AIG Settles With Regulators For $100 Million

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

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

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

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

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

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?

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

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

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

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

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

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

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

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?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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?

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

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.