degree of impairment of injured workers. It also allows for the use of PPOs in Workers Comp, although workers can still opt out of such networks and obtain care from a doctor of their own choosing.

The new law also tightens up limitations on benefits when alcohol or drugs are involved--shifting the burden of proof to the worker, applying a blood alcohol limit of .08 and a zero tolerance for illicit drugs. But the language of the law is that such intoxication must be the "sole cause" of the injury in order for WC benefits to be ruled out.

The reforms also reduce the amount of time paid for carpal tunnel injuries, and strengthens the use of Utilization Reviews.

One thing the new law does not do, to the frustration of some in the business community, is require that workers prove that an injury or illness was caused by work. In my own view, that might well have been a bit too much, as it would have likely caused some legitimately injured workers to be denied benefits if they could not conclusively prove the injury occurred at work.

All in all, these reforms represent a significant improvement for Illinois employers, while not throwing the baby out with the bathwater. Now if only someone would consider some of the Workers Comp insurance reforms that I advocated for--but everyone in Springfield was focused on fighting over benefit levels, so the insurance industry got to avoid having some of their practices reined in.

California Woes for A WC Insurer and A Staffing Agency

2011-04-25T21:08:00.000-07:00

There have been a couple of developments in the California Workers Comp marketplace that are leaving some employers scrambling. First, regulators have placed Majestic Insurance into conservatorship. Majestic wrote most of its business in California, but also wrote policies in New York, Arizona, New Jersey, Nevada, and some other states.

At the same time, it is reported that a large California temporary staffing agency is prepared to shut down in the wake of disputed multimillion dollar fine by California regulators. Mainstay was created and operated by an Indian tribe in California. Mainstay has been embroiled for years with California regulators over Workers Comp and Unemployment Compensation issues.

A WTF Moment in Illinois Workers Comp

2011-04-06T15:33:00.000-07:00

Illinois state representative John Bradley has introduced a bill in the Illinois House to repeal the Illinois Workers Compensation Act. Bradley, a Democrat from Marion, Illinois, reportedly has characterized this as a response to the efforts by the business community to change the causation standard in Illinois Workers Compensation so that the workplace must be the primary cause of a covered injury or illness.

That's right--a Democrat in Illinois has introduced a bill to abolish the Workers Compensation Act. Now, it seems pretty clear that such a proposal will go nowhere, that is intended merely as some kind of protest, but even so...WTF, as they say on the internets.

Illinois Governor Proposes His Version of WC Reform

2011-04-02T14:40:00.000-07:00

Illinois Governor Pat Quinn (who is, if nothing else, the rara avis of politics, an honest man) has proposed his own version of Workers Compensation reform for Illinois. There are also several reform proposals still floating around the state legislature (including one bill backed by the Illinois Chamber of Commerce, of which I am a member.)

All of these proposals focus on the claims side of the equation, though. Quinn's version, like some others, would prevent injured workers from collecting Workers Comp if drugs or alcohol played a part. Quinn also proposes putting some limits on medical expenses, and upgrading the caliber of Workers Comp arbitrators by requiring them to be attorneys.

Business groups are less than satisfied, though, as they really want some greater changes, such as requiring that a worker be able to prove that the workplace was the primary cause of the injury, and making the medical fee schedule that was approved a few years ago actually adopt meaningful standards.

But all of these proposals ignore what I think is something important: insurance reform. For most employers, insurance is the only viable way to satisfy their Workers Compensation liabilities, and the insurance regulations in Illinois could be significantly improved to hold down the cost of Workers Compensation insurance.

Many small employers in Illinois are in the Assigned Risk Plan, for instance, only because they are small or new businesses. And the cost of the Assigned Risk Plan is often double what the cost of the same coverage would be in the so-called "voluntary" insurance market.

I've written to Governor Quinn, and Illinois legislators, about what could be done to reform Workers Compensation insurance costs in Illinois. So far, no one has bothered to even respond to me. And I don't think that's likely to happen, either, more's the pity.

Pennsylvania Planning A Change In WC Rules

2011-03-22T14:46:00.000-07:00

Pennsylvania is currently considering making a change in the Commonwealth's Workers Compensation rules to allow for partners and members of an LLC to voluntarily elect coverage for themselves. Most other states allow this, but Pennsylvania is unique in some important aspects of their Workers Compensation system.

For more information about how Pennsylvania operates its unique Workers Compensation system, take a look here.

Workers Comp Blitzes Indoor Football Team

2011-03-20T09:41:00.000-07:00

The Lafayette Wildcatters, a minor league indoor football team in Louisiana, have announced that they are scrapping their 2011 season because Workers Compensation insurance isn't available at an affordable cost.

I don't know any more about the situation than what is being reported in the press, but it does make me wonder if there was some behind-the-scenes tussling between the Wildcatters and the insurer that serves as Louisiana's insurer of last resort, the Louisiana Workers Compensation Corporation, or LWCC.

I've had a little experience reviewing premium audits done by LWCC, and based on those cases I think LWCC can be a bit aggressive in how they calculate premiums. In one case from a year or so ago, they had ratcheted up premiums by about a million dollars for a client, premium increases that were based on a fundamental mis-reading of manual rules and how they applied to this client. So, without being unfair to LWCC, it strikes me that it might well be that something similar has happened to the Wildcatters.

Of course, it isn't just LWCC that sometimes hammers sports teams over Workers Comp. A couple of years ago, I was able to help the San Francisco 49ers in a very large Workers Comp premium dispute. Although I was able to produce a very beneficial result for them, the details of the matter are covered by a confidentiality agreement that prevent me from providing any details. But the insurance company wasn't LWCC, it was a large national insurer.

It's surprising to some folks that professional athletic teams would have to tussle with Workers Comp costs just like any other business, but state laws are pretty clear in most jurisdictions--just about any business enterprise is responsible for Workers Compensation for its workers. And football players who play for money are not just athletes, they're also employees.

$15,000 Refund For a Waste Hauler

2011-03-01T15:47:00.000-08:00

Here's a quick case study from our recent files. We successfully recovered an overcharge of $15,000 for a waste hauler in Lexington, South Carolina. The overcharge had been caused by the failure of their insurer to properly report to NCCI some significant reimbursements the insurer had received from the Second Injury Fund. Under the rules, the insurer should have filed corrected reports with NCCI, so that the experience modifier for the waste hauler could be revised down. But as we often see, the insurer failed to file proper corrected reports. Until we got involved, that is.

We had to bug the insurer to file the corrected reports, then follow up with NCCI to make sure the experience modifiers were recalculated, and then finally we had to work with subsequent insurers of the waste haulers to get audits revised to use the now-lower experience mods.

Sad to say, this is far from an isolated case.

Helping Small Biz With Workers Comp

2011-02-21T11:34:00.000-08:00

Now here's an idea that might have some merit. A legislator in California is proposing to give small businesses a 20% discount on their Workers' Comp insurance. Assemblyman Anthony Portantino has proposed the credits, and I have to admit this would directly address one of my own long-standing concerns about the Workers' Comp system in most states: small employers get the shaft.

Larger employers tend to have insurers competing on price for their business. Smaller employers just get tossed into Assigned Risk plans (where costs tend to be much higher and service really crappy.) A 20% credit for smaller employers would be an effective way to shift some of this unfair burden.

Here in Illinois (where AIM is based) small employers usually get shunted to the Assigned Risk plan, where insurance costs can often be double what the cost would be in the so-called "voluntary market".

Price competition in Workers' Comp insurance tends to only exist for larger employers, even though the majority of businesses are small business.

So here's to Assemblyman Portantino for cutting right through this Gordian knot with a straightforward approach that actually could help small business.

More Musings on Stealing Big

2011-02-18T13:03:00.000-08:00

Yesterday I wrote about the Matt Taibbi article in Rolling Stone that details how Joe Cassano, former head of AIG Financial Products, got away with what would appear to be serious financial misrepresentations without ever being criminally charged. In my blog piece, I noted that AIG's actual insurance operations had always been profitable.

Today, I was reading through the original 2007 federal civil complaint that NCCI (National Council on Compensation Insuance) filed against AIG on behalf of all the other insurance companies that write Workers' Comp insurance in the U.S. That lawsuit sought one billion dollars in damages, and made detailed allegations that AIG had, for decades, lied about how much Workers' Comp insurance it actually wrote, so that it could dodge out of AIG's fair share of Assigned Risk losses and assessments.

That lawsuit, by the way, was recently settled by AIG. In a settlement with all Workers' Comp insurers except Liberty Mutual, AIG has agreed to pay $450 million dollars. Liberty is still pursuing separate legal action against AIG. And that $450 million is on top of $146 million paid by AIG to state regulators last December over the same improprieties, and $750 million AIG agreed to pay investors for financial improprieties, and then the $330 million AIG paid way back when as a settlement to New York state when Eliot Spitzer first figured out how the insurer was playing fast and loose. It's little wonder a federal judge once characterized AIG as having been run as a "criminal enterprise."

Here's the thing: the Matt Taibbi story asked why Cassano and some other titans of finance aren't doing time, or at the least aren't busily defending themselves against criminal charges. And reading this complaint by NCCI against AIG, I am left with a similar question: why the hell isn't Maurice "Hank" Greenberg sitting in a cell next to Bernie Madoff?

Or at the very least, why hasn't this man faced a criminal prosecution for the misdeeds that he reportedly instigated and oversaw at AIG for decades?

The NCCI complaint quotes extensively from internal AIG reports and investigations that state that Greenbert knew all about these schemes, and that he in fact insisted that they be carried out. So (if the NCCI and the internal AIG reports were right) it would appear that Mr. Greenberg presided over a billion dollar, decades-long scheme of financial fraud, and yet has never had to answer for this.

Sometimes the inconsistent enforcement of our laws can be a little depressing. I've served as an expert witness in two federal criminal trials, where individuals allegedly profited far, far less than Mr. Greenbert allegedly did. Those individuals ended up serving time in the federal penitentiary. And in one of those cases, I remain convinced to this day that the federal prosecutor managed to convict entirely innocent people.

If you're going to steal, steal big.

New Article on AIG Implosion Raises Serious Questions

2011-02-17T11:18:00.000-08:00

There's a new piece in Rolling Stone by Matt Taibbi (the writer who compared Goldman Sachs to a "great vampire squid wrapped around the face of humanity".) Taibbi here examines the alleged deceptions and other transgressions of Joe Cassano, former head of the AIG Financial Products division. AIGFP was the cause of AIG's implosion and subsequent rescue by the federal government (the actual insurance operations of AIG have always been quite profitable.) Cassano made some very optimistic statements about the financial health of AIGFP, just before the whole thing went kablooey and took down the entire company.

According to this article, there were some very serious misrepresentations made by AIG concerning the actual state of AIGFP, misrepresentations serious enough to make one question why those responsible haven't been charged with criminal wrongdoing. Take a look at the article and judge for yourself. Taibbi is a bit of a rabble-rouser when it comes to financial reporting, but the extraordinary financial crisis we've all lived through these past few years make it difficult to quibble with many of his assertions.

The article covers far more territory than just AIG, though. The article suggests that some major insider trading was protected and covered up by means of high level political interference. The article names names and gives specific instances of some rather suspicious financial activity by some very well known captains of finance.

Wasn't there a line in a movie a few years ago, "If you're going to steal, steal big"? Meanwhile, in the aftermath of the financial crisis these captains of finance created, we get record unemployment, a housing and foreclosure crisis, and states slashing funding for education. It sure feels like we've all been played for suckers.

Interesting Iowa Supreme Court Ruling

2011-02-08T11:00:00.000-08:00

The Iowa Supreme Court has issued an interesting ruling that an insurance agent did not have a duty to advise a client about insurance coverage that the client did not inquire about. This case involves several important issues, not only what the duties of an insurance producer are, but also involving Workers Compensation insurance for a self-employed truck driver.

Timothy Merriam was a self-employed truck driver who purchased various personal lines of insurance from Farmers' agent Steven Stonehocker. Stonehocker had discussed some other coverages that Merriam might consider, but did not ask about whether or not Merriam might need Workers Compensation coverage, and Merriam did not raise the issue. Merriam later was severely injured on the job, and was not apparently covered by the Workers Compensation coverage of the company using his services.

The suit had claimed that Stonehocker had a duty to advise Merriam on the need to obtain Workers Compensation coverage for himself, and had failed to do so. But the Iowa courts found otherwise.

The decision noted that the relationship between the agent and the client had been of short duration, and that the agent's advice to add auto coverage did not create a duty to advise about other coverage areas that were not raised by the client.

This case illustrates an important and often-misunderstood point about insurance agents: their duties to clients are limited, unless certain circumstances serve to increase them. Having a long-standing relationship with a particular client can serve to increase the duty owed, and so can the agent's holding himself out as having particular expertise in certain insurance areas.

But without those special circumstances, an agent may only have a duty to be an honest and accurate order-taker.

