AIG Nationalized--End of an Era?

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

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?

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

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?

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

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.