Unable to reach a consensus on which new methodology would be best for projecting loss adjustment expenses for California's workers' comp carriers and their impact on the state's pure premium rate, the Workers' Compensation Insurance Rating Bureau's (WCIRB) Actuarial Committee last week disagreed with its own actuary and ultimately settled on the "none of the above" option. CDI actuaries also disagreed with the decision.

But in a unanimous vote, the committee agreed to have the Bureau stick with the methodology that it used to compute loss adjustment expense provisions in its last rate filing – interestingly enough, an approach ultimately rejected by Insurance Commissioner Steve Poizner and the actuarial staff at the California Department of Insurance.

This sets up another shootout between the Bureau's rate recommendations and Commissioner Poizner's better judgment. It has to be a rolling-of-the-eyes moment for the commissioner, who has spoken out about the Bureau's poor record when it comes to rate projections and data quality.

The impasse on the committee stems largely from disagreements over how to account for loss adjustment expenses at State Compensation Insurance Fund in calculating for statewide LAE rates. Last year, the Bureau recommended a 5.2% adjustment to the pure premium rate based in large part on carriers' higher costs for adjudicating claims. But Poizner's final decision threw out the recommendation for a rate hike and rejected the LAE estimates and the Bureau's methodology as inaccurate. Poizner's decision saved California employers about a half-billion premium dollars.

The Department looked at alternative methods after a Workers' Comp Executive article, which confirmed that State Fund controlled some 73% of all California contractors. Here's a link to the article: Does State Fund Control Contractor Pure Premium? (http://www.wcexec.com/articles/WCE00-20071121-007.htm.aspx) State Fund continues to control nearly the same percentage of contractors and also controls a majority of both the premium and policies in trucking and other classes. It also has a legislatively mandated monopoly on claims adjusting for state employees.

The discussion last week by the committee was its final say on the matter before the Bureau completes its analysis and makes and approves a rate filing.

In or Out?

Key in the dispute was whether distortion in the final LAE estimate is greatest when State Fund's data are added to the mix or when they are excluded entirely and only private carrier data are used. The Bureau used the prior approach in developing its rate recommendation last year, but the commissioner ultimately opted for the latter.

During the committee's discussion of the matter, Bob Meyer, senior vice president and actuary for Zenith National Insurance Company, steadfastly opposed excluding State Fund's data from the calculation, noting that all of the costs are related to California claims in the system. "Including them causes a little distortion, but excluding them is discounting all those costs," he argued. "I don't know which [approach] is more distorting."

Jill Petker with Liberty Mutual joined in the debate and prodded the committee to find a solution that would use all of the data available, including State Fund's.

But State Fund's increased cost drivers increase the ultimate rates.

Ron Dahlquist, senior actuary with the Department, argued the opposite point, that including State Fund's data throws off the calculation for the rest of the state. "They have too many employees that can't be released, so too much money is going [to LAE] that is really not relevant," Dahlquist noted, echoing the Department's findings from last year. The commissioner's rate order noted in part that "we are of the opinion that SCIF's increases in LAE ratios are not indicative of its post-reform expense requirements, but are instead largely due to its inability to reduce claims staffing as fast as its claims handling workload is reduced due to its reduced market share."

Rumors of layoffs at State Fund have reared up from time to time, but sources tell Workers' Comp Executive that executive decisions are not scheduled to be made at the present time but may be made before the start of 2009.

The data do show a steep increase in the ratio of incurred LAE to incurred loss during the reform and post-reform period, which has seen State Fund's market share slip from well over 50% to approximately 24% currently. Since 2004, State Fund's incurred LAE ratio to incurred loss has more than doubled— climbing from 15.2% to 38.7% in 2007.

The impact on the LAE projection for the industry as a whole is more than a three-point swing when State Fund's data are added to the mix, says Dave Bellusci, chief actuary for the Bureau, who repeatedly expressed reservations about including State Fund's ratios in the calculation. Excluding State Fund from the calculation under the methodology used by CDI in its rate decision last year results in a projected LAE ratio of 25%. Adding State Fund data and using the Bureau's existing methodology would boost the projected 2009 ratio to 28.2%, according to the Bureau's preliminary calculations.

Other Factors Considered

In addition to the issue of LAE determinations, the committee also reviewed the data set behind the upcoming filing.

The Bureau is formulating its rate recommendations on financial data from the first quarter of the year. Bellusci noted that the committee will get a chance to review second-quarter data in early September, which could result in the Bureau refiling its recommendations.

"We're not expecting the five-point swings that we were seeing a few years ago," Bellusci told the committee, noting that such a large jump would necessitate a refiling. "If it's one to two points, then we wouldn't refile."

The Bureau's Governing Committee will review its rate filing at a meeting today and is expected to make a formal filing on Friday. Watch your email for a Flash Report detailing the Bureau's final recommendation.