Is The Insurance System Targeting Certain Types of Roof Inspectors?

As I think I've mentioned before, sometimes it seems like the insurance companies are worried about whether or not we have enough work, so they create serious premium audit disputes that panic policyholders (and drive them to seek us out.) In the latest iteration of this, it looks like they're currently targeting certain kinds of companies that do roof inspections, and then subcontract out the actual roofing repair.

We've gotten calls from three different such companies in the past month, all with similar stories. All these companies don't actually do any roofing work themselves--they hire independent contractors that have their own Workers Comp insurance. This is an important point, as it means that the workers who are doing the roofing repair are not covered by the policies purchased by the roofing inspection companies.

The insurance companies are developing huge additional premium charges at the audits, saying that the roofing estimators, since they sometimes go up on a roof as part of their inspection work, go into the roofing classification--which is a pretty expensive classification.

One of these small businesses just got a bill for $400,000 from their insurance company. Another got a bill for $150,000. As one of these small business owners told me, "my annual profit from the company is $25,000--how do they expect me to pay $150,000?"

The thing is, there is a separate classification that is designed for those who do roof inspections--a class that is much, much, much less expensive than the roofing class. But the insurance companies are taking the position that NCCI rules require estimators who work for roofing companies to go into the roofing class. And even though there are no actual roofers covered by the policies in question (the roofers, remember, have their own policies) the insurance companies are adamant.

So now we're going to be trying to help these roofing inspection companies avoid being destroyed by these huge and unexpected premium increases. We think we have a sound, reasonable, and fair basis for using the roof inspection class for these companies. But only time will tell if we can actually persuade the various appeal boards involved to use it for these clients, or if the insurance system will instead drive these companies out of business.

Workers Comp Insurance Deregulation: A Bridge Too Far?

In most states, Workers Compensation insurance has been deregulated to a very great extent, in the sense that the historic requirements about standardized rates, policy forms, endorsements, and rating plans have been removed from the once-strict oversight of insurance regulators.

Nowadays, many state insurance regulators don't really appear to have a good handle on what's going on out in the insurance marketplace. And so Workers Compensation insurance has moved from being the most tightly regulated line of insurance to being...little regulated, in many important aspects. This has coincided with an historic reduction in staffing and budgets of many state insurance departments of insurance.

Once upon a time, Workers Compensation insurance companies couldn't even compete much over price or policy form, as this was considered bad public policy. It was feared that price competition would undermine the financial stability of insurers, to the ultimate detriment of injured workers. But back in the 1980's, the trend began towards "open rating" in Workers Compensation insurance, which was believed to encourage price competition, which would benefit employers by harnessing competition to hold down premiums.

And arguably, this did occur to some extent--if your business was relatively low risk, with a good loss history, but decent premium size, insurers would indeed compete for your account on price. And such employers could really enjoy having a whip hand when multiple insurers competed, especially in soft markets.

But the downside of deregulation is that insurance companies in many states can just "file and use" rating plans and endorsements--that is, insurance regulators no longer get a veto of proposed new ways of pricing Workers Compensation insurance. In South Carolina, for example, insurers don't even have to file their new forms with regulators--as long as the insurance company has the policy form or manual available (you know, in the underwriting managers desk drawer or something) they don't have to file anything at all with the department of insurance. So insurance regulators no longer really know what's going on out in the marketplace.

The theory of all this deregulation is that Workers Compensation insurance can be "negotiated" between an insurance company and a sophisticated buyer. The flaw in that theory is that insurance companies almost always have a far superior understanding of the fine details of the working of their rating plans than the buyers do. Especially when the buyers are making their decisions based on proposals from an agent or broker that summarizes the premium calculation details rather than really spelling out in detail all the fine print.

At least in the old days, things were relatively standardized. But now, insurance companies can come up with complicated rating plans that only an actuary could really understand and not even the insurance regulators know what's in the details.

Deregulation has also produced the phenomenon of allowing group self-insurance trusts to flourish in many states--flourish, that is, until enough time has passed for claims costs to grow in the dark, like mushrooms, and overwhelm many of those trusts (many New York employers are learning this lesson right now) leaving businesses not only with suddenly-vanishing coverage but also unexpected liability for their share of the entire trust's losses.

