Friday, August 5, 2022

A Somewhat Unusual Phone Call This Morning

 Got a call this morning from the UK, which is somewhat unusual for me, as my specialty is consulting on the US system of Workers Comp insurance pricing. But this caller said that his company had recently purchased a US-based operation, and had some questions about our somewhat unique system.

The American system of Workers Comp coverage, using private insurance companies to a great extent, is different from what is done in most other places, after all. This caller wondered about why the manual rates on his policy were significantly higher than NCCI rates would suggest.

I got to explain the modern development where, in most states, insurers are allowed, and even encouraged, to file and use their own manual rates for Workers Comp, often using NCCI rate components as a base but ultimately coming up with their own particular schedule of rates. This is in marked contrast to the way things were in the halcyon days when I first began working with Workers Comp insurance, back in 1978.

Back then, most states required insurers to all use a single schedule of manual rates. The theory, back then, was that price competition might not be in the best interest of the system's stability. But that began to change, and change rapidly, in the very early 1980s.

Nowadays, the operating theory is that "price competition" will benefit employers and help hold down insurance costs. Regulators thought this would even reduce the need for oversight of Workers Comp insurance, with a somewhat naive faith in the power of the marketplace.

The pricing of Workers Comp insurance is complex enough so that insurers very quickly figured out how to turn this "competitive rating" system to their advantage. It is now common, in voluntary market policies, for an insurer to underwrite via a "loss pick"--forecasting the losses they expect an employer to have during an upcoming policy and then determining what premium they need to charge so that the account will be profitable.

The insurer then essentially works backwards from that premium, figuring out how to utilize classifications, manual rates, and other rating factors to have the premium come out to where they want it.

This rather turns the carefully-constructed system of WC premiums on its head, of course. And makes it difficult for policyholders to truly comparison shop, because the pricing system is now fundamentally opaque in important ways.

In our consulting work, of course, we manage to still figure things out, and I guess I could be thankful that the insurance industry has made things so that it requires an outside expert to figure out if they're being overcharged. Heck, they inadvertently created my life's work, as I've now spent more than half my life (and the majority of my working life) doing exactly that--identifying and correcting the hidden overcharges the US system is prone to.

It's been an interesting career, and it's (God willing!) far from over. Nowadays, we're busier than ever, figuring out the latest ways some insurers have devised to generate higher premiums, all while making it harder to figure out their pricing mechanisms.

It's a unique niche, I suppose, but it suits me. And people like my UK caller seem to appreciate my efforts. Employers like us, it seems, even if insurers sometimes don't.

Wednesday, March 9, 2022

Weaponizing Workers Comp Insurance Against Small Business

 In just the past week, I’ve been contacted by multiple small businesses, located in disparate states, with a shared problem: their insurance company is trying to put them out of business.

Now, of course, that isn’t really the primary objective of these huge insurance companies. It’s just that they don’t give a shit. They think they are owed money for Workers Comp insurance—a lot of money, in fact—and thus these financial giants have put in motion their standard operating procedures for obtaining what they believe is owed them.

And that is how Workers Comp insurance gets weaponized into a very efficient financial equivalent of a thermobaric bomb.

Consider one of these cases, a small construction company in Georgia. This company was required by state law to buy Workers Compensation insurance, so they reached out to a local insurance agent. They were a small company so the insurance agent placed them into what’s known as the Assigned Risk Plan—a state-sanctioned insurance industry mechanism that accepts all applicants, even very small businesses that insurers aren’t normally much interested in.

The premium charge for that policy was $1,500.00.

At the moment, the insurer is now seeking, years after the policy ended, over $700,000 from this small business, for that $1500 policy and the subsequent policy (which the small biz also bought for about $1500).

So a small and unsophisticated construction business bought two Workers Comp policies, policies that state law required them to buy, and now, years after those policies ended, they are on the receiving end of a bill for over $700,000.00.

This is not an aberration. This is not some weird one-off situation. This is an everyday occurrence. I know, because I get calls and emails almost every day from small business owners in the same kind of situation.

Around our office, we call them Shock Audits.

It is difficult to imagine any other industry where this sort of thing could occur, much less be commonplace. Insurance, after all, is supposed to be regulated by state agencies. And Workers Compensation is, according to insurance industry spokespeople, the most highly regulated line of insurance.

And yet.

We have a system that often drives small employers out of business, or saddles them with huge unexpected costs, for something that they are required to purchase. A system that routinely sells an insurance product that is priced very low at the outset, only to balloon outrageously after the policy has ended.

Stay tuned for more information to come on this subject.

