Anyone involved with policy making knows that insurance rate filings can have, how best to put this, political dimensions.
Case in point: Last week, New York Governor Andrew Cuomo and his Insurance Department of Financial Services stuck their collective fingers into the holes in the dike holding back a workers' compensation cost Tsunami.
Here's what happened and what we think it means for the future. The New York Compensation Insurance Rating Board (NYCIRB), which in New York functions much like the National Council on Compensation Insurance (NCCI) functions in most other states, had filed a loss cost rate increase request of 11.5% to be effective 1 October 2012 (we'll come back to that in a bit). After due consideration, the Department of Financial Services rejected the Rating Board's filing, ruling that there would be no increase in loss costs. Result: status quo.
In his remarks about the decision, Governor Cuomo said, essentially, that the last thing New York's employers needed, given the economy in which they are forced to exist, was an increase in the cost of workers compensation. Amen to that. The Governor also said that the insurance industry had not taken fully into consideration the decrease in costs associated with reforms enacted in 2007 under the Spitzer administration.
It's a great picture - reforms enacted, costs go down, everybody's happy. If only that were true. There are a number of fact-based reasons why it's not.
We talked with Consulting Actuary Scott Lefkowitz, FCAS, MAAA, FCA (Lefkowitz has more initials than I have fingers), a partner at Oliver Wyman, a leading global management consulting firm with offices in more than 50 cities across 25 countries and a member of the Marsh & McLennan companies. Mr. Lefkowitz specializes in workers' compensation and operates from Oliver Wyman's Melville, NY, offices. In addition to consulting to many of New York's employers and reviewing loss cost filings for numerous regulators, he offers expert testimony in many jurisdictions. His testimony with respect to the Rating Board's filing and his comments following the Department of Financial Services's rate request rejection offer a stark contrast to the optimistic (perhaps a better word might be "hopeful") remarks of the policy makers and politicians. His public comments and testimony are here: NYCIRB Hearing 2012 Comments with Cover Letter (PDF).
In the first place, there is the indisputable fact that the 2007 reform has just about doubled the maximum indemnity benefits paid to injured workers, from a pre-reform maximum of $400 per week (which had been the maximum since the early 1990s) to $792, effective 1 July 2012. That maximum is still lower than most all of the industrialized states. Even so, consider this - according to the recently released 2012 Edition of NCCI's Annual Statistical Bulletin, the average cost of a lost time claim across all NCCI administered states for 2008 adjusted to a final cost basis is $47,800. However, when the NYCIRB publishes data claim costs, it projects only to what is called a 9th report, a subtle, but important, distinction. For 2008, the NYCIRB-published average cost of a lost time claim in New York is $61,700, which is nearly 30% higher than NCCI's all-state average. But this is not even at a final cost basis. When Oliver Wyman's Lefkowitz analyzed New York's data and projected to ultimate, the 2008 figure was $73,000, making it one of the highest in the nation. And he projects 2012's ultimate cost to be about $100,000. Wow! (Oliver Wyman's and Lefkowitz's analysis of New York's costs and trends) (PDF).
Then there are the employer assessments, and there are five of them. We'll just mention the big three, and look at them relative to indemnity dollars paid. These include:
- The slowly winding down Special Disability Fund (the SDF is New York's version of the 2nd Injury Fund), currently assessed at 21.8%
- The Reopened Case Fund, which since reform has grown from 3.5% to 13%
- The funding of the Workers' Compensation Board at 6.5% (not to be confused with the New York Compensation Insurance Rating Board).
Taken together, in 2012, New York's assessments equate to 51% of every indemnity dollar paid in the state, or about 21% of premium. New York's self-insured employers are assessed based on indemnity dollars paid. Employers purchasing insurance are assessed based on premium. Either way, no employer can escape from these extraordinarily large additional charges. The hope of the 2007 reform was that, by closing down the SDF, costs would decline significantly, but that hasn't happened yet, and it won't for a few more years. Meanwhile, New York's employers are stuck with the highest claim costs and the highest assessments in the nation.
Next, one of the major pieces of the 2007 reform was the elimination of lifetime benefits for permanent partial disabilities. These were to be capped at 10 years, which, on its face, could save significant money for the system. However, there is what is called a "hardship" provision as part of the 2007 reform, open to claimants with at least an 80% impairment rating. They can appeal the 10 year cap based on hardship, and it's not a wild stretch to suggest that the Board will approve a majority of these appeals, leading to lifetime benefits for the most seriously impaired and much less cost saving than the reform predicted.
So, back to the NYCIRB's 11.5% loss cost increase request. Built into the filing was a somewhat unusual qualitative adjustment downward because the Rating Board believed, without stipulating evidence, that New York's insurance carriers were over-reserving lost time claims. Without that highly questionable downward adjustment Mr. Lefkowitz wrote that the increase would have been not 11.5%, but 28%.
With the now 0.0% rate increase, Lefkowitz and Oliver Wyman contend that costs in New York today are just slightly less than costs prior to reform, before consideration of assessments. With consideration of assessments, which have grown from about 30% of every indemnity dollar paid in 2007 to over 50% of every indemnity dollar paid in 2012, workers compensation costs in New York today are even greater than they were prior to the 2007 law change. He compares this with post reform costs in other highly expensive states, such as Florida and California. Florida's reforms have decreased costs by about 60%, California's by 66% (in fact, California's costs are at a level not seen since 1999). However, Florida, California and other reform states will have to go some to beat the decline in Massachusetts, where, due to reforms enacted in 1992, rates are now equal to what they were in the mid-1980s.
We will continue to watch events unfold in New York.