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.