This can fly in the face of the expectations of clients, who often assume that an insurance agent automatically will serve as an insurance advisor and point out potential problem areas involving insurance.

Many insurance agents voluntarily do act as insurance advisors, of course, and once they do so they then create a higher duty for themselves towards clients. But insurance consumers need to be aware that not all agents choose to serve as advisors, and in those cases the duty the agent owes may well be more limited.

The particulars of just what duty an insurance agent owes to a particular client can be a bit complicated, and depend significantly upon the unique circumstances of the particular agent/client relationship, and also upon the state where the insurance transactions occurred (many states have statutory or case law requirements that bear on this subject.)

But insurance consumers would be wise to make explicit any desires for their insurance agent to provide insurance and risk management advise, to avoid unhappy disputes such as this one.

The other interesting aspect of this case is that it involves a self-employed truck driver who apparently was not covered by the company he was working for. Again, this is a subject that is very much dependent upon the particular state involved, as statutory and case law can vary significantly from one jurisdiction to another. Many states have, in recent years, addressed the issue of how "self employed" workers, particularly truck drivers, are treated under Workers Compensation, so the rules on this have been evolving in many jurisdictions.

The Bad Penny of Workers Comp Turns Up In Montana

2011-01-14T15:33:00.000-08:00

When I was a kid, I remember the Red Skull telling Captain America, "Like a bad penny, I always turn up." I wasn't really sure what that meant, as I hadn't ever seen a bad penny, but nonetheless the phrase stuck in my head. Now, in Montana, a perennial bad idea in Workers' Compensation has turned up once again: denying illegal immigrants Workers' Compensation statutory rights and benefits.

This is a bad idea for a number of reasons, but the reason that I think might be most persuasive is this: it would encourage employers to hire illegal immigrants.

This would happen because if illegals were to be denied Workers' Comp rights and benefits, then injuries to such workers would not show up on the employer's experience modification factor. That would make Workers' Comp insurance premiums lower for employers who use illegals than for employers who follow the rules. Surely it cannot be the intention of legislators in Montana to encourage the hiring of illegal immigrants.

I would expect their intentions are merely to make it possible for some employers to maim and occasionally kill such undocumented workers with impunity, as a way (so they think) of discouraging such workers from migrating to their state. A little blood on the workshop floor, a few missing fingers or arms, would be a small price to pay for making a principled political stand to earn a few votes, as long as the blood and fingers belong to folks who won't vote anyway.

That's why I point out the economic flaw in their proposal, rather than the cold blooded disregard for human life that it entails. Their vindictive little proposal, if ever enacted, would actually serve to create an economic incentive to hire illegal workers over legal ones.

Even in Montana, unintended consequences can be the most long lasting ones.

Competition in Workers' Comp Insurance

2011-01-06T13:03:00.000-08:00

There's an interesting article in the Insurance Journal today, about how "competitive" Florida's Workers' Comp insurance market is. This got me to thinking about this subject, about what it really means for a state's Workers' Compensation insurance marketplace to be "competitive".

Actually, my home state of Illinois is even more "competitive". We have around 400 different insurance companies admitted to write Workers' Compensation insurance here. This point was noted recently in a hearing at the Illinois Senate (which I attended) by different witnesses, to make rather different points.

Illinois appears to be the most "competitive" state in the union, by the way. We have more insurance companies admitted to write Workers' Compensation insurance than any other state. But what does it really mean, from an employer's point of view, to have such a number of insurers writing Workers' Comp?

As one witness at the hearing pointed out, one thing it means is that insurance companies find it profitable to write Workers' Compensation insurance in Illinois. That's why more carriers are active here than in other states.

Illinois is profitable for these insurers because Illinois has long had open rating for Workers' Compensation insurance premiums. Insurance companies have great flexibility in pricing Workers' Compensation insurance--even though rates are subject to review and approval by the department of insurance.

The reason is that, first off, insurers in Illinois are allowed to file and use "Schedule Rating" plans that give them the ability to make very large rate adjustments. These adjustments can be either credits (when an insurer wants to reduce premiums for an attractive account) or debits (when the insurer thinks it needs higher premiums than the usual rating procedures would produce).

Additionally, insurers in Illinois are free to file their own schedules of manual rates, so they can adjust the manual rates for various classifications to focus which kinds of employers they want to be competitive on.

But all this talk of a "competitive" marketplace for Workers' Compensation insurance misses some important points. For one thing, many smaller or newer businesses don't get the benefit of that rate competition. Many smaller or new businesses end up in the Assigned Risk Plan, where there is no competition, and rates can be double what they would be in the so-called "voluntary market" (that is, the non-Assigned Risk insurance companies.) But since those voluntary market insurance companies are free to compete only on those accounts they think will be most profitable, the small employers may not ever get the benefit of that theoretical price competition.

The Assigned Risk Plan is a very expensive place to get Workers' Compensation insurance, and it can severely penalize a small business just for being small.

The "Competitive" voluntary market tends to mainly interested in larger accounts, so smaller employers never see much benefit from the competitive market for Workers' Comp. And the current Assigned Risk plan is rather punitive towards small businesses (not to mention larger ones, who may have ended up there because of insurance market fluctuations).

And larger employers in the Illinois Assigned Risk Plan can really get clobbered if they become large enough to get forced into the Loss Sensitive Plan that is used for employers whose premium is over $200,000. It's a very unattractive Retro style plan that can make WC costs really, really painful.

All of which is not to say that there are not real benefits to having a competitive Workers' Comp market, such as in Illinois and Florida. Those benefits are quite real, it's just that they are not always as widely distributed among employers as they could or should be.

AIG Settles With Regulators For $100 Million

2010-12-22T14:54:00.000-08:00

Troubled insurer AIG has reached a settlement with insurance regulators across the country and agreed to pay a $100 million fine for having systematically mis-reported Workers' Compensation insurance premiums as other kinds of liability insurance. In addition to the fine, AIG will pay $46.5 million in fees and assessments, and has agreed to a potential $150 million in further fines if the insurer does not follow a compliance plan.

This was the same kind of mis-reporting of Workers' Comp insurance premiums that was the basis of a major prior settlement with New York's then Attorney General Elliot Spitzer.

It's unclear at this point how this settlement may impact the ongoing federal lawsuit between other Workers' Comp insurers and AIG. In that lawsuit, the other major Workers' Comp insurers claim AIG damaged them because they had to pick up the slack when AIG dodged fees and assessments for Workers' Comp assigned risk programs by mis-reporting Workers' Comp insurance premiums.

AIG's defense in that lawsuit has been to claim that the other Workers' Comp insurers engaged in similar behavior. Which leads to the question: if that federal trial uncovers evidence that other insurers did engage in similar behavior, will regulators have other targets to pursue? Or does this settlement with regulators presage a similar settlement by AIG with the other insurers?

The other unanswered question is this: to what extent did AIG's misreporting of Workers' Comp premiums distort the ratemaking process for Workers' Comp insurance? Is it possible that the $2 billion in Workers' Comp premiums that AIG has now admitted to mis-characterizing as other kinds of insurance introduce distortions in the data used to compute premiums for all other Workers' Comp policyholders in the U.S.? Did AIG cause premiums for employers all over the U.S. to be higher than they should have been, because AIG was hiding these Workers Comp premiums?

Field Guide Now On Kindle

2010-12-01T10:58:00.000-08:00

My latest book, Worker's Compensation: A Field Guide for Employers, is now available on the Kindle from Amazon. AllBusiness.com said: "...a book you absolutely should not be without." And who am I to disagree?

Seriously, the book has gotten very nice reviews. Workers Comp Law Judge David B. Torrey wrote, "His chapters on classification and experience rating, meanwhile, may be the most lucid currently available."

So if you have a Kindle, and are keen to learn the secrets of reducing Workers' Comp costs for your business, this may be a Christmas gift you want to give yourself. And if you don't have a Kindle, you may want to check out what you've been missing. I love mine.

(But if you prefer the feel of a real book in your hands, never fear, The Field Guide is also available as a regular book, also available from Amazon.)

Hearing on Illinois Workers' Comp

2010-11-30T13:41:00.000-08:00

Yesterday, I attended a hearing chaired by Illinois Senate President John Cullerton at the State Capital building in Springfield. The subject of the hearing was Workers' Compensation, hence my interest and attendance.

Several employers gave testimony about how the cost of WC claims in Illinois is higher than in nearby states, and gave some anecdotes about some past claims situations that they felt had been unfair. Many of these employers were larger self-insured companies, so their focus was not on the cost of Workers' Comp insurance, but rather the cost of WC claims in Illinois.

Interestingly, it was the labor representatives who testified that focused on Workers' Compensation insurance issues.

I myself had submitted some written testimony to the panel that also focused on Workers' Comp insurance reforms, so I was keenly interested in the testimony provided by the AFL-CIO and some trial attorneys.

They pointed out, correctly, that for small and medium sized employers, the way they generally satisfy their Workers' Compensation obligations is to buy insurance. Thus, for most employers in the state, the cost of Workers' Comp is really the cost of Workers' Comp insurance.

The head of the Illinois Insurance Department testified that Illinois has a competitive Workers' Compensation insurance marketplace, but that really is only partially accurate, in my view. For some employers in Illinois, there is genuine price competition for Workers' Comp insurance. If an employer is the right size, and in the right line of work, and has a decent loss history, there are usually multiple insurance companies interested in competing for the account.

But for small or new businesses, or for those employers in many construction fields, there is little or no price competition for WC.

A lot of employers still end up in the Assigned Risk Plan in Illinois because they're small, or new, or have some bad losses in recent years. And our Assigned Risk Plan is a pretty bad deal for employers--premiums there can be double what premiums would be in the so-called "voluntary market". And the Assigned Risk Plan provides no real help for employers who need assistance in making their workplaces safer.

I offered to the panel some specific suggestions for Workers' Comp insurance reform (in the form of written testimony.) I'll detail those suggestions in a subsequent post.

SC Work Comp Commission in Audit Trouble

2010-11-24T15:30:00.000-08:00

We've done a lot of work in South Carolina, helping employers recover Workers Comp overcharges resulting from insurers not reporting Second Injury Fund reimbursements, so we keep a weather eye on developments in the Palmetto State. And a news item from there has caught our eye. The Workers Compensation Commission has gotten in trouble when an audit found that the commission did not reporting in a timely basis fines the commission had collected. Reportedly, the commission was worried the SC legislature would learn of those fines and appropriate them for other uses. These fines came from employers who were found to be operating without valid Workers' Compensation coverage.

This actually is not an unheard of practice. In Illinois, our former Governor Blagojevich would raid the funds of the Department of Insurance and use the money for other purposes, even though the funds at the DOI came from fees on the insurance industry and not from taxpayers. Blago managed to starve the department, preventing it from being able to properly function, and in the process got money for other things.

But in South Carolina, the WC Commission tried to avoid a similar problem by collecting, but not depositing promptly, some $244,000 in fines. In the process, they managed to be in violation of state law.

Washington State Keeping State WC Monopoly Fund

2010-11-11T10:18:00.000-08:00

Voters in Washington state decided to retain their state's monopoly fund for Workers' Compensation. This means that insurance companies will not be allowed to insure Washington employers for their Workers' Comp liabilities, and employers there will continue to have to use the state fund for that purpose.

Insurance companies had lobbied hard to change things--I guess the Workers Compensation insurance can't be completely unprofitable--but ultimately, the voters decided to keep the monopoly fund going. Only a couple of states and territories still operate monopoly funds for Workers Comp--the trend in recent years has been to shift away from monopoly funds and embrace a competitive private insurance system. But Washington won't be joining that trend, at least not for now.

Another Employer Going to Jail Over WC

2010-10-26T10:41:00.000-07:00

An Arizona man has been sentenced to a year in county jail for defrauding the Arizona State Fund of $72,000 in Workers Comp premiums over several years.

Damian Andre had been president of Arizona Payroll Systems,Inc., a PEO type operation. Mr. Andre was convicted of misreporting classifications and payrolls to the fund. More info can be found here.

This is representative of a trend in recent years, one I have written about in the past--employers getting in legal trouble for taking aggressive and improper actions to reduce Workers Compensation insurance costs. Once upon a time, I think it was less likely that employers would face criminal prosecution for such wrongdoing. But those times, they are a'changing.

Just last year, I worked as an expert on a federal criminal case against a former head of an Illinois-based PEO (Professional Employer Organization.) That woman (a very bright, engaging, professional businesswoman) is now serving time in a federal correctional institution. So employers need to keep in mind that what they think of as just playing hardball with their insurance company can sometimes produce disastrous consequences.

This news item puts me in mind of another case of mine, one that has just recently been concluded. In this case, I had been hired by the insurance company rather than by an employer. The policyholder in this case had initiated legal action against the insurer, claiming that the insurance company had overcharged them by about $1.5 million. I believe this suit was the result of a review by an outside consulting company, which had reported to the employer that various improper claims handling techniques had caused the employer to be overcharged by that $1.5 million dollar amount over five years.