Price competition has also contributed to the demise of some major insurance companies in recent decades, with resulting unpleasant consequences for employers and workers. The largest writer of Workers Compensation insurance in my home state of Illinois, back in the 1980's and 1990's, was Casualty Insurance Company, one of the early beneficiaries of price deregulation. They are no longer in business.

Neither is American Mutual, the insurance company that wrote the very first Workers Compensation insurance policy in the U.S. They vanished after deregulation took hold, also, unable to adjust to the brave new world of price competition, among other difficulties.

Now, I'm not arguing that we should go back to those long ago days of strict price and policy regulation. Employers really have benefited, I think, from price competition. But we've also lost something along the way--the ability of many insurers to really have a reliable understanding of how their insurance premiums would be calculated, for one thing. And the discipline that was imposed on the insurance industry by having some level of regulatory oversight, along with the consumer protections that came from that regulation.

The Workers Compensation insurance industry has been consolidating, with a few very large companies increasingly dominating the marketplace. Sure, there are still a lot of smaller niche players, but those niche ecosystems have been growing smaller.

Employers need to be able to rely on their Workers Compensation insurers to play fair in computing premiums and handling claims. Deregulation has, I believe, undermined the ability or employers to so rely on their insurers. Without effective independent oversight, our consulting work on behalf of employers indicates that there is a certain rottenness setting in deep behind the scenes, with some insurers not really playing fair.

Not long ago, the NCCI filed suit against AIG, for a billion dollars, claiming AIG had been systematically cheating the system behind the scenes. In its countersuit, AIG said all the major insurers were doing the same, and then some. The legal documents make for some interesting reading.And provide a lot of food for worry, if even only some of the charges and counter charges are true.

Connecticut Considers PTSD Inclusion in Workers Comp

Connecticut is considering two bills that would extend Workers Compensation benefits to workers suffering PTSD type complications. One bill would extend coverage only to state or municipal workers, the other would extend it to all workers.

CT used to include such emotional disabilities under its Workers Compensation Act, but a 1993 revision eliminated such coverage.

In an age when violent tragedies seem to be more common than ever, and when PTSD type injuries are being understood and recognized far more than in the past, this may be the humane and appropriate course correction to take. It will, of course, exert an upward pressure on Workers Compensation insurance rates and premiums, and that is never an easy sell to the business and insurance communities.

Legal Issues With Experience Modifiers

Found a very interesting article about legal issues surrounding experience modification factors. Reviewing experience modifiers (and finding ways to get them lowered by correcting errors in the calculations) has become an increasing part of our consulting workload here at AIM. Particularly with the implementation of the new NCCI formula for experience mods, and the increasing prevalence of clients (particular governmental entities) using modifiers as a criterion for project bids, more and more companies are asking us to double-check their mod calculations, and to fix any errors we find.

Such errors, sad to say, are more common than generally understood.

Texas Going All NCCI On Us

It has been reported that Texas is in the process of shifting over to using the NCCI system of Workers Comp classifications and manual rules. Historically, Texas has had the Texas Department of Insurance, or TDI, function as a sort of de facto rating bureau, while outsourcing the calculation of experience modifiers to NCCI. But now TDI has announced that they plan on transitioning to adopting the NCCI (National Council on Compensation Insurance, that is) classification definitions and the NCCI manual rules for premium computation and auditing.

TDI says they still intend to carry over some Texas-style rules into this new system, and the NCCI system is designed to accommodate state special classifications and manual rules. So a lot will depend on the details of just how much of the old rules are kept, and how many are discarded. Stay tuned for further developments, as they say.

Insurers and The Carrington Event

Back in  1859, earth got whacked with a huge solar storm. At the time, it disrupted telegraph communications but not a lot more than that. Today, a comparable event to the 1859 "Carrington Event" would be a major world-wide disaster, and insurers are now starting to contemplate what could and should be done to try to reduce the crippling damage that would result to our modern electronic infrastructure.

Travelers Now The 800 Pound Gorilla of Workers Comp

According to the National Association of Insurance Commissioners, Travelers Insurance was the largest writer of Workers Compensation insurance in 2013. Travelers wrote $4.18 billion in WC premium, or 8% of the market. Liberty Mutual was next, with $3.6 billion, followed by Hartford with $3.3 billion and AIG with $2.84 billion.

