Tuesday, June 4, 2013

Surprise! PEOs Not As Bad As Thought

Gomer Pyle, the television character played by Jim Nabors on the Andy Griffith Show in the early 1960s catch phrase was, "surprise, surprise, surprise!"

The National Council on Compensation Insurance (NCCI) says just that, as its most recent report on the Professional Employer Organization (PEO) industry refutes the common perception that PEOs are a workers' compensation problem.

In fact, the NCCI report suggests that non-PEO employers might do better if they managed risks as well as PEOs do.

“The conventional but untested wisdom has been that PEOs are a problem,” NCCI Chief Economist Harry Shuford tells WorkCompCentral. “Our analysis suggests that this is not supported by the data.”

NCCI reviewed claim development for PEOs versus non-PEOs in 2004 to 2006 policy years, and found that, in the voluntary large-deductible coverage area, the reported number of claims for a group of policies issued in a given year increased by 2% for PEOs in a five-year time span, compared to 4% for non-PEOs.

The ultimate cost of claims for voluntary large-deductible accounts increased 27.8% for PEOs, compared to 41% for non-PEOs.

The purpose of the NCCI study was to counter arguments that it was misleading to compare PEOs with non-PEOs based on results reported early in the claims process because of complications associated with PEOs, such as their physical separation between the worksite where the worker was injured and the location of the PEO staff responsible for reporting claims.

In terms of statistical relevancy, Shuford said, “This means that the more developed estimates of claims experience for PEOs is even better relative to non-PEOs than indicated by the favorable initial results for PEOs.”

With regard to the collapse of PEO-focused carriers, Park Avenue Property & Casualty Insurance Co., Pegasus Insurance Co. and Southern Eagle Insurance Co., NCCI finds that the recession had more to do with these carrier's problems than writing PEO business.

“There was no discernible pattern that suggested that the key driver was dependence on PEOs for premium,” Shuford said.

Some challenge the reports findings because the PEO industry is dominated by several very large businesses - in fact the NCCI report acknowledges that 15 large PEOs comprise two-thirds of the market.

And the critics say that NCCI ignores one inalienable fact - that all three carriers were focused on PEOs.

"What are the facts of the three insolvencies?" Michael Schroeder, president of Ohio-based insurance manager Roundstone Management told WorkCompCentral. "That is far more important than comparisons of workers' compensation delivery strategies. I am pretty confident a PEO with unchecked access to a workers’ comp insurer can very quickly undermine the insurer’s solvency. I’ve seen it before."

Schroeder may be right - the glaring commonality between the three defunct insurance companies is the focused risk assumption on the PEO industry.

But when California had minimum rates and very specialized, highly focused risk based specialty carriers, the small insurance market thrived - these small carriers completely understood the market that had been underwriting and had exceptional claims management programs that kept reserve ratios adequate.

The NCCI study is not the end-all, be-all to the PEO controversy. But it is a start and does, in my opinion, reflect that there is a legitimate place in the employment market for PEO supplied workers and the coverage of this employment risk by the carrier community.

Again, it all comes down to understanding your market, taking the necessary precautions to minimize risk, and properly managing the risk when the inevitable claim occurs.

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