The problem was that, when the insurance company hired us to review other aspects of these Workers Comp premium charges, it was found that the employer had been systematically misreporting the kinds of work being done by many employees. So at the end of the day, the employer had not been overcharged, they had been significantly undercharged due to their misreporting.

The bottom line is that the case was settled, with the employer not receiving the $1.5 million dollar refund they had sought, but instead by agreeing to pay an additional $2.5 million dollars to the insurance company. Not exactly the outcome the employer had anticipated when they filed suit.

But while this employer is likely not happy over the outcome of this case, I would point to the example of this Arizona employer and suggest that he count his blessings.

Washington State Ending Game of Monopoly?

2010-09-26T12:57:00.000-07:00

The state of Washington is considering ending its monopoly fund for Workers Compensation. Specifically, Initiative 1082 will be voted on by Washington citizens in November, and if passed would allow private insurance for Workers Compensation for the first time since 1911.

Employers there argue that the monopoly state fund there is inefficient and expensive. I don't know enough about the Washington state fund to comment on the wisdom of either side in this debate, but I can offer some perspective. A number of other states have made this change in recent years (West Virginia and Nevada) and the change appears to have worked fairly well so far. In general allowing competition via private insurers can help some employers obtain some price relief for WC. The problem is that for many smaller employers, the competitive benefits never really materialize, because there isn't any effective competition for a lot of smaller employers.

In theory, a state operated monopoly fund ought to be able to achieve some price advantages, as such a system doesn't have to operate at a profit. But state run monopoly funds can easily degenerate into politically-distorted bureaucratic boondoggles--Ohio comes to mind in this regard.

Employers in Washington should go into this with their wide open: the private insurance system comes with its own problems. Insurance companies can be bureaucratic and high-handed in some of their decisions, so scrapping the state bureaucracy doesn't guarantee an end to such problems.

Competition can help address such problems, but insurers don't always compete for smaller employers. And if a major insurer goes belly up (think Casualty Insurance in California and Illinois) it can cause real disruptions. So the private insurance system is no panacea.

It will be interesting to see which way the voters of Washington call this shot. And heck, if they choose to allow private insurance, it will at least open up one more state in which my company can offer consulting services.

Workers Comp Premium Plunge Not Good News For Employers

2010-08-23T08:15:00.000-07:00

In 2009, Workers Compensation insurance premiums plunged. The top 25 WC carriers saw premiums decrease collectively by 13.2%. The entire WC insurance premium volume declined by 12.4%. For some carriers, the decline was more pronounced: AIG saw premiums drop by 22.2%.

This wasn't the result of rate decreases--it was caused by precipitous drops in payroll, as the economic crisis roiled its way through the country. As carriers performed audits for 2009 policies, again and again they saw that large Return Premiums were due policyholders, due to significant declines in payroll.

Now, not only is this bad news for employers in that it reflects slashed payrolls, it also portends an era of tightened underwriting standards by employers. As carriers deal with lower premium volume, they are tightening up their criteria for writing business. The net effect of this will be a significant increase in Assigned Risk policies (and in most states, the Assigned Risk programs carry much,much higher premium charges, and much poorer customer service.)

Oh, and for the folks out in California, their rating bureau, the WCIRB, has announced it wants a rate increase of around 30%. That may never come to pass, due to political pressure, but some significant rate increase seems likely.

So all in all, we would appear to be heading into a period of significantly higher Workers Comp insurance premiums, at least for those employers still in business (more on that in my next post.)

A Glowing Review For The New Book

2010-08-12T14:26:00.000-07:00

Okay, can I share something of which I am inordinately proud? My latest book, Workers Compensation: A Field Guide for Employers, just received a glowing review in the "Workers Compensation Law Section Newsletter" published by the Pennsylvania Bar Association.

The reviewer, David B. Torrey, is a Workers' Compensation Judge in the PA Department of Labor & Industry, and here are a few excerpts from his kind and generous review:

"His chapters on classification and experience rating, meanwhile, may be the most lucid explanation currently available."

The judge also wrote: "I know that I have read and annotated the book repeatedly, and am always picking up nuances that I can relate to the cases that I have heard (and hear) litigated before me."

Judge Torrey concludes his review thusly: "So buy a copy of Mr. Priz' book and take in a critical explanation and account of fronting--and a myriad of other insurance customs, practices, and procedures. Like a new Beaujolais, breathe it in, drink it in, get lost in it, and don't ever let some risk manager catch you unaware on the topic of insurance coverage."

My goodness, I don't believe I've ever heard anyone wax rhapsodic about a Workers' Compensation book, but I am delighted (and humbled) that Judge Torrey has found my work so useful.

Workers Comp Consultant Convicted of Fraud

2010-07-29T22:27:00.000-07:00

A consultant based on South Carolina who specialized in helping employers reduce Workers Compensation insurance charges has been convicted of fraud in federal court. Robert A. Kohn of Charleston, South Carolina, was found guilty of submitting fraudulent payroll information to Companion Property & Casualty for his client, Knight's Services, a pipe-fitting contractor in Charleston.

This is, of course, a black mark on the industry of which I am a part, but it is fortunately a notable exception. Most consultants in this field (that I'm aware of, at least) provide ethical and professional services. But as in every field, there are always some bad apples.

Still, this story illustrates the need for some regulation and oversight of our industry. At the moment, no state licenses or regulates consultants on Workers Compensation premium reduction. I have drafted model legislation here in the state of Illinois that would provide such regulation, but at the moment it has attracted no interest from the legislature.

This is not the first time there have been unscrupulous operators in this field, and it surely will not be the last. Employers who are interested in having a review of their Workers Compensation costs performed would be well advised to check carefully into the background and credentials of any consultant who offers to save them money.

A good consultant can save you a lot of money. A crooked one can involve you in insurance fraud.

New Book Reviewed at AllBusiness.com

2010-07-27T12:10:00.001-07:00

My newest book, Workers Compensation: A Field Guide for Employers, has received a very nice review in AllBusiness.com. Take a look at the review here.

AIG Musings

2010-06-30T15:13:00.000-07:00

AIG is in the news today again, as Joseph Cassano (former head of the Financial Products Division) testified in Washington that he believes the disastrous derivatives trades that destroyed the company would have ultimately worked out just fine, if only the U.S. had not unwound them so quickly when the Feds had to rescue AIG. I dunno, that does seem to ignore the fundamental point that, if those trades were all so hunky-dory, why exactly did the government have to invest $80 billion or so in loose change to keep the company from going under?

But AIG is (once again) on my radar screen today for another reason as well. I just received a phone call and email from a former policyholder of AIG's who wanted to alert me to another instance (so he says, anyway) of AIG playing fast and loose with the rules.

This former AIG policyholder says that AIG failed to apply the maximum payroll caps that applied on payroll his company paid to New York workers. It was only when he independently learned of these payroll caps from another employer that he was able to get AIG to correct the audits and return the premium overcharges.

Now, it seems to me that knowing what the particular payroll maximums are in a given state is something that premium auditors at AIG should have known about. It was certainly their responsibility to know about that. But beyond the overcharges that happened to this individual employer, he raised an important point to me: how many other New York employers were overcharged by AIG in this manner?

This is a question I cannot answer at present, but I would certainly encourage all New York employers with highly paid individual employees to look into this issue.

Interesting Court Ruling in Minnesota

2010-06-23T13:32:00.000-07:00

There has been an interesting court ruling in Minnesota that illustrates the importance of getting the Named Insured correct and exact on a Workers Compensation insurance policy. The case, STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY v. MEYER, was decided in June by the Court of Appeals there. And although it might appear to some to be splitting hairs, in fact the decision makes clear the vital importance of getting the Named Insured exactly right.

In this decision, the Court of Appeals reverses the lower court ruling that a Workers Comp policy that insured "Timothy Pearson DBA Park Rapids Funeral Home," insured Timothy Pearson individually and thus would also have covered a ranch owed by Mr. Pearson. The Appeals Court ruled that the policy did NOT also insure Timothy Pearson as an individual, and thus did not provide coverage for a worker at the ranch owned by Mr. Pearson. But the details of the case are a bit complicated.

It turns out that Park Rapids Funeral Home was a corporation, not a sole proprietorship. The Appeals Court points out in its decision that if the funeral home had been a sole proprietorship, then the d/b/a language WOULD have also covered Mr. Pearson as an individual. But, the court decided, since a corporation is a separate legal entity, in this instance the Named Insured language did not extend coverage to Mr. Pearson as an individual.

To further complicate things, the injured worker involved worked at both the funeral home and the ranch, and at the time of injury was doing work that involved both workplaces. The Appeals Court ruling only means that the policy does not insure the ranch for Workers Comp. If it turns out that the worker is eligible for benefits from the funeral home, then the policy would cover the claim, as the policy clearly covered all workers of the funeral home.

The problems could have been avoided, of course, if the Named Insured on the policy had been set up to properly and accurately reflect the actual needs of the client. The policy should have had as Named Insured the proper corporate name of the funeral home, and the individual owner of the ranch (assuming that Mr. Pearson intended to also cover his ranch operations.)

A Workers Comp policy provides coverage for all workers of the named insured, but getting the named insured right and complete is a basic, but important, aspect of setting up the policy. And it is not uncommon for a WC policy to mistakenly fail to name all the various separate legal entities that should be named (including land trusts, if applicable.

New Georgia Law

2010-06-09T14:15:00.000-07:00

Georgia has enacted a law that allows employers who were left stranded by the collapse of Southeastern US Insurance Company to buy coverage from the state's insolvency pool. The collapse of SEUS had left a lot of Georgia employers with Workers Comp claims that were unexpectedly uninsured, as SEUS had not been required to participate in that insolvency pool.

Some private insurers are upset with this development, though. They don't like the idea of giving a break to employers who had chosen to insured with SEUS (which was a captive insurer)instead of with regular insurers (who were contributing to the insolvency fund.)

California Gold Rush Ending for NFL Players?

2010-06-03T15:25:00.000-07:00

There has been a recent ruling in California that could put a serious crimp in the trend of former NFL players filing for California Workers Comp benefits.

For those who came in late, former NFL players have been successfully pursuing California Workers Comp claims in recent years, taking advantage of some California rules that are more lenient in some regards than the rules in other states. Thus, players who may have only played a single game in California (or who just participated in a single practice in the Golden State) have been deemed eligible for disability benefits that stem from their professional football careers.

But a recent ruling by the California Workers Compensation Appeals Board may change that. The decision reportedly would require players who played for teams based outside California to make their Workers Comp claims under the statutes of those "home" states. And in many cases, the rules in those other states would not appear to be as friendly to the players' claims as those of California (that's why the players have been making their claims in CA in the first place.)

More information can be found here.

New York WC Rate Increase Sought

2010-06-02T12:47:00.000-07:00

WCIRB, the New York equivalent of NCCI, has filed for a 7.7% increase in loss costs. Loss costs are the major component of manual rates, so if this is approved by NY insurance regulators, Workers Comp rates (and thus insurance premiums) will be increasing in the near future.

This increase is reportedly based mainly in an increase in weekly indemnity benefits that had been approved back in 2007.

It's not a sure thing yet that this full increase will be approved by regulators, as Workers Comp rate increases are always a political football, but it sounds as if it is likely New York state employers may be heading for a rate increase.

An Interesting Rip-Off--I Mean, Approach, in Utah

2010-05-27T14:32:00.001-07:00

Quite the news story today from Utah. Authorities there are looking into a situation where, reportedly, "thousands" of Utah construction workers have been forced to become "owners" of their own businesses, and thus responsible for their own Workers Comp and Unemployment Comp costs. Of course, as "owners" they still don't get to set their own hours, or where they work, and can even be fired from the worksite.

This clever little bit of "reclassification" is orchestrated by a company in Utah that sells it's services to interested employers. By using their services, employers change their employees into "owners" of the other company, and thus they all become responsible for their own payroll taxes, unemployment, and Workers' Comp.

This is done by making the former employees "owners" of an LLC--on paper, at least. The LLC that these folks become "owners" of is the company selling the service to their former employer.

Given the way of the world, I would expect this neat little trick to spread to other jurisdictions, if it isn't snuffed out fast. Mind you, I suspect that ultimately this chicanery won't pass muster with the authorities, but before that happens there will be ample opportunities for people to be maimed and killed without having proper Workers Comp coverage.

File This Under WTF

2010-05-24T12:58:00.000-07:00

Over in Rhode Island, a VP for Beacon Mutual (the dominant Workers' Comp carrier in the state) has been acquitted in a criminal case over preferential premium breaks for certain politically connected companies. The VP had been charged with failing to reveal to insurance regulators that Beacon maintained this "VIP" list of certain companies who would be favored with low premiums, but was acquitted because regulators had not asked for such a list.

