Thursday, August 8, 2013

Saving Money for 2014

There was good news and not so good news (but not completely negative news) coming out of the California Workers' Compensation Insurance Rating Bureau's Governing Committee meeting yesterday.

The not so good news is that the committee approved a a 2014 advisory pure premium rate of $2.62 per $100 of payroll, 3.4% higher than the average filed rate of $2.53.

SB 863's influence apparently wasn't impressive to the committee and they are waiting to see if projections come true.

The good news is that the committee also approved changes to the dual-wage threshold for seven job classifications and a 25% cap on the maximum amount an employer’s experience modification can go up as the result of a single claim, though the committee rejected a proposal to establish maximum X-Mods for some smaller employers.

SB 863's impact is still too uncertain relative to employer costs for the WCIRB to make any changes, and the Bureau has no updated its savings projections on the bill since October 2012.

In those projections, increases to permanent disability indemnity (projected at $1.2 billion) are offset by independent medical review, which is expected to save $390 million a year, and lien-filing fees and statutes of limitations that are expected to save an additional $480 million a year.

The totality of savings was projected at $1.7 billion, so the net savings projected $520 million a year starting in 2014.

Of course the lien savings are tenuous now given the pending lawsuit against the government to, in the least, temporarily enjoin the lien filing and activation fees while a court reviews the constitutionality of those new laws. While the fees themselves don't affect costs and rates, if the fees are unenforceable then there may be an increase in lien filings which affects overall costs.

Another unknown in the calculation of rates is the switch to a Resource-Based Relative Value Scale medical fee schedule.

The current rules proposed by the Division of Workers’ Compensation would increase total allowable fees to $981.6 million when the RBRVS fee schedule is fully implemented in 2017, 11.9% more than the $867.88 million in aggregate fees allowed under the current schedule, according to the WCIRB.

WCIRB stats reflect that severity has moderated, but that frequency has stayed flat since 2010, which contradicts the long term trend of a 3 to 4% decline in frequency year after year.

Chief Actuary, Dave Bellusci, said the filing represents a 2.7% deterioration in loss costs since the Jan. 1, 2013, filing, of which about one-third can be attributed to loss inflation.

The dual-wage threshold system gives premium discounts to employers in certain industries who pay wages above the threshold on the theory that employees who are paid more have more training, more experience and are less likely to be injured on the job.

The seven job classifications affected by the dual-wage threshold are electrical wiring, plastering/stucco work, plumbing, refrigeration equipment, sewer construction, sheet metal work and water mains or connection construction.

These changes should provide relief to one of the state's back bone industries (construction) as it struggles to recover from the recession and the severe decline in construction activity that followed the mortgage meltdown, and should help keep the industry competitive, at least in the small part that workers' compensation plays.

The limit on the amount an employer’s X-Mod can increase of 25% will provide help to government construction contractors who generally can not bid on jobs if their X-Mod is greater than 100%. The smaller contractors often find themselves out of the bidding process due to a single claim, which can take the X-Mod from 85% to 138%.

Another proposal that was intended to assist the small contractor was a limit on X-Mod increases for a year. The proposal would have set a cap of 200% for employers with expected losses of less than $22,760 during the three-year rating period, which is about $12,000 in annual premiums, 300% for employers with annual premiums of about $100,000, and to 500% for businesses with $250,000 in annual premiums.

The argument against this type of cap is that employers would have less incentive to maintain safe workplaces and that it would subsidize the employers who are generating more losses than others in their industry.

The complexity of rate determination is a fascinating process, at least for someone like me who has no actuarial education or experience, and who's mathematical skills are only partially enhanced by calculators and computers - trust me I was lucky to get out of Algebra 1 alive in high school and completely avoided anything to do with numbers in college (unless, of course, it was preceded by a dollar sign...).

The employer community, which had been primed to see a decline in rates from the SB 863 propaganda machine, is going to be disappointed though. While the rate increase is not monumental, and likely isn't going to make too much difference on most employer's premium bill when that arrives in January, the psychology of failing to attain instant savings from the bill is going to have an impact on employer perceptions and perhaps the voting machine come election time.

Unless you are a self-insured employer - in which case the two-thirds of SB 863 dedicated to restructuring self-insured retentions, offsets, capital requirements and other financial esoterica will provide substantial relief (and for which there is no accounting in WCIRB numbers).

Which all goes to my point when SB 863 was first proposed: one can not change just the claims administration rules without also changing the risk allocation rules if one expects any long term savings for the majority of employers in California.

Only time will tell whether the claim administration rule changes from SB 863 will reduce rates over the long term. I'm just not putting my money on it because I need to save it for my 2014 premium increase.

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