I just returned from two days working with independent agents in West Virginia. They are boning up on NCCI's complex experience rating model, in preparation for a radically transformed marketplace. Long a monopolistic state, West Virginia is half way toward becoming a competitive market. Under the transition, Brickstreet Insurance, a creation of the legislature (and spin off of the monopolistic operation), will manage the entire system until July 2008. At that time, the competitive market opens for business.
Given the state's huge unfunded liability for comp claims (just under $3B), given years of operation under an inefficient state bureaucracy, this transition is not going to be easy. West Virginia has developed a true "culture of disability" - where one in seventy lost time claims turns into permanent and total disability (the next closest state comes in at a rate of one in 220).
Thus the transition is not just from monopoly to competition. It involves transformation of a culture from disability entitlement to a priority on return to work. For the first time, it involves the mobilization of the independent agent network: agents never really had a role in the state's monopolistic comp system. Suddenly, they have a crucial role to play in guiding their clients through the bewildering choices of an open market. Agents will soon find themselves advising clients in a line of insurance long off the radar screen. They have a lot to learn and not a whole lot of time to learn it.
Who Pays for Reform?
Comp reform is about reducing the cost of insurance, so reform boils down to one key issue: who pays? Where are you going to find economies in the system? In West Virginia, two parties will pay for most of the reforms:
Injured employees bear the brunt of the cost savings. Benefits, traditionally very generous, have been cut. Weekly indemnity rates have been lowered and the duration of temporary total disability has been cut in half (to two years). The system will rely less upon permanent total awards. In addition, those awarded permanent total benefits will have to undergo periodic independent medical exams to determine fitness for work.
Over time, employers are also going to pay, in the form of higher premiums. To be sure, NCCI has announced a reduction in rates. That's good public relations. But we know that, historically, the premiums have fallen substantially below the benefits paid (hence the humongous deficit). Claims have been significantly under-reserved. Going forward, in a fully accountable and truly competitive system, it's "pay as you go" - and that means employers with high losses are eventually going to see substantially higher costs. In addition, industries that have been subsidized for political reasons will now pay their own way. Their costs are going up immediately.
There are about 36,000 businesses covered by workers comp in West Virginia. Up until now their premiums were the result of an idiosyncratic and not very effective experience rating model, combined with completely inadequate claims reserving practices. There was very little accountability in the old system. The new system operates under NCCI's exacting rules, which are tough, fair and proven. However, it may take as long as five years for the NCCI system to really take root. Because there are inadequate claims reserves for the rating years between 2003 and 2006, the experience mods generated from now until 2011 are going to lack full credibility. Indeed, because the reserves understate ultimate losses, experience mods for 2007 through 2010 will be artifically low.
As the temporary guardian of the entire system, Brickstreet faces enormous challenges. They have to ramp up to serve 36,000 employers, even though the ramp up will build excess capacity that is needed only for a year or so. At the same time, Bricksteet has to build a lean and efficient delivery system for key insurance operations: claims, loss control and underwriting. Over the next 18 months, they face relentless pressures of both quantity and quality.
How much business can Brickstreet manage effectively? What should their market share be? While it's natural for Brickstreet to want to hold onto as much of the market as possible, that's not necessarily what is best for West Virginia. In a healthy, competitive marketplace, Brickstreet's share would probably be less than half the employers and half the total premium. If Brickstreet garners much more than that, the state could well drift toward "monopoly" by another name.
Follow the Yellow Brick Road
The good folks at Brickstreet and the hundreds of eager independent agents in the state now stand at the beginning of the yellow brick road. This is an exciting, but potentially overwhelming time. As with most roads in that beautiful, mountainous state, the yellow brick road winds back and forth on itself. Driving north, the road wends south, following the base of a mountain. If you're in a hurry, you won't get there. If you go too slow, opportunity may slip through your grasp. While West Virginia is finally on the road to a viable workers comp system, I'm not sure how long it will take to reach the Emerald City - where employees receive fair benefits and stay productive, where employers focus on risk management and pay a fair price for their insurance and where the tin man finally gets his brain. (Post script: Oops, tin man gets a heart. See reader comment below).