It does rather beg the question, does it not, of how regulators would know to ask for such a list? Maybe regulators need to add some generalized, blanket questions to their market conduct examinations. Something like, "Please list any improper, blatantly unethical, sneaky and underhanded practices that you don't want us to know about."

I guess Rhode Island operates under a special kind of "Don't Ask, Don't Tell" policy for insurance companies.

Another Employer Charged With Fraud

2010-05-20T10:57:00.000-07:00

I see today, in my Google News page, that an employer in Sacramento has been charged with fraud for "misrepresenting fact to obtain insurance at less than proper rate".

Allegedly, this roofing contractor failed to report proper payrolls for use in computing WC premium. News stories such as this one are a daily item in my Google News page (which I have set up to scan for news items about Workers Compensation insurance). In fact, today's Google News page has items not just about this California case, but also about employers in New York and Louisiana being charged with Workers Comp premium fraud. Employers should take heed of this trend.

I suppose there have always been some employers who have felt it ok to try to "fudge" their payroll numbers, thinking it's just a hardball negotiating tactic with their insurer, with no downside risk. Employers need to realize that they run the risk of criminal penalties when they engage in such activities.

I've served as an expert witness in several criminal cases involving these issues, and I have observed how devastating such criminal charges can be to a business person.

Employers need to protect themselves from excessive Workers' Comp premium charges--my consulting work has found that insurance companies often overcharge employers--but they also need to resist the temptation to reduce premium improperly. Otherwise, they may end up as another sad news story on Google News.

The South Carolina Situation

2010-05-13T14:10:00.000-07:00

As reported in WorkCompCentral, my company, Advanced Insurance Management (AIM) is currently trying to get the South Carolina legislature to close a loophole that has allowed insurance companies to get away with overcharging some South Carolina employers on Workers Comp insurance.

At the moment, the effort to close the loophole is struggling, I fear. (That old adage about not wanting to see how sausage and legislation gets made---very true.) The SC legislature is winding down its current session, and there are a lot of other issues clamoring for the attention of the wise solons of SC. But we're not finished yet, so stay tuned.

This all relates to our ongoing work to recover overcharges for South Carolina employers who were victimized by insurance companies not properly reporting to NCCI claims reimbursements they got from the Second Injury Fund. Although we've been able to get the money back for a number of employers, in some cases the rip-off (sorry--error) occurred long enough ago that current NCCI rules prohibit correcting the experience modifiers now. Of course, the reason that the problem wasn't addressed sooner was that the insurance companies ignored NCCI rules in years past, and NCCI didn't police their own rules. So it wasn't until AIM got involved, years later, that this little scheme was uncovered.

It's funny--insurance companies expend a lot of time and effort in catching policyholders who aren't following the rules (and not paying proper Workers Comp premiums). But apparently, when it is the insurance companies themselves who benefit from breaking the rules, they are not so scrupulous in insisting that things be made right. And that surely undermines the integrity of the entire Workers Comp system.

Workers Comp News Bits

2010-05-11T15:29:00.000-07:00

There are a few interesting bits of news today from the wide world of Workers' Comp. First off, Arizona's governor has signed a bill that mandates the Arizona state fund morph into a private insurance company by 2013. This is part of a larger trend that's been happening in many states with Workers Comp funds. Changing over to an independent insurance company enables these insurers to branch out and offer coverage in other states (a la Accident Fund from Michigan) and it also removes the loss reserves from the possible reach of state legislatures desperate for easy funds.

Over in the great Commonwealth of Massachusetts, regulators there have just approved lower rates for Workers Comp insurance, starting in September. Insurers were disappointed, employers pleased, understandably.

Finally, Florida-based NCCI (National Council on Compensation Insurance) announced that John T. Leonard, President and CEO of MEMIC Group (a group of insurance companies based in the Northeast) has been elected the 2010 Board Chair of NCCI. NCCI is the organization that computes experience modifiers, creates and maintains the Workers Compensation classification system, and writes the manual rules for Workers Comp insurance for most states. Although a lot of folks act as though NCCI were some kind of regulatory agency or independent body, it is in fact a creation of insurance companies, and the majority of NCCI's board members are insurance company executives. So while NCCI is technically separate from the insurance industry, there is a great deal of shared DNA.

New Book Now Available on Amazon

2010-05-11T11:48:00.000-07:00

My new book, Workers Compensation: A Field Guide for Employers, is now available on Amazon.com. Readers who found my previous book, Ultimate Guide to Workers Compensation Insurance, a useful resource may appreciate this new tome. It contains all the information that so many found helpful in Ultimate Guide, but it's been updated and expanded.

Work Comp Insurers Under Stress

2010-05-07T11:45:00.000-07:00

The NCCI (National Council on Compensation Insurance) has just announced that the U.S. Workers Compensation insurance industry is in a "precarious position". The overall combined ratio of U.S. WC insurers in 2009 rose to 109% (up from 101% in 2008). That's the biggest jump since the mid-1990's. This means that for every $100 of premiums they took in, WC insurers had $109 in losses and expenses.

It should be noted, though, that three percentage points of that increase came from a single (unnamed) insurer adding a billion dollars to its loss reserves. Poor investment income is also adding stress to Workers' Comp carriers, who rely on investment income to make up for thin (or nonexistent) underwriting profits.

Factors contributing to this development have included premium declines due to the economic downturn (lower payrolls equal lower WC premiums)and a continuing soft market for commercial insurance.

But a 109 combined ratio may change that soft market in the near future. At the very least, it will mean insurers will keep the pressure on when doing audits, to make sure they find every possible bit of premium they think they are entitled to. And sadly for employers, they may well occasionally try to find premium that they are not really entitled to under the rules.

New Book Out

2010-05-04T12:10:00.000-07:00

My new book, Workers Compensation: A Field Guide for Employers is now available. As a real book, I mean. It's been available for a while as an e-book, but now the actual physical book is available.

For those interested in the backstory, my earlier book, The Ultimate Guide to Workers Compensation Insurance, was allowed to go out of print by the publisher. So I got the rights back, and proceeded to update and expand that book. The result is this Field Guide for Employers.

I got a lot of feedback from employers and insurance agents that they found the earlier book a really useful resource so hopefully this new updated book will continue to help those who need to understand how Workers Compensation insurance is priced, audited, and sometimes mis-priced and mis-audited.

Important Ruling by Illinois Department of Insurance

2010-04-28T12:17:00.000-07:00

The Illinois Department of Insurance has just recently made a determination in a legal hearing that has important implications for every employer in the state. In this hearing, the Department has officially held that an insurer may not retroactively adjust the schedule credits or debits on a Workers Compensation insurance policy to offset a premium refund owed to the policyholder.

I testified at this hearing back in 2005 (although the ruling was only made recently in 2010) about the past policy of the Department of Insurance in the regard. In my experience as a consultant, the Department had always held that an insurer could not retroactively change schedule credits or debits just to offset a refund owed to the policyholder. But in the instance of this one particular policyholder, an official at the Department of Insurance had ruled in favor of Liberty Mutual and allowed an exception in this one instance, for unspecified reasons.

This legal determination by a hearing officer at the Department of Insurance has ruled that it was improper of Liberty to make this change in schedule credits, as Liberty's filing with the Department about schedule rating had made it clear that specific criteria would be used as the basis for such adjustments. The ruling upholds that earlier informal policy that an insurance company may not adjust schedule credits and debits just to manipulate premiums and avoid making a return of premium that is otherwise owed.

In this particular case, Liberty had used the wrong governing classification for several years to compute Workers Comp premiums. After NCCI ruled that a less expensive classification was really correct for this company, Liberty was asked to recalculate premiums and refund the overcharge (as required by Illinois law).

Liberty refused, saying they would just adjust schedule credits to offset the return premium owed because of any classification change. So a complaint was filed with the Illinois Department of Insurance. But this time an exception was allowed, for reasons that were never made clear.

That triggered a request for a formal legal hearing at the Department. And even though it took five years for the final determination to be made, that ruling is now out. Liberty was wrong to retroactively change schedule credits to offset these premium refunds, as Liberty's filing with the Department about schedule rating made it clear that such schedule adjustments were to be based on very specific criteria, not just Liberty's desire to manipulate premium charges.

The Big Short & Workers Comp Insurance

2010-04-27T15:10:00.000-07:00

As I recently mentioned, I just finished reading The Big Short by Michael Lewis. It's a great read, explaining in detail how investment banks and rating agencies created various AAA rated securities that were really based on Junk-quality subprime mortgages. And I was struck by some interesting parallels with the world of Workers Compensation insurance.

One of the ways that this financial scam was enabled was that rating agencies like Moody's and S&P rated various investment securities as AAA (essentially risk free) even though they were based on mortgages of dubious quality. This happened because the rating agencies were paid by the investment banks that created these frankenstein investments, and the lucrative fees corrupted what should have independent analysis by the rating agencies.

Something kind of similar exists in the world of Workers Compensation insurance with the NCCI, I think. NCCI, the National Council on Compensation Insurance, is at the center of the Workers' Compensation insurance universe for most states. NCCI does the actuarial work to calculate rates, NCCI devises the classification system that determines what kinds of employment are assigned to which class code, NCCI devises and operates the experience rating system that calculates experience modifiers for employers--NCCI is really central to the whole system that is used in most states to figure premium charges for Workers' Comp insurance.

NCCI is often viewed as some sort of regulatory agency--except that it isn't. Most of NCCI's money comes from the insurance companies that write Workers Compensation insurance. NCCI was created by insurance companies way back in the early part of the 20th century, and to this day the majority of NCCI's Board of Directors is made up of insurance company executives.

Now, I'm not saying that I have any evidence that NCCI has been corrupted by this close financial relationship with insurance companies. What I am saying, though, is that one important lesson from this financial crisis is that you need truly independent and impartial rating agencies. Even with the best of intentions, the financial relationship between NCCI and the insurance companies creates the appearance of a conflict of interest.

Another parallel: the financial products created by investment banks were so convoluted and arcane that almost no one really understood them properly, not the banks selling them and not the investors purchasing them. That reminds me a lot of the system behind Workers Compensation insurance premiums.

Not only are the rules of classification and experience rating difficult to follow, many insurance companies have devised policies that further complicate how premium charges will be calculated, so that policyholders often have a very poor understanding of how their costs will really be calculated. Some insurance companies actually issue side contracts that change the terms of the policy, even though the terms of the policies themselves explicitly state that they cannot be changed except via endorsement to the policy.

The good news, though, is that I don't think the Workers Comp insurance market is going to implode like Bear Stearns. Given how most employers are required to buy Workers Compensation insurance, demand for the product is guaranteed. But unpleasant surprises when employers receive their audit bills also seem guaranteed to continue.

New Name--Same Great Taste

2010-04-19T14:41:00.000-07:00

Hmmm. For the second time in its existence, I've had to change the name of this blog. After receiving a very gracious phone call from the gentleman who holds the trademark for the term "CompWatch", the name of this blog has been changed to "WorkComp Watch". It does not appear that anyone currently has trademarked that phrase.

This blog had originally been titled "CompControl", which was the title of my 1995 book about reducing Workers' Compensation insurance costs. But someone went and registered that phrase (my earlier book title did not give me any rights over that phrase) so I switched to CompWatch. Sigh.

Seriously, the gentleman who called me to point out that his company held a trademark for "CompWatch" was very nice and I certainly understand why they want to protect that trademark. So without further ado, we'll try this new title. And if that doesn't work, I'll change the name to "The New York Times". We'll see how that works out.

A Nice Refund For a Texas Client

2010-04-19T11:06:00.001-07:00

We've just gotten word that a Texas client of ours has received a $74,000 refund on 2007-08 WC policy, thanks to an experience modification factor correction we engineered. A nice way to start the week, with news like that.

The Big Short

2010-04-18T12:03:00.000-07:00

That's the title of an excellent new book I'm reading (bought it for the airline flight back home from the premium auditor's convention). The Big Short is by author Michael Lewis, whose earlier works have included Liar's Poker and Moneyball.

The Big Short explains in painful detail exactly what went wrong on Wall Street and how institutionalized greed and an utter lack of ethics came close to destroying the world economy. It also finally explains in detail how AIG managed to destroy itself (well, save for the financial intervention of U.S. taxpayers).

This book should be required reading for everyone who is outraged over our current economic problems. The degree to which large Wall Street investment banks turned our financial system into a literal casino is shocking. So many people (who all thought they were the smartest people in the room) made ill-gotten fortunes by turning financial institutions into a gambling den and then deluded themselves into thinking they made honest livings.

How did that writer for Rolling Stone describe Goldman Sachs? Something about a great vampire squid wrapped around the face of humanity? Read The Big Short, and you will realize it wasn't just Goldman Sachs.

Thoughts from the Premium Auditors Convention

2010-04-13T12:06:00.000-07:00

I've just finished up attending the annual convention of the National Society of Insurance Premium Auditors, and thought I would post some thoughts on the event while they are still fresh in my mind.