Monday, March 22, 2021

Today's Workers Comp Shock Audit Phone Calls

 As I have often written in the past, it's a rare day at my office that we don't get a phone call or email about a Workers Comp "Shock Audit" from some employer, somewhere in the U.S. Today I got two.

The first one, this morning, was from a small biz in New York. This gentleman operates an import/export type logistics business. He insured his business through the New York State Insurance Fund, and bought a policy for only a few hundred dollars, as he was the only worker at his company. Or so he thought.

He called me because he now has a "Shock Audit" from SIF for $50,000. He's not absolutely sure how SIF managed this bit of legerdemain but it appears to involve him being charged for when he hired independent trucking companies to move some goods and he didn't get Certificates of Insurance from them.

I think we can likely help him straighten this out, once we get all the documents and paperwork from him regarding this Shock Audit. Most of these trucking companies didn't even operate in New York State, so it does make one wonder how an insurer that only insures an employer's New York liabilities is charging premium for those trucking companies. My initial impression is that there is a very good chance we can help reduce this audit bill substantially.

The second call I got today, though, is even more extreme. The call was from a non-profit agency in Georgia, an agency that helps Hispanic businesses. The Shock Audit involves a small roofer who bought a policy for around $1,000 and now has an audit bill of $600,000.00.

Yeah, that's not a typo. The non-profit is going to serve as a translator tomorrow, as the small business owner isn't fluent in English. Interestingly, the non-profit person who called me said this is far from the only such case they've seen like this. It appears these Shock Audits have been clobbering an awful lot of small businesses.

As Harry Bosch put it, you have to follow the facts. So I can't yet say what the odds are of helping this second Shock Audit. But based on other, similar cases I've seen in recent years, I have some expectations of what might have happened. We'll find out tomorrow if my theories hold water or if the insurer found some new and innovative ways to turn a $1,000 policy into a $600,000 audit bill.

I only know this. If there are errors in these audits, we will find and reverse them. Because that's what we do.

Saturday, February 6, 2021

Forty-Three Years Working With Workers Comp Insurance--Some Observations

 I started in the wonderful world of Workers Compensation insurance--still often called "Workman's Compensation" back then--in 1978, working at the late, lamented insurer American Mutual. American Mutual had, according to the company lore, written the very first "Workman's Compensation" insurance policy in the U.S., back in 1911. The company specialized in what we now call "Workers Compensation" insurance, and so they provided a very thorough training program to their Industrial Account Representatives, as they called their in-house insurance producers. They shipped me out from our offices in Chicago to a classroom they ran out by the Home Office near Boston, for an intensive three week course covering the fundamentals of underwriting, pricing, and auditing this unique line of insurance. 

That course was taught by a remarkable guy named Don Barber, who had an engaging and energetic way of covering materials that, in other hands, might have been dry as dust. 

Here I am, forty-three years later, still working with Workers Compensation insurance every day, and still using many of the lessons Don Barber tried to teach us, all those years ago. And yet, a great many things have changed in the field. Not all of them for the better, I think, although a great many of those changes have produced genuine benefits for many. Occasionally, those changes even serve the interests of the employers who have to buy the insurance. But some of those changes have eroded important things that were once viewed as inviolable principles that were fundamental to Workers Comp insurance.

The biggest change I've observed over these forty-three years is the erosion of regulatory oversight and control over insurance companies, along with significant changes in underwriting practices.

Back in the day, Workers Comp insurance was pretty closely regulated. Every company had to use the same rates, the same classification rules, the same experience rating rules. Innovation was discouraged, as it was felt that it was more important to maintain uniformity and predictability for policyholders, and to preserve financial strength for insurers.

But starting in the 1980s things began to change. Insurance regulators moved to allow price competition in Workers Compensation insurance, something that had been virtually impossible before. In 1978, American Mutual and other insurers differentiated themselves largely by the services they could provide for loss control, as pricing was pretty uniform. Then American Mutual introduced a rather revolutionary kind of policy, a sliding scale dividend policy that offered smaller employers the possibility of premium returns if losses were favorable--a feature previously only available to larger employers who were eligible for Retrospective Rating plans.

Then regulators in various states began to allow actual competition on filed rates and greater use of schedule rating. In Illinois, an insurer named Casualty Insurance Company took early advantage of these changes, filed their own manuals and radically different rates, and very quickly grew from nothing to the largest Workers Comp insurer in the state.

It took a while for more traditional insurers to catch on. I remember American Mutual seeing its book of Illinois business rapidly decline as Casualty swooped in and took policyholder after policyholder away. The oldest writer of Workers Comp insurance didn't realize it right away, but their days were numbered.

