Wednesday, February 27, 2008

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.

Monday, February 11, 2008

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.