One of the presenters included our website in his list of useful resources for auditors. That was very cool and made my day.

Same presenter also had an excellent suggestion for improving work efficiency and productivity: look for 100 things to do 1% better.

In another session, a very interesting point was made by a field auditor, who noted that, due to our current economic tough times, he is seeing an increase in situations where experienced office personnel have been laid off, only to be replaced by someone like the owner's wife, who lacks the experience and familiarity with office records and procedures the auditor needs to perform a quality audit.

Interesting point was made in another session, that reimbursements paid to workers for out-of-pocket medical expenses would be excluded from the payroll used to compute WC premium if the employer has a group medical plan, but payments to workers for individual health insurance costs in lieu of a group plan would not be excluded.

Another good distinction made at one session: stock options granted to workers would be excluded from payroll used to compute WC premium (except in NY, according to one participant) unless those options allowed worker to purchase stock at no cost--then value of stock would be included in payroll.

Stock bonuses generally are included in payroll, valued as of date the bonus is paid (not the presumably later date when it is redeemed).

Also got to sit in on an excellent session where fraud investigators from KEMI, the Kentucky insurer of last resort, presented a case study of a very serious and blatant case of criminal premium fraud.

Cost Control Gone Wrong

2010-03-26T13:08:00.000-07:00

According to California prosecutors, some former managers at a Smurfit-Stone Container facility in Salinas went too far in their efforts to hold down Workers Comp costs. Those managers have pleaded no contest to charges that they deprived workers of their rights under California Workers Compensation law.

Reportedly, an incentive program at the facility led the managers to deny some 20 workers their statutory rights. The full story is here.

"Statewide, this is getting to be a bigger and bigger problem," Managing Deputy District Attorney Ed Hazel said of the rising number of workers' compensation violations. "There's the pressures of trying to keep medical and insurance costs down. Sometimes, people figure they can cut corners and take shortcuts."

A lesson here for all those who are straining to control Workers Compensation costs: be careful that financial incentives contain controls to make sure that managers aren't inadvertently encouraged to cross the line into illegal activity.

Update on South Carolina

2010-03-24T11:13:00.000-07:00

I've just been informed that the President Pro Tempore of the South Carolina Senate, Glenn McConnell, has been given a copy of yesterday's CompWatch entry (along with other information) about the refusal of the NCCI Appeal Board to hear our appeal on behalf of South Carolina employers who were overcharged because their insurers failed to properly report Second Injury Fund reimbursements to NCCI. This failure by the insurance companies made the employers' experience modifiers higher than they should have been, and thus made their Workers' Comp insurance premiums higher than proper.

Perhaps the South Carolina legislature can focus the attention of NCCI and the SC Appeal Board on the need to correct these problems for employers. Stay tuned for further developments as they happen.

NCCI Appeal Board to SC Employers: Drop Dead

2010-03-23T13:07:00.000-07:00

Okay, okay, I know that's a melodramatic headline. I've just always wanted to use a variant on that famous NY Post headline, "Ford to NY: Drop Dead" and now I've done it. But even though it's a little strident, I think it fairly summarizes what the NCCI's South Carolina Dispute Resolution board just told us (and four of our South Carolina clients).

Here's the deal: we've been working for years now on the issue of Second Injury Fund reimbursements in South Carolina, and how insurance companies have often failed to properly report those SIF reimbursements they get. You see, when an insurance company gets reimbursed by SIF for a Workers' Comp claim that the insurer has paid on behalf of a policyholder, the insurance company is supposed to report those reimbursements to NCCI. That way, the experience modification factor for the employer gets adjusted downward to reflect the fact that the claim's cost is lower than earlier reported.

But we found out years ago that insurance companies were routinely failing to make those corrected reports to NCCI, and that NCCI had been making no effort to police such reporting failures. As is often the case, the insurance industry was happy to just let the employers pay the inflated costs for the failure of insurance companies to follow their own rules.

We've been working with a number of South Carolina employers to get these abusive overcharges corrected and refunded, and we've had considerable success with our efforts.

But for some affected employers, there was a problem. The errors had occurred just long ago enough that NCCI rules did not allow for the routine correction of these experience mods. So NCCI suggested that we ask this Dispute Resolution board that NCCI operates for South Carolina for an exception for these cases.

Today we got the letter from that board. They flatly refused to hear our appeals for these employers. They wouldn't even let us make our case before them. Like I said in our headline, they said, in essence, "Drop Dead".

Now, we're not exactly willing to accept this back of the hand treatment. We're already working with our various contacts down in South Carolina, including the South Carolina Small Business Chamber of Commerce, to see what redress may be available once the South Carolina legislature and the South Carolina Department of Insurance are apprised of the situation.

It's just frustrating that it should be so bloody difficult to get this all fixed. The insurance industry makes a great hue and cry over situations that they feel defraud them of proper Workers Compensation insurance premiums. Insurance companies do not hesitate to seek criminal sanctions against those they feel have cheated on Workers Comp premiums. So you would think that the insurance industry would want to be particularly scrupulous to correct situations where the shoe is on the other foot, where it is the insurance companies that have defrauded their policyholders.

Such is not the case for these defrauded South Carolina employers. Not yet, at any rate.

Putting The Compensation in the State Compensation Insurance Fund

2010-03-22T12:52:00.000-07:00

Interesting news item today about California's State Compensation Insurance Fund, or SCIF. SCIF is the California Workers' Compensation fund, a public-private hybrid that competes with private insurance companies to write Workers' Compensation insurance in the Golden State.

The news report is about Janet Frank, a recently-departed "reformer" who had been brought in to attempt to clean up some earlier scandals at SCIF. It turns out that Ms. Franks' own compensation for her work was considerable, something like $1.6 million for two years work. Ms. Franks left SCIF then, saying she needed to care for her mother. But two months after leaving SCIF, she took a job as President of Zenith National Insurance, a SCIF competitor.

At a time when California, like many states, is closing schools and laying off employees in droves, this is an interesting tale of how one person managed to do quite well working for the state, at least for a while. Nice work if you can get it, I guess.

AIG Subpoenas Other WC Carriers

2010-03-17T14:07:00.000-07:00

Insurer AIG (or whatever they're calling themselves currently) has now issued subpoenas against other major Workers Compensation carriers, to determine if they were guilty of the same kind of abuses they say AIG engaged in for years.

Some background: a year or two ago, the NCCI (National Council on Compensation Insurance) filed suit against AIG in federal court for a billion dollars, alleging that AIG had dodged out of paying the assessments and fees that are part of the Workers Compensation system. NCCI charged that the other member insurance companies that make up NCCI therefore had to pick up the slack, to the tune of that aforementioned billion dollars.

That suit eventually got tossed out because the judge ruled that NCCI lacked standing--so several of those other insurance companies filed their own suits over the same issue. AIG has always contended that what they did was common practice at other insurance companies. And now AIG has been granted the right by the court to subpoena the records of those other insurance companies to see if this was really so.

Should be interesting to see what dirty laundry (if any) AIG finds at its competitors.

New Article in Risk & Insurance

2010-03-16T11:41:00.001-07:00

I've been quoted in a recent article in Risk & Insurance. It's all about how widespread the problems are with overcharges in Workers Comp insurance premiums--a subject I've been speaking and writing about for several decades.

Interesting Response From an Insurer

2010-03-08T12:29:00.000-08:00

Sigh. Sometimes insurance company people say the darndest things. Today, my son (and partner in my consulting practice) is talking to someone at a major insurance company about how they didn't report claim data properly to NCCI for use in a client's experience modifier. This person, whose job it is to report unit statistical data to NCCI, said that she didn't have a copy of the NCCI unit statistical reporting manual. This was by way of explanation for why they hadn't included important and pertinent information in their reporting of claim data to NCCI (an error which had made our client's experience modification factor significantly higher than it should have been.)

I swear, sometimes it seems as if the insurance industry is actually trying to create a need for our particular consulting services.

Backlog at NCCI?

2010-02-10T13:39:00.000-08:00

We've been doing a lot of work getting experience modifiers corrected for clients who were victimized by the failure of their insurers to properly report Second Injury Fund reimbursements to NCCI. (NCCI is the National Council on Compensation Insurance, the rating bureau that calculates experience modification factors for employers in many states.) We've been doing so much work on this, in fact, that we are now being told by several insurers that there is a bit of a backlog at NCCI in getting modifiers fixed.

Several insurers are independently informing us that they have now sent in (several times in fact) the corrected loss data for our clients, but NCCI appears to be losing the data. This is consistent with a problem we've observed in the past, where NCCI misplaces authorization letters we have faxed in to them.

We're going to try to work with appropriate NCCI personnel (who have been very, very cooperative in fixing this overall problem in the past) to try to address this logjam problem. For those clients of ours out there who are awaiting revised experience modifiers, please try to be patient while we try to sort this all out. As is often the case, correcting these problems is turning out to be a slower process than identifying the problem in the first place.

New Wrinkle in Reducing Mods

2010-01-07T13:03:00.000-08:00

I was talking to an agent/broker in Tennessee the other day, and he mentioned helping a couple of clients reduce their experience modification factors in a way that struck me as both innovative and questionable.

For many employers in the construction trades, keeping an experience modifier below 1.00 is more than just a matter of keeping Work Comp premiums down--it's the difference between being able to bid on certain projects at all. For many projects, a requirement for being able to bid is that your experience mod is 1.00 or lower.

This TN agent explained that he had helped some clients lower their mods by arranging for them to buy back the indemnity portion of some claims from the insurance company. That is, the employer reimbursed the insurance company for what the insurer had paid out for the indemnity (lost time) part of the claim. Not only did this reduce the overall cost of the claim that the insurer reported to the rating bureau for use on the mod, it changed those claims to "medical only" status. In many NCCI jurisdictions, "medical only" claims are heavily discounted in the mod calculation formula.

Now, this is certainly innovative, as I said before. I'm a little surprised that insurance companies were willing to go along with it, though, as it really seems to be improper in a number of ways. Just because the insurance company has been reimbursed for the indemnity costs of the claim doesn't really make it a "medical only" claim. And this practice would give an employer a lower modifier than the employer would really have earned, absent this bit of dollar swapping, giving the employer an advantage over competitors, even though the "dollar swapping" employer really doesn't have a better loss record.

This also eats away at the credibility of the experience rating system, allowing deep-pocketed employers to avoid the mod impact of serious claims.

I understand that the state of Wisconsin has already outlawed this practice, and I'm trying to find out more about what, if anything, other states have done.

For the moment, I certainly can't in good conscience recommend that employers try this trick at home. They might want to be aware, however, that some of their competitors may be gaining unfair advantage over them when it comes to experience modifiers.

New Study on CA Workers Comp Market

2009-12-21T19:41:00.000-08:00

There's been a recent study done jointly by the Rand Corporation and Navigant Consulting on the California Workers' Compensation market. The study was commissioned by the Commission on Health and Safety and Workers Compensation.

The study found six factors that have contributed to the price volatility of the California Workers Compensation market since rate deregulation happened back in 1995:

• inaccurate projections of claim costs;
• pricing below expected costs;
• reinsurance contracts that gave insurers and reinsurers insufficient stake in the profitability of the policies they wrote;
• managing general agents who had little financial interest in the ultimate profitability of policies;
• underreserving for claim costs by insurers; and
• insurer policyholder surplus that was inadequate to provide a cushion against adverse events.

For those interested in understanding the underlying dynamics of what has been creating the market turmoil in California, this report makes fascinating reading (but for those who don't have that interest, of course, not so much.) The study digs fairly deeply into the specific mistakes, misjudgments, and missteps made by carriers and regulators that have contributed to the problem in the Golden State.

Federal Court: No Premium For Independent Contractors in Alabama

2009-12-09T19:31:00.000-08:00

The 11th Circuit Court of Appeals has ruled that Workers Compensation premiums are not owed for independent contractors in Alabama. In Continental Casualty Co. v. Alabama Emergency Room Administrative Services, No. 09-12385, 12/3/09 it has been held that insurers are not entitled to charge premiums for independent contractors, as Alabama law stipulates that Workers Compensation benefits are payable only to employees.

The particular dispute in the case was over physicians sent to emergency rooms by a medical staffing company. Although premiums were paid for other workers who were employees of the company, the staffing company disputed additional premium charges sought by Continental Casualty, saying that the physicians were independent contractors who were not eligible for Alabama WC benefits.

Continental argued that because they could possibly be responsible for claims for these doctors, they were entitled to charge premiums. The court rejected that view, holding that since only employees are entitled to Alabama WC benefits, premium could not be charged for independent contractors.

2009-12-08T21:23:00.000-08:00

Georgia Insurance Commissioner John Oxendine has confirmed that legal action is planned against M. Clark Fain III, founder of Southeastern U.S. Insurance Company (SEUS), now in liquidation. Records indicate that Fain had made some contributions to Oxendine's campaigns for insurance commissioner and governor, and Oxendine indicated the planned legal action in response to questions raised about the contributions.

