Preliminary results from a statistical study conducted by Providence Publications, owner of Workers' Comp Executive, show that State Compensation Insurance Fund insures at least 73.22% of all California contractors who carry workers' comp. In some classes, it insures 70%, 80% or even 90%.
In five classes, jail and prison equipment, land clearing, floating docks, staff and stone and steeplejack, there are fewer than five risks each and State Fund has them all. In these cases, the question should be put to WCIRB as to whether these classifications of risk should belong where there is more experience to base advisory pure premiums on.
It is a data set of astounding statistics and one that means that State Fund – one carrier – controls enough of the market to affect changes to pure premium rates, to experience modifications of many of these contractors and to the expected loss rates that go into X-Mod calculations for all California employers. And because insurance is a cost that must be passed through by employers to their customers, State Fund affects how much both personal and business consumers end up paying in construction costs.
Providence Publications is releasing the results of its preliminary findings so that regulators and legislators have a fair opportunity to consider their implications while looking at State Fund's upcoming January 2008 rate filing. So far, the study does not take into consideration size criteria, payrolls or other important contractor attributes. The next iteration will include many of these criteria. It properly does not include self-insured contractors.
A chart showing the classifications where State Fund controls more than 50% of the market as of today appears at the end of this article on the next page.
Which Data Does State Fund Affect?
There are several reasons why these data are important to the industry, consumers, the legislature and regulators. Let's look at some of them.
As anyone who has ever looked at rate filing by the Workers' Compensation Rating Bureau of California (the Bureau) knows, it comes with plenty of backup. One of the most important data sets in that backup is called a
Classification Relativity Review Sheet (CRRS)
. It essentially is the statistical justification for the recommended pure premium rate.
This CRRS contains basic data that, taken in context, can be quite revealing. It shows overall systemwide payroll in the classification over the past several years (the number of years varies), and overall systemwide amount of losses in three categories: serious, non-serious and medical. Taken altogether, these are the data the Bureau uses to make rates. They are also the data that drive expected-loss data used to calculate X-Mods.
For example, if one carrier has 70% of the market in one classification, that carrier represents 70% of the data used to calculate rates. To be fair to SCIF, we must point out that our study, so far, is based on number of risks, not amount of premium.
But this is precisely why the Insurance Commissioner needs to order the Bureau to provide publicly the appropriate statistical evidence to show how State Fund affects the rest of the market and consumers. In other words, Classification Relativity Review Sheets are created on the whole data set (already a public record) and a separate set breaking out State Fund's portion and the rest of the market when State Fund represents 25% or more of the risk in any one classification.
This provides the regulator, the public (i.e., insureds) and the Legislature (which created State Fund) a fair and accurate methodology to measure State Fund's performance. This is an especially accurate measurement for adjudication of claims of all sizes as compared to the market as a whole on a class-by-class basis.
Analyzing this would offer some insight into a comparison of State Fund's efficiencies or lack thereof versus the private market. In the end, this measure will speak volumes. That State Fund will undoubtedly oppose, object to and obfuscate the issue also will speak volumes.
For its part, State Fund should welcome this opportunity to live up to its promises to be more transparent and accountable. To do this requires simple release of its own statistics from its own computer systems. Its statistics are in the Review Sheets. In the absence of a willing State Fund, or an order from the Department to the Bureau, the Legislature has several methodologies to choose from and certainly can create the necessary disclosure.
For the regulator's part, this would be a useful way to help manage a State Fund currently and clearly unable to control itself. Its claims-paying cost performance could be accurately and fairly compared and contrasted against the private market and steps, if they need to be taken, could be suggested or ordered. With size should come efficiency, but the examination and other reports from the Department of Insurance, and studies done by private consultants such as IBM and Connolly, likely demonstrate otherwise.
Such a release of information also provides each carrier in the private market with objective guidelines that it can measure itself with, and with additional statistical information that it can use to knowledgeably deviate up or down from recommended or approved pure premium rates.
This will have the additional effect of helping to analyze solvency concerns as they relate to State Fund and its rate filings and private-market conduct.
Protecting SCIF from Itself
Even more critical to this open process of ratemaking is that if State Fund for whatever reason chooses to make a reserve adjustment to its reserves in a specific line of business it has a major stake in, that adjustment drastically affects the pure premium rate charged to all employers in that class.
Such an adjustment could be a way of this public enterprise fund intentionally or unintentionally creating a scenario where the private market loses money in a specific class, thereby giving State Fund the ability to create for itself a monopoly in that class. Or it could have just the opposite effect, and it could create for itself, after attaining major market share in any one class, the ability to control its own profitability at unreasonable or unfair cost to all employers in the state.
There is certainly a widespread belief in the marketplace that this is precisely the technical methodology State Fund used in the mid-1990s to end the existence of small California carriers and create for itself a market share of unheard-of proportions.
We know, for example, that in the period from 1999 to 2002, State Fund was successfully sued by private litigants over its reserving methods. Those reserves were found to improperly increase X-Mods by reserving at a maximum probable loss.
But what we don't know is the effect this practice had on development of pure premium during this same period and whether, in fact, SCIF ever changed its reserving practices.
One of the questions that we hope the Commission on Health and Safety and Workers' Compensation will address in its study mandated by SB 316 (Yee) is whether this reserving practice, and the data it generated, gave a false impression of how the system was performing, leading to inadequate rates in the private market while SCIF sat in an over-reserved position.
Given SCIF's unique status, the question is: Did it in fact over-reserve during this period rather than increase its surplus? This is important because over-reserving would have required it to charge much higher rates. Did SCIF data inflate pure premium, and its own loss ratios, leaving the private market to react with deep discounts it thought could be sustained? Is what occurred during this critical time, in essence, "predatory reserving"?
To the extent that State Fund writes a certain amount of business, say 25% or more of the total in one class, it needs to be transparent and its results need to be separated out of the whole. if only to view for the sake of honesty and accountability.
The current rate law is premised on the proposition that competition forces prices down. Although this is currently viewed in terms of the market as a whole, interaction between buyers and sellers of insurance is more on the classification level than among all businesses throughout the state. Clearly, classifications with low pure premiums are seeing very aggressive competition in today's marketplace.
But equally clear is that certain classifications are not competitive. In these classifications, the rate law is not working because there is no downward pressure on rates coming from demand for efficiency that a competitive market creates. In these cases, consistent with the rate law, the Commissioner is obligated to intervene and make sure these businesses are charged a premium that reflects their true costs.
Is There a History Here?
A couple of years ago, State Fund needed to bulk up reserves by a billion dollars to keep the Garamendi Department off its back. How did it manage to raise so much cash so quickly? And was this at the expense of hundreds of thousands of small employers who had nowhere else to go precisely because the figures were manipulated? Or could it have been at the expense of members of some of 280-odd groups in classes where State Fund controlled most of the premium? Perhaps members of those groups thought they were getting as good a deal as possible?
2004 and 2005 should be stable, as far as premium decreases are concerned. Nevertheless, if SCIF's numbers drastically affect LAEs in total, why is it fair for employers to pay more through higher X-Mods when other carriers, which have premium results on the rise, may have comparatively lower expenses?
It would be interesting to see what the numbers would be without SCIF. It would be fair (depending on the results of the analysis) to approve pure premium rates without including State Fund's results in some classifications and to let SCIF make adjustments to its rates to alleviate its own situation, which anecdotally runs counter to the market as a whole. It also would be a lot fairer to California employers who have X-Mods, most of which are not insured by or are being moved out of SCIF by their brokers.