Tuesday, November 29, 2011

A CT State Fund? Rate Hikes Insufficient for Change

I had lunch the other day with a friend of mine who owns a regional insurance brokerage with a large workers' compensation book of business. When we talked industry he said that his firm is experiencing increased volume and pricing, and that the "market is hardening".

"Market hardening" is insurance-speak for prices are increasing.

When prices increase so too does the word "reform" increase in conversations about work comp. This happens every seven to eight years or so. Most of the reform movement across the nation occurred in the 2003-2005 time frame, so we're right about on target for the next wave of "reform" to hit the states.

This morning's WorkCompCentral story about Connecticut emphasized this point.

The National Council on Compensation Insurance (NCCI) has filed to increase loss costs in the voluntary market by 4.5% and to boost rates in Connecticut's assigned-risk market by 2.9%, effective Jan. 1. If approved the increases would come on the heels of a 5.8% increase approved last year by acting Insurance Commissioner Barbara Spear.

The filing has prompted reformists to speak up, citing the competitive disadvantage that Connecticut has relative to its neighboring states, and the rest of the nation, because of the cost of comp.

Observers tend to rely on the Oregon Department of Consumer & Business Services biennial report on ranking of state's cost of workers' compensation to measure how one state compares to other states. It's like comparing the cost of a Toyota to a Lexus, because each state is different and the Oregon report does not account for these differences, but it's the only compendium of its kind so people use it to support arguments in favor of reform.

Connecticut was ranked as the sixth most expensive workers' compensation market in the country in the 2010 Oregon biennial report, compared to a ranking of 20th most expensive state in the 2008 Oregon report.

The reform discussions in Connecticut seem focused on two issues.

Labor wants the Legislature to create a state-chartered insurance carrier, while business interests are hoping for a statutory cap on the price of repackaged drugs.

Capping repackaged drugs likely won't get much opposition from the major lobbying groups other than the medical industry - and if other states are a model, the opposition will be more about what the caps are, rather than the fact of imposing a cap.

But creating a state fund is a different matter in Connecticut, the insurance capital east of the Rockies with many general line, national carriers based in Hartford.

Connecticut likes the insurance industry.

Legislation for a state fund in Connecticut had started making its way through the state's legislative process but died en route in March 2010 never reaching the floors of the state House or Senate for a vote. Labor is already lobbying for a refiling of the bill, which would start-up a state fund with $5 million in capital drawn from the Connecticut Labor Department and a 3% assessment on premiums.

Insurance industry organizations in the state oppose a state fund, declaring that it would drive out competitive private carriers afraid of price competition.

Connecticut has an "assigned risk pool" to provide for the coverage of risky employers that can't get coverage from traditional sources. The assigned risk pool is the coverage of last resort.

State funds primary mission is to provide coverage of last resort. State funds are traditionally non-profit, and though chartered through legislative exception, generally are free of governmental intervention, operating like any other insurance company except that "profits" are returned to policy holders in the form of dividends, if any.

The argument in Connecticut against creating a state fund is that government doesn't know what its doing, and lobbyists point to that state's Second Injury fund and pension systems, both of which ran into financial trouble with unfunded liabilities threatening their existence. This argument fails to distinguish between a pure governmental program and an independently operating state created insurance entity.

State funds provide stability to a compulsory insurance market. In addition, no state to my knowledge that has a state fund has seen an exodus of private coverage. Private carriers tend to react more to the nature and quantity of risk in a state's market rather than to competition. Indeed, a state fund may "bleed off" more of the risk leaving a richer, more appealing traditional market for carriers without having to account for potential risk in the assigned risk pool.

This should lower prices for everyone and ultimately make the line more profitable for private carriers.

But Connecticut cultivates the insurance industry. Does it like the insurance industry more than the general employer population? That will depend, I presume, on the fervor of reform and whether rate hikes are sufficient to fuel reform.

In my estimation though, the presently proposed rate hikes aren't sufficiently dramatic to give lift to the voice of reform in Connecticut.workers compensation, work comp, injured worker 

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