SEUS specialized in writing Workers Compensation insurance for the PEO (employee leasing) industry, and was shut down after Fain had attempted to remove a key real estate investment subsidiary from the insurance company.

Interestingly, our company had it's own little encounter with both Fain and Oxendine's office a year or two ago, when we filed a complaint against SEUS with the Georgia department of insurance over a classification dispute. The Georgia Department sided with SEUS on what seemed (to us) flimsy grounds.

Perhaps the problem was that we hadn't contributed to Oxendine's campaign funds.

That may seem a cheap shot, but Oxendine's accepting campaign money from the owner of an insurance company also seems cheap--something along the lines of providing Georgia with the best insurance commissioner money can buy, and at Wal-Mart prices to boot.

At the very least, it gives the appearance of impropriety. Georgia law prohibits insurance companies from donating to insurance regulators, but allows employees of such insurers to make contributions. A loophole large enough, it would seem, to drive a truck through.

CA Agent Held Liable For Failing to Recommend WC

2009-11-30T09:24:00.000-08:00

The California Court of Appeal has affirmed a lower court ruling that an insurance agent was negligent in failing to advise a client of the need for Workers Comp insurance when she produced other business insurance coverage for that client.

In Williams v. Hilb, Rogal & Hobbs Insurance Services of California, Inc., No. B203691 (Cal. Ct. App. 09/09/09), the court affirmed that the insurance agent failed to meet the duty owed to a car dealership by failing to advise them of the need for Workers Compensation coverage, even though the agent held herself out as having expertise in business insurance. A fire at the client's premises severely burned a worker, and the lack of Workers Compensation insurance then led to litigation.

The agent claimed she had recommended WC coverage to the client, but could produce no documentation to support this. More about this case can be found here.

This case illustrates several important points for insurance producers. Although the legal duty for insurance producers in most jurisdictions is not onerous, a number of factors can serve to increase the duty owed in particular circumstances. One of those factors is if the insurance agent holds himself or herself out as having particular expertise, or serves as an insurance advisor to a client.

This case also underlines the critical need for insurance producers to keep good records and documentation. In this case, the agency had a form for recording conversations with clients that contained no record of the agent advising the client to obtain WC insurance. Good record keeping and proper documentation of communications with clients can go a long way to helping insurance producers meet the duty they owe to clients and others. A lack of it can be costly.

A Ranking of the States of WC

2009-11-05T20:05:00.000-08:00

My friend and insurance writer Peter Rousmaniere has just had published an excellent article in Risk & Insurance, available online here. Peter has ranked each state's Workers' Comp system in terms of costs, benefits to workers, and some other factors. Take a look and see what grade your state gets.

Maybe I need Kanye West

2009-10-27T11:06:00.001-07:00

The nominations for best Workers Comp blog are out and I didn't make the cut. Again. Is this how Bob Hope felt all those years ago? Ah well, I'll just make sure to read all those other blogs and figure out what they're doing better than I am, and then we'll see what happens next year.

And if that doesn't work, there's always the Chicago way.

But congratulations to the winners. You can find them here.

A Brief History of AIG

2009-10-26T10:49:00.000-07:00

I've been reading a fascinating book recently that tells the history of the AIG company and its fabled chief executive, Maurice "Hank" Greenberg. The book is Fallen Giant, The Amazing Story of Hank Greenberg and The History of AIG, by Ron Shelp. Shelp is a former AIG insider who worked for Greenberg, and it provides a comprehensive history of both the insurance company and its legendary head honcho.

The book seems to provide a balanced examination of both subjects--it doesn't read like a hatchet job of either the company or the man. The book reinforces the well-known reputation of Greenberg as being a difficult man to work for (reportedly he got upset when he was left off the annual list of worst bosses to work for) but the picture painted here is not entirely unsympathetic.

All in all, a very interesting book for those of us with an interest in how AIG got to be the world's largest insurance company (which only happened after Greenberg got the reins) and in how AIG managed to collapse so spectacularly in more recent times.

Denial Not Just A River in Egypt

2009-09-02T11:31:00.000-07:00

I did a presentation a week or so ago to a meeting sponsored by the Illinois Chamber of Commerce. I spoke on Workers Compensation insurance (what else--quantum mechanics?) In passing, I mentioned the error rate we see year in and year out--that we find significant overcharges in the range between one-third to one-half of the Workers Comp insurance programs we review.

I was careful to point out that this doesn't mean that one-third to one-half of all policies contain overcharges. Because when we check over WC premiums for clients, we normally are reviewing several years worth of policies. Typically we might find an error in one or two years, but not all the years we are reviewing.

But even so, an insurance company representative who was at the meeting sent an email in response, suggesting that I had greatly exaggerated this error rate. He said that if this error rate was truly this high, it would be scandalous and surely by now someone would have filed a class action lawsuit over it.

I certainly agree, it is scandalous that this error rate is so high. As I often say, in a perfect world I should have to do something else for a living. But it's not a perfect world, so I get to make my living correcting all the mistakes that the insurance industry makes. What can I say, I enjoy my work, and the insurance industry seems determined to keep me busy for the rest of my working life. Heck, there's even a second generation now working in this field, as my son Scott joined the firm more than six years ago.

His class action suggestion is interesting, but perhaps a little misleading. The errors we find are very diverse. It's not as if the insurance industry is repeatedly making the exact same error on a wide scale--it's a whole universe of different errors, involving different classifications, experience mods, and payroll audit errors.

So it's not really the kind of thing that would actually lend itself to a class action.

However, I also have to say that we're actually in discussions about a possible class action against the insurance industry, because we have found a particular widespread error that does appear to lend itself to a class action. More than that, I cannot say at this time, but stay tuned.

The PAAS that doesn't refresh

2009-07-31T21:36:00.001-07:00

I've just learned that I was sort of...slandered..at a recent conference sponsored by PAAS, the Premium Audit Advisory Service. At this insurance auditing conference, a group of insurance company auditors made a presentation about premium recovery companies, and listed my company, Advanced Insurance Management LLC, as one of them.

This "fair and balanced" presentation is online here, for your review and consideration.

In this presentation, the insurance company auditors reveal that...horrors...premium recovery firms are for profit enterprises.

Last time I looked, I believe insurance companies are also for-profit enterprises (well, all except AIG, which is now apparently a government subsidized system for vaporizing money.) So I don't see the point of trying to discredit the premium recovery industry on that score.

Mind you, I've long been critical of some of my "competitors" for their exaggerated claims and their unethical operations. And I've long advocated regulating the premium recovery industry. I've even written model regulatory statute and sent it in to the Illinois Department of Insurance, to no effect at present.

So I really don't like being lumped in with other companies, some of which are good and ethical professional service companies and some of which...are not.

But these insurance company auditors got to take some excessive verbiage from some of my competitors' websites and tar me with that same brush. That's just bush league.

While we're on the subject of PAAS, let me tell you a little about the Premium Audit Advisory Service. They publish manuals and materials for use by premium auditors so they can make sure they aren't making any mistakes that would cost the insurance companies money. Nothing wrong with that. But I don't own any. Not because I haven't tried to purchase them, but because PAAS refuses to sell their materials to anyone who isn't working for an insurance company.

That's right. PAAS, the organization that sponsored this presentation that questioned how the premium recovery industry operates, is afraid to sell their materials to anyone who doesn't work for an insurance company.

Now, as I pointed out earlier tonight in an email to one of the authors of this presentation, I've been doing premium recovery work for over 25 years. I've recovered millions and millions of dollars for clients---millions and millions of dollars that insurance companies had gotten from employers when the insurers weren't really entitled to it. And some of those millions of dollars in recovered premiums came from the very same insurance companies that employ the auditors who authored this presentation.

So their industry overcharges employers by hundreds of millions of dollars, but the ethics of my company are questionable.

Maybe I should be proud that PAAS doesn't like me.

The Public Option for Health Care

2009-06-23T10:31:00.000-07:00

A conversation I took part in the other day reinforced my conviction that we need a "public option" in whatever health care reform comes out of Washington, even though the conversation was about Workers Compensation insurance.

The conversation was with an acquaintance of mine who had formerly been a high level manager at a major Workers Comp insurer. We were discussing why some Workers Comp audits at this insurer had been billed out so late--more than a year after being completed. His comments were revelatory.

The short version of his comments is that this major insurer was absolutely riven with "confusion and delay" as Sir Topham Hatt would put it (my grandson is the world's greatest fan of Thomas the Tank Engine, so I have learned about Sir Hatt's railway.) All audits were processed out of a particular unit of this insurer, in reaction to the demands of the legendary tyrant then in charge of the insurer to improve their effficiencies.

The resuls were not what the legendary tyrant would have wished, I suspect. The processing of audits at this unit was, according to my source, the ultimate Chinese fire drill (which would be appropriate, I guess, given the attachment of the company's legendary tyrant for all things oriental.)

What does this have to do with health care reform? Only that today, the headlines are that major health insurers are insisting that they cannot compete with a "public option" health insurance source--a government sponsored plan. And these major insurers further insist that to introduce such a public option will mean that they inevitably must wither and die.

And in the face of such dire threats, I think back on this major Workers Comp insurer that couldn't shoot straight when it came to processing audits (and I'm sure the situation is likely worse there now, given recent events.) And I have to wonder how much of the cost of health insurance reflects similar "confusion and delay" scenarios. My deep suspicion is that there is a fair chunk of premium that goes to cover the various CFDs at health insurers, on top of the fair chunk that has to be allocated for profits.

I know that a government plan isn't likely to be much more efficient than these insurance company operations--but I suspect it wouldn't be much worse, either. And the competition could be healthy for everyone in the system. Might even clean up a few of those CFDs.

Twitter

2009-06-09T11:48:00.001-07:00

In what some folks will surely interpret as a sign of the coming Apocalypse, I am now on Twitter at Twitter.com/edpriz. Just what the world needs--140 character "tweets" about Workers Comp and any other thing that crosses my mind. What hath blog wrought?

The South Carolina Scandal

2009-05-13T15:58:00.000-07:00

Back in 2006, my company (Advanced Insurance Management) was commissioned to perform a study looking at how effectively the reimbursements paid by the South Carolina Second Injury Fund translated into lower premiums for employers there. What we found in that study was shocking: over 50% of the time, insurance companies did not perform the needed corrected reporting to NCCI so that the experience modifiers of employers would be reduced to reflect the reimbursements the insurance companies had received.

So in over 50% of the cases examined, employers ended up being overcharged for Workers Compensation insurance, because their insurance companies were taking the reimbursements from the Second Injury Fund and not reporting it to the appropriate rating bureau.

South Carolina enacted new legislation in 2007, in response to our findings, that required insurance companies to certify that they have made the appropriate reporting to NCCI before they actually get the reimbursements. But we wondered what had happened to those employers who had already been overcharged.

We're now working on that, and finding that the insurance industry has done nothing to address the overcharges that occurred. In partnership with the South Carolina Small Business Chamber of Commerce, we're working with individual employers whose insurers received Second Injury Fund reimbursements. So far, we're finding an even higher percentage of overcharges than we found in our original 2006 study.

This leads us to strongly suspect that the problem is not confined just to South Carolina, but instead is likely to have occurred in other states that have Second Injury Funds.

South Carolina employers can find out more here about how to check if they've been overcharged.

Employers in other states can contact us here to find out about how we can check if they've been overcharged. If your company had had any claims reimbursed by a Second Injury Fund in the past five years, it appears likely that you may have been overcharged on your Workers Compensation insurance. If that's the case, we can help correct that.

Our South Carolina Project

2009-04-27T13:51:00.000-07:00

Our new South Carolina recovery project is going great guns. This is a followup to a study we performed a couple of years ago, where we found that significant percentages of employers in South Carolina had not received the experience modifier adjustments they were due over Second Injury Fund reimbursements their Workers Comp insurers had received. We're finding significant recoveries for South Carolina employers so far, and this project is just in it's early stages.

Interested South Carolina employers can learn more about this project at www.cutcomp.biz, by the way, or by calling 800-288-9256 and choosing extension 6.

You can also read the original report we published here.

The New Book

2009-04-08T22:25:00.000-07:00

The new updated book is done, at last. It took longer than I thought it would, but Workers Compensation Insurance: A Field Guide for Employers & Others is now complete. It's a revised and updated version of my earlier book, Ultimate Guide to Workers Compensation, which went out of print earlier this year. The publisher of Ultimate Guide wasn't interested in publlishing an updated edition, so we took it on ourserlves (along with Amazon's BookSurge publishing arm.)

The actual book version will be available shortly from Amazon, but the new book is available now as a CD-ROM or pdf via email at www.cutcomp.com/ultimate/htm.