Today, most states don't really have much real oversight over Workers Compensation insurance pricing. They review and approve manual rules produced by rating bureaus like NCCI and WCIRB but there it often is a bit of a Potempkin Village these days. In my home state of Illinois, the Department of Insurance has seen an exodus of those who had real experience and knowledge of Workers Comp insurance. An older generation of regulators has retired or been forced out through budget cuts and those remaining, even with the best of intentions, are overworked and under supported by higher ups.

So the trend has been for insurers to underwrite policies without so much regard to figuring out things like correct classifications for a particular employer. I've seen sworn testimony from insurance company personnel that the prevailing attitude is to issue policies without exercising any real judgement about classifications initially used on a policy, with the thought that any errors can simply be caught on the audit.

That kind of attitude sets up employers for frighteningly expensive "Shock Audits" where classifications (or allocation of payroll among classifications) is changed after a policy ends, leaving an employer with a massively higher premium bill for a policy that's already expired.

It also fostered the environment where an insurer could market a program like EquityComp, where the details governing the ultimate cost of the insurance policy were so complex as to be incomprehensible to employers and even many of the insurance agents selling the policies. This ended in tears for many employers, when very large bills for additional premium came in and the explanations for those costs may as well have been an explanation of quantum mechanics. In Esperanto.

It's also fostered the huge growth of complex Large Deductible policies as well, where the ultimate cost of the insurance is determined by complex and proprietary formulas that are often poorly understood by those buying the insurance. It's only when the bill for huge additional premiums arrive that some employers start to realize they didn't really understand the pricing of the policies they purchased, to their eventual regret.

And even in smaller policies through Assigned Risk plans in many states, the concept of underwriting only at the time of the audit is a common one, causing Shock Audits a'plenty for smaller employers who often have only a very rudimentary understanding of this line of insurance. And insurance regulators typically can offer only very limited assistance when those Shock Audits threaten the existence of a small employer, because of deregulation and diminished authority and staff at many insurance regulatory agencies.

So in forty-three years, Workers comp insurance has gone from being tightly regulated (arguably too regulated, perhaps) to something that is, in this writers view, almost unregulated, in a practical sense. Policy forms are still filed, rates are still reviewed, but too much emphasis has been placed on using competition alone to regulate the pricing of Workers Compensation insurance. While that approach can offer some benefits, it also encourages large and powerful insurance companies to take advantage of employers, especially small employers, in the pricing of insurance that is a required purchase for most businesses.

Insurance regulators have been gradually enfeebled and hobbled in many states, and while this might make life easier for insurance companies it has not, in my view, been in the interests of employers.

Thursday, January 21, 2021

Nebraska Legislators Introduce Covid-19 Workers Comp Presumption

 Out in Nebraska, legislators have filed a bill to make COVID-19 infections presumed to be compensable for first responders and other designated types of workers. Now, so far, I've been unable to find specifics about which categories of workers are included in this bill--which has not yet been passed into law, btw. 

The other interesting aspect of this bill is that is specifies that no COVID-19 case can increase an employer's Workers Compensation insurance premiums, or experience rating, or modifier. So that should be an interesting thing to handle behind the scenes, if the bill passes as currently written.

Stay tuned for more details as I can find them out.

Monday, January 18, 2021

Another Shock Audit Illustrates What's Wrong With Workers Comp For Small Biz

 I know I sound like a broken record, going on about these Shock Audits for Workers Comp we see just about every day from some small employer somewhere in the U.S. But I keep writing about it because it is such a widespread problem and yet is on no one's radar screen.

So this particular small biz is from my home state of Illinois. He was in the construction biz, doing home remodels and he bought an Assigned Risk policy. The policy was sold to him as a Minimum Premium policy with premium of $1,500 and ran from 6-15-2019 through 6-15-2020. After the policy ended, the insurance company sent out an auditor. And after the auditor was done, that $1,500 policy had turned into a bill for $179,070.

Can you imagine any other business service a small biz might purchase that could legally get away with that?

The worst thing is that, for this particular Shock Audit, there doesn't appear to be a lot I can do to reduce the bill. Because everything appears to have been done according to the rules. It's just that the rules suck.

Let me be more specific. The rules are largely written by the insurance industry, for the interests of the insurance industry. And that's why a small business owner can be sold a policy for $1,500 and then, a year later, get a bill for $179,070.

That's because, in Illinois (and most other states) independent contractors paid on a 1099 basis get treated, for Workers Comp insurance purposes, just the same as regular W-2 workers. And this particular business used a fair amount of 1099 labor during the policy.

