A Somewhat Unusual Phone Call This Morning

 Got a call this morning from the UK, which is somewhat unusual for me, as my specialty is consulting on the US system of Workers Comp insurance pricing. But this caller said that his company had recently purchased a US-based operation, and had some questions about our somewhat unique system.

The American system of Workers Comp coverage, using private insurance companies to a great extent, is different from what is done in most other places, after all. This caller wondered about why the manual rates on his policy were significantly higher than NCCI rates would suggest.

I got to explain the modern development where, in most states, insurers are allowed, and even encouraged, to file and use their own manual rates for Workers Comp, often using NCCI rate components as a base but ultimately coming up with their own particular schedule of rates. This is in marked contrast to the way things were in the halcyon days when I first began working with Workers Comp insurance, back in 1978.

Back then, most states required insurers to all use a single schedule of manual rates. The theory, back then, was that price competition might not be in the best interest of the system's stability. But that began to change, and change rapidly, in the very early 1980s.

Nowadays, the operating theory is that "price competition" will benefit employers and help hold down insurance costs. Regulators thought this would even reduce the need for oversight of Workers Comp insurance, with a somewhat naive faith in the power of the marketplace.

The pricing of Workers Comp insurance is complex enough so that insurers very quickly figured out how to turn this "competitive rating" system to their advantage. It is now common, in voluntary market policies, for an insurer to underwrite via a "loss pick"--forecasting the losses they expect an employer to have during an upcoming policy and then determining what premium they need to charge so that the account will be profitable.

The insurer then essentially works backwards from that premium, figuring out how to utilize classifications, manual rates, and other rating factors to have the premium come out to where they want it.

This rather turns the carefully-constructed system of WC premiums on its head, of course. And makes it difficult for policyholders to truly comparison shop, because the pricing system is now fundamentally opaque in important ways.

In our consulting work, of course, we manage to still figure things out, and I guess I could be thankful that the insurance industry has made things so that it requires an outside expert to figure out if they're being overcharged. Heck, they inadvertently created my life's work, as I've now spent more than half my life (and the majority of my working life) doing exactly that--identifying and correcting the hidden overcharges the US system is prone to.

It's been an interesting career, and it's (God willing!) far from over. Nowadays, we're busier than ever, figuring out the latest ways some insurers have devised to generate higher premiums, all while making it harder to figure out their pricing mechanisms.

It's a unique niche, I suppose, but it suits me. And people like my UK caller seem to appreciate my efforts. Employers like us, it seems, even if insurers sometimes don't.