I saw reports that folks were offering their used copies of Ultimate Guide online for over $100! Sorry to deflate that market, but the new updated publication is available for a lot less than that now. So if you liked Ultimate Guide, or the even earlier (1995) book CompControl, I think you'll love Field Guide.

The new book updates a lot of the information from Ultimate Guide, and adds some expanded new material as well. So if you need a book that can help you learn to control your Workers Compensation premiums, the Field Guide is for you.

California Comp Increases Proposed

2009-03-27T11:41:00.000-07:00

WCIRB, the California rating bureau for Workers Compensation insurance, has called for a nearly 25% increase in California Workers Compensation rates. This would be a nasty coup-de-grace for California employers, who are already stressed to the breaking point by the current economic crisis (which has hit the Golden State particularly hard.) The crisis in California Workers Compensation costs had abated a bit in recent years, after some much-publicized changes in their benefits rules, but things appear to be changing again for the worse.

California can be a tough state to do business in even in good times, but the past year or so has been anything but good times for a lot of employers there. And the state's Workers Compensation system has never been particularly employer-friendly--the State Compensation Insurance Fund, or SCIF (the state fund that competes with private insurers) can be a difficult and demanding agency to deal with, and SCIF writes about half the Workers Compensation coverage in the state. Combine that with high rates and rules that make it more difficult for employers to recover overcharges, and you have a recipe for encouraging employers to set up shop somewhere else if possible.

And now, if WCIRB has its way, the Golden State may be about to become even more tarnished as a place to do business.

South Carolina Has a Very Bad Idea

2009-02-18T13:28:00.000-08:00

Legislators in South Carolina have come up with a truly bad idea. They are proposing to reduce the Workers Compensation benefits for illegal aliens. While the bill would still have the WC system pay for medical costs for injured illegals, it would deny them disability payments.

"I think the attempt is to punish a company that hires illegal aliens," said Senator Brad Hutto. But it wouldn't punish them, it would reward them.

By making serious claims less expensive if they happen to illegal immigrants, the bill would reward such employers by reducing future experience modification factors (and thus reducing future Workers Compensation insurance premiums.) It would penalize those employers who don't hire illegals because their Workers Comp insurance would not be so reduced, all other things being equal.

Perhaps even worse, it would reduce the financial incentive for employers who maintain safe workplaces. If the financial impact of workplace injuries is lower if you hire illegals, it reduces the incentive to avoid such injuries. That eventually leads to more dangerous work environments at employers who hire illegals--more dangerous for the illegals, and for those who work alongside them.

All in all, a very bad idea.

AIG Nationalized--End of an Era?

2008-09-17T12:31:00.000-07:00

Everybody who can read or turn on a radio probably already knows that AIG--American International Group--has just been rescued by the Federal Reserve for $85 billion. The U.S. government has taken a 79.9% ownership stake in the world's largest insurer, to prevent a truly catastrophic meltdown in the world financial markets. So AIG has been nationalized--by a Republican administration that once wanted to privatize Social Security and have us all invest in the stock market.

I suspect it will only be a matter of time before federal regulation of large national insurance companies if finally enacted. And the collapse of AIG certainly makes the case that more strenuous oversight of such companies is absolutely needed.

The era of state regulation of insurance in the U.S. may be about to finally end. We'll have to be careful not to throw the baby out with the bathwater, as many states have enacted truly important protections for insurance consumers. But state insurance regulators have seen their staffs, budgets, and authority eroded in recent decades, as many state governments bought into the idea that insurance should be more deregulated to encourage "innovation" and "efficiency".

Now we all get to pay for all the "innovation" and "efficiency" that was going on at AIG.

I just hope that as the Feds take over ownership of Mr. Greenberg's former imperial duchy, they check out all the dirty little secrets that were rumored to be hidden in the closet of Mr. Greenberg's office. The NCCI (National Council on Compensation Insurance) apparently figured out some of those secrets, as they filed a billion dollar lawsuit against AIG in the past year, claiming that AIG systematically dodged their fair share of taxes and assessments meant to maintain the Workers Comp Assigned Risk system. I suspect that was only the tip of the iceberg over at AIG.

Since the various states have not been able to do the job of regulating these mutating financial behemoths, and since these once arrogant empires are now begging for corporate welfare to save them, methinks it may be time to actually start exercising some real oversight over their activities. It's the Golden Rule, after all. He who has the Gold makes the Rules.

California Bracing for Comp Cost Jump

2008-09-04T09:16:00.000-07:00

California is a tough state to do business in. Just ask anyone trying to run a small or medium sized business in the Golden State, and you'll hear plenty of reasons. Workers Comp costs are likely to be near the top of their lists, and now there's new reason for California employers to groan: a proposed 16% rate increase for next year.

California employers suffered through horrendous rate increases after the WC rules were changed back in 1995 to deregulate rates. Then, more recently, there were some significant rate reductions after benefits rules were changed. But California is still an expensive state for Workers' Comp, and the 16% rate increase being proposed by the WCIRB (California's version of the NCCI) will really ratchet up the pain levels for employers who are already trying to survive the current economic headwinds.

To make matters even worse, California has the worst rules and regulations concerning Workers' Comp overcharges and refunds--it is significantly more difficult to get refunds of premium overcharges under California rules, and those rules do not allow employers to recover overcharges for as many past years as other states allow.

All in all, Workers Comp remains a compelling reason for California employers to consider moving to Arizona. And it's about to get worse.

Has Workers Comp Been Rigged For Decades?

2008-03-20T16:12:00.000-07:00

A lot of employers, in their more cynical moments, have probably felt that Workers' Comp insurance is definitely rigged against them. Now, according to the largest insurance company in the world, those suspicions may have been confirmed.

AIG is in the middle of a federal lawsuit brought by the NCCI, the National Council on Compensation Insurance. AIG is a member of NCCI, but NCCI has filed suit for a billion dollars, claiming that under-reporting of Workers Comp premiums by AIG has harmed the other NCCI member insurance companies.

AIG has already settled charges brought by a number of states over this issue--settled them by paying several hundred million dollars, without admitting wrongdoing. But NCCI says the harm done to other insurers is more than that--a cool billion dollars more.

By under-reporting Workers Comp premiums, NCCI says AIG dodged out on their fair share of assessments and taxes that help fund various assigned risk programs. And so the other insurance companies would have had to pick up the slack.

But now in federal court here in Chicago, AIG has defended itself by claiming that all the other major insurance companies have done the same, since the 1980's. AIG says that Liberty Mutual, Travelers, Hartford, CIGNA, Aetna, ACE, Sentry, and others all under-reported Workers Comp premiums for decades.

The thing is, if this is true, it would have done more than just dodge assigned risk assessments. It would have seriously distorted the data that NCCI (and other rating organizations) have used to calculate the manual rates charged on every Workers Compensation insurance policy for the past twenty years or so. Every employer who bought Workers' Comp insurance (save those in monopoly state funds) would have been overcharged, because the manual rates would have been higher than they should have been. After all, if insurers are reporting all their claims, but not reporting all the premiums they're getting in, the fundamental data used to figure out those manual rates would be skewed in favor of higher rates.

I've made my living for the past 25 years catching insurance companies overcharging employers--and then getting that money back--but even I am shocked at this latest development. I've always chalked up the errors I found to innocent mistakes made in a complex system. But what AIG is alleging would be a systemic overcharge on every Workers Compensation insurance policy that's been going on since the 1980's. The mind boggles.

Now, it must be kept in mind that this is just an allegation, made by an insurance company that already has major blots on its own ethical record. Only time (and the federal court) will tell how much substance these charges really have. But if even a portion of what AIG is saying turns out to be true, somebody's gonna have a lot of explaining to do.

The Crackdown on Executive Supervisors

2008-02-27T16:34:00.000-08:00

I got a very interesting (and disquieting) call today from an agent out in Nebraska. This agent writes Workers' Comp coverage for a lot of clients in the residential construction field, and he wanted to talk about something that was causing a lot of pain for those clients. Now, if you haven't been vacationing on Mars for the past year, you may have already figured out from news reports that residential builders are generally in a fair bit of financial difficulty, what with the collapse of the real estate boom. But what this agent called about was related to Workers' Comp, and he said it was looking to be the final nail in the financial coffin for a lot of these folks. It has to do with how Executive Supervisors are classified under Workers Comp.

Historically, code 5606 has been assigned to what are known as executive supervisors--folks who are out at the building sites but aren't directly supervising the work being done. These folks are typically working in trailers on the worksite, meeting with the foremen who directly supervise the construction workers. But, this agent said, he's recently been swamped with complaints from angry and frustrated employers, because their insurance companies are disallowing the use of code 5606 for people who have historically been assigned to that classification.

Remember, code 5606 is normally a fair bit less expensive than the construction classifications that apply to the workers who are actually doing the building. And also remember that executive supervisors tend to be fairly well-paid individuals. So changing the manual rate that applies to these workers can be a significant increase in premiums. Just what beleaguered builders don't need right now. Especially when this new scrutiny of who gets into 5606 and who doesn't represents a change for many of these builders. It isn't so much that the manual definition has been changed, but that suddenly the auditors are being a lot more picky than they have been in the past.

This conversation reminded me that this subject had been covered at last year's annual meeting of the National Society of Insurance Premium Auditors (of which I am a member.) Of course, almost all of the other members are auditors who perform payroll audits for insurance companies, so the subject matter of the presentations there tend to be from the point of view of insurance companies. And at that last meeting, it was being stressed to the assembled auditors that they needed to be vigilant and strict about which workers qualified for the executive supervisor classification.

I got the distinct impression at that meeting that the assembled auditors were being given the message that the use of Code 5606 was something they should be examining closely in future audits, as the insurance companies felt that there were a lot of workers being assigned to that class who didn't really qualify--at least, not under a strict interpretation of the rules.

Under those rules, an executive supervisor has to have an "intermediary" supervisor between himself (or herself) and the workers. And if such intermediary foremen were absent at any job sites, that meant, under the arcane rules of Workers' Comp insurance, the executive supervisor was disqualified from Code 5606 completely, even though the problem might be at only one of dozens of job sites.

Judging from the phone call from the Nebraska agent, the field auditors have been paying attention to the directives they've been receiving about the use of Code 5606--to the frustration and anger of policyholders.

And the problem is that the insurance companies are technically right about this--not surprising, since they write these rules. (Alright, technically it's the NCCI that writes these rules--but the National Council on Compensation Insurance is essentially owned and controlled by the insurance companies.)

So the only recourse for these builders may be to work to get the NCCI rules about executive supervisors changed--and that's not easy. It can be done, but you can be sure that the insurance industry won't be very cooperative. But when push comes to shove, local builders that are already an endangered species may be able to make a persuasive argument that such a change is fair and equitable--assuming that enough of them survive long enough to argue their case.

The Sound of the Next Shoe Dropping?

2008-02-11T21:32:00.000-08:00

AIG has been in the news today, and it hasn't been particularly good news. In fact, it may be the sound of the next shoe dropping in the current financial crisis that has been unfolding in slow motion for the past six months or so. AIG's outside auditors have reported that AIG has not made proper provision for losses related to declining values of "credit default swaps involving collateralized debt obligations."

What it all means is that the sub-prime mortgage mess/credit crunch mess is impacting this huge insurer. And it raises the question of how much impact will this evolving financial disaster impact major insurance companies--with resulting impact on the rates insurance consumers pay for Workers Compensation insurance and other lines of commercial insurance.

It's been generally thought that major property and casualty insurers were not so exposed to financial harm from the financial crisis that's been devastating banks and mortgage companies.
One can hope that's true, but historically broad based financial shocks have often led to shifts in the commercial insurarance market. My own gut feeling is that this current mess is far, far from over, and before things get better they'll get significantly worse. And that means the pressure will be on for higher rates.

California Blames Employers for WC Cheating

2008-01-18T10:50:00.000-08:00

Back in August, the California Commission on Health and Safety and Workers' Compensation issued a report claiming that employers cost the California Workers Compensation system billions of dollars in premiums by underreporting payrolls. This commission is a "joint labor-management body", according to their website, so it would appear that they don't have a particular axe to grind on this subject. But even so, I don't know how well this finding was received by California employers. In my experience, a fair number of them feel pretty put-upon by the California Workers Compensation system. A fairly common feeling expressed to me by employers is that the California WC system is literally threatening to put them out of business.

Having worked with a fair number of California employers, I can see their point. A lot of them are covered by SCIF, the state Workers Comp fund, and SCIF often comes across as difficult to deal with. It's not easy to make private insurance companies look reasonable, but by comparison to SCIF they are, at least in this humble consultant's opinion.

On top of that, the rules and regulations in California give employers fewer protections against premium increases than can be found in a lot of other states. One would think that the opposite would be true, but it's not. So I might suggest to the commission that they keep in mind that some of those employers that they accuse of ripping off the system might be more desperate than greedy. The overall system that California has created for Workers Compensation insurance just isn't very employer-friendly. I know that employers in most states feel that way, but in California it's noticably worse than elsewhere.