Only nobody explained that to this small business when the policy was sold. And nobody's required to explain it. And in the normal course of the insurance business no one does explain it.

This small biz is based in Chicago. The policy was sole by a small agency out in Frankfort, Illinois, way out in the south suburbs. And because it's an assigned risk policy, the agent makes very little money in commissions. But if you sell a lot of these tiny minimum premium policies I suppose you can make a bit of money.

But agents don't typically spend much time with such accounts--who could afford to? But that means these insurance agents are just order-takers. Order takers who commonly don't take the time to explain to these tiny accounts about the potential for these Shock Audits.

And because insurance agents aren't required to be anything more than order takers (unless they voluntarily start to offer advice, thus creating some additional professional duties) the small business owners who use their services don't really have any recourse against the agents who sold them these policies.

Yes, insurance agents aren't legally treated the same as other professionals like an accountant or attorney, even though many insurance agents aspire to similar professional status. So unless the agent can be shown to be acting as an insurance advisor, in addition to just selling insurance as an order taker, the small biz owner on the receiving end of one of these Shock Audits has no recourse against the agent who sold the policy.

And the insurance company? Heck, they're just charging the premium that's really due under the rules. Too bad the system allows these minimum premium policies to be sold without making sure somebody is really explaining how these Shock Audits can happen.

Insurance companies and agents aren't required to provide any simple and clear warnings about this at the time the policy is sold. But insurance companies sure do love to provide lots of explanations after the policy has ended and they are trying to collect one of these huge Shock Audit premiums.

See what I mean about the rules being largely designed for the interests of the insurance industry?

Now, fortunately, a lot of times I can find ways to reduce these audits, because the insurance system still manages to build in overcharges into these audits a lot of times, overcharges based on errors in classifications or payroll determination or experience modifiers. But I can't help all victims of Shock Audits, alas.

And so, pretty much every day, I get a phone call or email about another Shock Audit.

Monday, December 7, 2020

The Shock Audits Keep On Coming

 I know I've visited this subject before, but it bears repeating. Just today, I had two more small contractors reach out to me, each one a small employer crushed under a Workers Compensation insurance Shock Audits--where the premium developed after the policy has ended is far, far larger than the employer ever anticipated, based on the original policy premium.

One was an email from a Chicago small contractor, who bought a Workers Comp policy for $1,515.00, but who has now received an audit bill for $177,555.00 in additional premium for the policy.

The problem, as it often is, was that no one explained to this small business that payments to subcontractors would be picked up just the same as payments to regular direct employees of his company. This small biz had purchased an Assigned Risk policy, with Minimum Premium, and as is so common in such situations the insurance agent had not taken any time to explain the potential for this particular trap.

Agents who sell Assigned Risk policies to tiny employers often don't spend much time and effort explaining how the premium charges will ultimately be computed, after the policy has ended. And so these tiny employers are left thinking their Workers Comp insurance will cost only $1,500 or so in premium, only to be traumatized when they get the Shock Audit billing, after the policy has ended.

You might think such small employers might have a basis for holding the insurance agent responsible for this SNAFU, but that is not such an easy proposition.

Unlike professionals like accountants or attorneys, insurance agents typically have a much lower professional responsibility, generally. As long as the agent obtains the insurance requested, or explains that it can't be obtained, and doesn't steal money from the insured, the agent's professional responsibilities are generally viewed as having been satisfied--unless, and it is a big unless, the agent has voluntarily started serving as an insurance advisor or otherwise voluntarily taken on greater duties towards a client. But absent that, insurance producers typically have a very low level of professional responsibility.

And when producing Assigned Risk Workers Comp policies for tiny clients, agents often just don't spend much time or effort advising clients about potential problems with the insurance.

So in this case, it doesn't appear the insurance company is necessarily wrong with this huge additional premium increase--although I'm still checking it to see if there are any potential avenues for reducing the bill--it's just that the insurance industry operates in such a way that these Shock Audit scenarios happen commonly.

I know, because I get the phone calls and emails when the bill arrives, every darn day. Sometimes I can help reduce the bill. Sometimes not. The devil is always in the details.

But it shouldn't be such an issue for small employers. Obtaining Workers Comp insurance should not constitute an existential threat to small business, and yet it does, surprisingly often.

Insurance companies tend to assume insurance agents explain all this stuff at the outset. They also assume most business people, even really small business managers, already understand these details.

Based on all these calls and emails, those assumptions too often don't hold up, with tragic results for small business.

My second Shock Audit contact today was from a Massachusetts small contractor. I'll cover that one in a separate post.