Of course, as many employers have discovered, bigger is not always better. Our experience as premium audit consultants has found Travelers' auditors to be particularly tough on policyholder audits, sometimes really stretching small points to make a big difference in the final premium bill. And the folks at Travelers are not always the easiest people to deal with, when trying to get mistakes corrected. Many insurer's audit personnel are skeptical, of course, when we first approach them about correcting errors for our clients, but Travelers seems to make it just a tad more difficult, more exasperating, to get these problems fixed. Maybe that's what happens when you get to be the 800 pound gorilla in any field.

Why Every Business Needs Someone Like Me

That sure seems like an egotistical headline for a blog post, but I hope readers will bear with me and let me explain. I'm not saying every business needs me, exactly (although that would be a nice thing, from my point of view) but rather that they need someone like me.  And this has to do with the rather unique, emerging specialty that I've been working in for the past thirty years or so. That specialty is the independent consultation and review of Workers Compensation premium charges.

Don't get me wrong--we help a lot of companies, big and small. So do our competitors, scattered around the country. But all of our combined clients constitute just a tiny, tiny fraction of all the businesses that buy Workers Compensation insurance. So despite all our best efforts at marketing and promotion, most companies don't really know our industry exists.

Yet I am firmly convinced that most, if not all, businesses that purchase Workers Compensation insurance would benefit from using the services of someone like me.

Consider this analogy: almost every business of much size hires an independent professional accountant to do their bookkeeping and taxes.  You just don't want to trust the IRS to figure your taxes, even though you could. Most businesses find it prudent to hire an independent professional because tax rules are complicated and they figure (correctly, I am sure) that the cost of such an independent professional is worth the expense to avoid paying unnecessary taxes or penalties.

Well guess what? The rules governing the computation of Workers Compensation insurance premiums are complex as well, and perhaps less well understood generally than the tax laws. Most of the people who know these rules well work for the insurance companies--and their training and management tend to focus on finding mistakes that serve to reduce premiums, and not so much on catching any mistakes that increase premium charges.

Ah, some folks say, but that's where our broker comes in--that's why we pay him those commissions. Our broker/agent takes care of that for us.

That sound you now hear is me clearing my throat dramatically. Because in every single case where we've found and fixed premium overcharges, the client had an agent/broker. And usually a good one. It's not like we only find overcharges for clients who have sloppy agents.

The problem is that agents/brokers aren't usually well-trained in the complex rules that govern Workers Comp premium computation. They know the basics, sure--but they're not specialists. And even when they do think they've spotted a problem, the insurance companies take anything they say in this regard with a huge grain of salt. The insurers tend to dismiss a lot of the input of agents/brokers in this regard because the insurance companies know that their own underwriters and auditors have a lot more training and experience in these technical areas. And they also expect that an agent will take the policyholder's side because the agent is trying to keep in good graces with his customer.

The other handicap agents and brokers have is that they can't be seen by the insurers as being too antagonistic to the insurance companies interests, because that agent may well need that same insurance company to give him a good quote on another account next week, or next month. So the agent/broker can't step on too many toes at the insurance company.

That's part of the reason why my company gets hired by insurance agents to help their clients sometimes--they understand that we can help clients when they can't.

The rules governing Workers Compensation insurance premium are complicated, as I said earlier, and can involve the interplay of multiple bureaucracies. Often, to correct an overcharge for a client, we end up working not just with the insurance company but also the appropriate rating bureau and maybe even state insurance regulators. Because these separate operators don't always work together as effectively as one might wish.

To correct an error in an experience modifier, for instance, often requires us to work with the rating bureau, a past insurance company, and possibly a different insurance company that writes the current policy. Sometimes, we also have to work with state insurance regulators, to prod recalcitrant or reluctant insurers to file the corrected reports on a timely basis.

Because we work with these fine details of the system every day, we know how things are supposed to work--and where they often fall between the cracks. It's a specialized field within the insurance industry, one that is still poorly understood by many.

But it is in the interests of businesses to understand that this specialized service exists, and how they could benefit from it.

As I often like to say, if your business doesn't trust the IRS to figure your taxes, why in the world would you trust your insurance company to figure your Workers Comp premiums? As a wise man once suggested, "Trust, but verify."