New Study on CA Workers Comp Market

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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.