The Golden State needs to take care that they don't kill the geese that lay their golden eggs--private employers, that is, particularly small and medium businesses.

New Hampshire Contractors Face WC Jolt

2007-10-22T14:42:00.000-07:00

Small contractors in New Hampshire are facing a serious increase in their Workers' Compensation insurance premiums, due to a new law that went into effect in September. This new statute requires that anyone working on a constuction site has to be covered by Workers' Compensation insurance (or approved self-insurance). Many small contractors have routinely exempted the principal members of their LLC from coverage, covering only subcontractors. This reduces premium charges by excluding remuneration costs for those principal members from the premium calculations.

But the new law requires that everyone working on the jobsite be covered--and insurance producers are scrambing to let their LLC construction clients know about the change. Somehow the bill flew under the radar screens of many small business groups, so small construction companies impacted by the change are just now voicing their objections, as the financial impact becomes clear.

The law clarifies a grey area that exists in many states, but it is certainly going to cause quite a few financial shocks to small companies in the Granite State as their Workers' Comp audits are done.

Louisiana Biz Coalition Seeks WC Reforms

2007-08-31T12:26:00.000-07:00

A coalition of Louisiana businesses is pushing for broad reforms in that state's Workers' Compensation system, claiming that the current system "...is in a crisis situation." The group, Louisianans for Workers' Compensation Reform, cites studies by such groups as the National Council on Compensation Insurance (NCCI), the Workers Compensation Research Institute, and others, as evidence that injured workers in Louisiana stay on temporary disability longer than necessary.

The group points to reforms in other states such as California, Colorado, Delaware, Florida, Hawaii, Illinois, Kentucky, Maine, Missouri, Nebraska, New York, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Vermont and West Virginia that have reduced costs for employers.

I would only caution them, as someone who has been involved in the efforts to reform the Illinois system, to remember that not all reforms produce the promised results. Here in Illinois, the business community thought it had made a reasonable compromise by accepting an increase in certain benefit levels in return for the first-ever medical fee schedule.

So far, the promised cost savings have not materialized, and many in the Illinois business community feel it is because the implementation of the medical fee schedule has been done in such a way as to minimize any actual cost reductions. The process of actually establishing a working medical fee schedule in Illinois has been difficult, and is still not finished. And so while the increased benefits have already gone into effect, the promised cost savings from the medical fee schedule remain in the future. And may always stay that way, if some influential groups have their way.

NY Workers Comp Rates Cut

2007-07-13T11:28:00.000-07:00

New York Insurance Superintendent Eric Dinallo has ordered a 20.5% cut in New York Workers' compensation rates, based on changes to the state's WC laws enacted earlier. New York Governor Elliot Spitzer made reform of Workers' Comp a priority in his new administration, and he worked with legislative leaders to make changes in benefits and other statutes that have led to this significant rate reduction.

Spitzer may have been the bane of some businesses during his time as New York's Attorney General (which included high profile legal attacks on insurance industry abuses) but this latest news has got to be very welcome indeed to the larger business community there.

New York Imposing New WC Requirement On Out-Of-State Employers

2007-06-25T15:28:00.000-07:00

Under new regulations set to take effect on September 9, 2007, out-of-state employers who have workers in New York State will have to make sure they have valid New York coverage, either through a separate policy for New York or by making sure New York is added to their multi-state policy in section 3.a of the policy.

More details can be found at http://www.wcb.state.ny.us/content/main/Small_Business/outOfStateEmployers.jsp

New York doesn't hesitate to apply significant fines for companies that they feel don't comply with these provisions, so if your company has workers who occasionally work in the state of New York, you will want to make sure you are in compliance with the new regulations.

Class Action Filed Against California WC Fund

2007-06-15T10:08:00.000-07:00

The State Compensation Insurance Fund, or SCIF, has been hit with a class action lawsuit against the fund and some of its top executives. SCIF is the California Workers' Compensation Fund, and it competes against private insurance companies to provide Workers Comp coverage to employers in California. SCIF is the largest provider of such coverage in California.

The lawsuit seeks $25 million in compensatory damages and $50 million in punitive damages, and alleges that there were improper payments made by SCIF to some safety groups operated by former board members of SCIF.

The lead plaintiff in the action is Acro Constructers, Inc. of Burbank, and the law firm handling the suit is Pearson, Simon, Soter, Warshaw & Penny, LLP. in Sherman Oaks. It is reported that potentially there could be 250,000 members of the class action among California employers.

NCCI Sues AIG--For A Billiion Dollars

2007-05-27T10:23:00.000-07:00

There's been an extraordinary development in the world of Workers' Compensation insurance in the past few days--the NCCI has sued American International Group (AIG) for a billion dollars. NCCI, the National Council on Compensation Insurance, is the insurance industry group that writes the classification and audit manuals used for Workers' Compensation insurance in most states. NCCI is essentially owned by insurance companies that write Workers' Compensation insurance, so it's an unprecedented event for this organization to file suit against a member insurer such as AIG--and for a billion dollars, no less.

The suit stems from something that had been uncovered by New York Attorney General Elliot Spitzer: AIG had for years been reporting a lot of Workers' Compensation premium as if it were other kids of liability insurance premium instead. This enabled AIG to avoid its fair share of Assigned Risk Workers' Compensation business, which tends to be unprofitable. And NCCI administers the national pool that makes the Assigned Risk system work in most states. Thus, AIG's deceptive practices made other insurers pick up more than their proper share of this Assigned Risk business. The suit by NCCI charges that the damages to other insurers was a billion dollars.

AIG, for its part, has responded that its settlement with Spitzer for $300 million dollars should have closed the book on this matter, but NCCI doesn't seem to agree.

A lot of insurance industry professionals have pooh-poohed Spitzer's investigations of their business, but this lawsuit would seem to suggest that there was even more to the story than even Spitzer documented.

Former Ohio WC Exec Sentenced for Fraud

2007-05-09T15:16:00.000-07:00

Terrence Gasper, who until not so long ago was the chief financial officer of the Ohio Workers' Compensation fund (a monopoly state fund) has been sentenced to a bit over five years in prison for his role in an investment scandal. This is the well-reported scandal involving an investment fund in rare coins that had been promoted and managed by Tom Noe, who is currently serving a 18 year prison sentence for his part in the scheme.

The Ohio WC fund lost $13 million in the investment fraud, along with a fair chunk of its credibility.

California WC Premiums Decline

2007-05-08T11:36:00.000-07:00

The latest report from the WCIRB (California's equivalent of the NCCI) indicates that statewide premiums for Workers' Compensation insurance have declined significantly in 2006. The report states that California WC premiums totalled $16.5 billion in 2006, down by $5 billion, or 23%, from 2005. The total is down $7 billion, or 30%, when compared to 2004 figures.

This is certainly good news for California employers, who had been subjected to horrific rate and premium increases in recent years. Of course, part of the reason current premium totals show such dramatic decreases is that prior years' totals were at record high levels. Still, California businesses are glad for the relief. California labor groups are far less happy with the reforms that are largely behind the decreases, of course, and there are some loud rumblings coming from that camp that the recent reforms may have gone too far in reducing benefits for injured workers.

Workers' Compensation in California clearly remains a political football match between employers' interests and workers' interests--as it is in every state.

West Virginia Changing WC Classifications

2007-04-11T13:32:00.000-07:00

The state of West Virginia is continuing its transition from a monopoly state fund to a state that allows competitive private insurance. The latest step is to move in two steps to the NCCI classification system used in many other jurisdictions. At the moment, West Virginia still has only one Workers' Comp provider--BrickStreet Mutual Insurance is a mutual insurance company that was formed from the old state monopoly fund. But in the next few years other insurers will be allowed into the state to compete for Workers' Comp business from employers, and so it was necessary to shift over to the classification system used by insurers in other states.

The old classification system used by the state fund and BrickStreet had under 100 classification codes. Last July, BrickStreet moved to a new system with 470 classifications, and come July of 2007 will transition to the full 586 NCCI classifications codes.

This will no doubt be a source of some confusion and difficulty for WV employers, particularly in light of the fact that even though the NCCI classification system is widely used, errors in application of the system are still widespread. (Classification errors are among the most common causes of overcharges that I find in my consulting work.)

So although West Virginia is getting in step with most of the rest of the country in regards Workers' Comp classifications, employers would still be well advised to check those new classifications carefully.

The Case for Increased Regulation

2007-03-19T10:41:00.000-07:00

I read a very interesting article in the New York Times the other day (it's now archived so you have to subscribe to see a copy of the article, entitled When Regulators Knock Twice. The article explained how an old adversary of mine, an insurance company named Fremont Casualty, was run into the ground by management using (according to the NYT at any rate) a sneaky little scheme involving reinsurance for their Workers' Compensation insurance operations.

Once upon a time, Fremont was a significant player in the Workers' Compensation insurance business. They were one of the major writers of California Workers' Compensation insurance back in the 1990's. I personally got the pleasure of dealing with Fremont when they purchased the largest single writer of Illinois Workers' Compensation insurance back in the 1990's. I found their audit people to be difficult to work with, but still managed to recover overcharges that had occurred.

But Fremont spectacularly flamed out of business a few years ago, shut down by insurance regulators. And according to the NYT article, the reason for the flame out was that executives of Fremont had decided to juice up their own bonuses and earnings by rigging a clever little reinsurance maneuver. They dramatically lowered the threshold where reinsurance would take over payment of Workers' Comp claims, and then dramatically changed their underwriting standards so that they would underwrite risky lines of business at discounts. This resulted in great increases in premiums, and the reinsurers were the ones responsible for paying most of the increased claims costs that resulted. It worked fine for a while, until the reinsurers figured out the game and balked.

Fremont itself was then left with the disastrous claims results of their new underwriting standards, and it didn't take long for those costs to destroy the company.

Most interestingly, those executives and managers have, according to the Times, repeated their clever scheme in a new arena--sub-prime lending. that's because although Fremont insurance went under, Fremont General (the parent company) remained open for business in other fields. But in March the F.D.I.C. issued a cease-and-desist order to Fremont which charged that Fremont had “engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations.”

Deja vu all over again.

All of which leads me to ponder how the lack of regulation of both the insurance industry and the lending industry may have allowed companies like Fremont to pursue such ill-advised schemes, while leaving the greater society holding the bag. After all, California famously "deregulated" their Workers' Compensation insurance market back in the mid-1990's, setting the stage for Fremont and some other significant California Workers' comp insurers to pursue strategies that ultimately imploded their companies and created huge disruptions for California employers who still needed to get Workers' Compensation insurance coverage.

Our currently-unfolding debacle involving sub-prime lending appears to be another instance when lack of effective regulation has allowed exeuctives and managers to pursue business strategies that generated considerable benefit in the short term to those same executives and managers, while ultimately creating huge disruptions in vital financial markets.

The neocon view that regulation stifles innovation in financial markets would appear to be, at least in my view, fairly well discredited by the double disasters created by Fremont and their fellow travellers. Once upon a time, insurance regulators understood that rate adequacy and market stability were factors that needed to be kept in mind, lest essential markets be disrupted. But the trend in recent decades has been to diminish or even eliminate most regulation of commercial insurance and other financial industries. In the short term, there were benefits to both consumers and to the industries. But in the longer term deregulation has simply ended up making the case for the need for some level of effective regulation of insurance and financial markets. Just ask employers out in California who have been dealing with the fallout of the disasterous deregulation of Workers' Compensation insurance. Or just watch our current financial markets deteriorate as the full impact of the largely unregulated lending business devastates hedge funds, insurers, and other financial institutions. The long term costs of deregulation can be huge and hugely disruptive, while the only real "innovations" are in the form of "creative" underwriting, accounting, marketing, and, of course, executive compensation.

This may be a lesson we're all about to re-learn at great cost.

Bill Introduced to Eliminate SC Second Injury Fund

2007-03-02T11:29:00.000-08:00

A subcommittee of the South Carolina Senate has approved a bill that would eliminate that state's Second Injury Fund by 2013. The Second Injury Fund has been a contentious issue in SC in recent years, with the insurance industry lobbying to eliminate the fund.

The Second Injury Fund assesses charges against insurance companies and self-insured employers to make reimbursements for injury costs to certain workers who have prior injuries--the idea being to encourage employers to hire such workers, in spite of fears that they might be prone to further claims costs due to to those prior injuries.

A recent study by Advanced Insurance Management found that many smaller employers in South Carolina were not receiving any premium savings from the operation of the Second Injury Fund, apparently due to failures on the part of many insurers to report reimbursements received by the fund. The study has led to calls for further review of the NCCI rate information that was used to justify recent rate hike recommendations.

As in many other states, employers in South Carolina remain extremely concerned over the costs of Workers' Compensation, and the issue of the Second Injury Fund has pitted large employers and insurers against small business organizations.