Legislature(2003 - 2004)
04/02/2004 03:35 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 540-WORKERS' COMPENSATION INSURANCE RATES CHAIR ANDERSON announced that the next order of business would be HOUSE BILL NO. 540, "An Act relating to workers' compensation insurance rates; and providing for an effective date." Number 1057 CRAIG NOOTTVEDT, Alaska National Insurance Company, explained that HB 540 establishes a mini-hearing and other procedures for the filing, reviewing, and approval of workers' compensation loss cost. Loss costs are the projected costs of workers' compensation claim benefits in Alaska and constitute the largest component of workers' compensation rates. Loss costs apply to all insurers and the Alaska assigned risk pool. Mr. Noottvedt provided the following analogy, "Workers' compensation loss costs are the raw material costs of the workers' compensation system." He noted that Alaska law requires that workers' compensation loss costs be neither excessive nor inadequate. The current system for filing, reviewing, and approving loss costs involves the following two parties: National Council on Compensation Insurance (NCCI), a national filing organization based in Florida, and the Alaska Division of Insurance. MR. NOOTTVEDT explained that NCCI compiles data into its computers, reviews the data with actuaries based in Florida and Southern California, and then makes its filing with the director [of the Alaska Division of Insurance] who approves or disapproves the filing. He specified that the current process doesn't provide for any active involvement of insurers or other interested parties actually doing business in Alaska. The aforementioned, he noted, was not always the system. Until the early 1990s other key parties with local Alaska knowledge, including insurers, employers, and brokers were active participants in the review and approval process through the Classification and Rating (C&R) Committee. However, the aforementioned system was abandoned due to heightened anti-trust concerns. This legislation is designed to bring insurers and other key parties with strong local Alaskan knowledge back into the process. Number 0922 MR. NOOTTVEDT turned to the question of what's wrong with the current system. The system hasn't been working for some time and workers' compensation loss cost has been seriously inadequate and has contributed to a growing crisis in the Alaska workers' compensation system, he explained. He specified that inadequate loss cost results in the following three problems. One, insurers lose money. In fact, the director of the Division of Insurance has recently been showing legislators that workers' compensation insurers have been losing a lot of money in Alaska for a number of years. He noted that although inadequate loss costs aren't the sole reason for recent carrier insolvencies and the Alaska Insurance Guaranty Association (AIGA) mess, they have been a contributor. MR. NOOTTVEDT turned to a homebuilder analogy. He explained that the homebuilder first determines the raw material cost, the labor costs, and profit. After the aforementioned the homebuilder sells the home and makes the profit. However, what if the material supplier comes to the homebuilder the next year saying that the raw material costs increased by 3 percent and thus tells the homebuilder that he or she has to pay that 3 percent increase, and the same scenario is played out year after year. The aforementioned is how inadequate loss cost can work. In the year the loss cost is charged, one is told those costs are adequate. However, if they're determined to be inadequate, the charges can continue. From the workers' compensation public filings of 2001-2004 a chart was developed demonstrating the loss costs for medical indemnity components of loss cost. The aforementioned, entitled "Comparison of the Ultimate Average Indemnity per Time Loss Claim Between 2001, 2002, and 2004 NCCI Filings," was shared with the Division of Insurance. Each of the lines on the chart simply took the filings made by NCCI and the data points for the indemnity cost and the medical cost. "What happens to the insurers then is they go back and say, 'Oops' each year that those items cost more. Even though you already charged all the premium you can get for those prior years, we got it wrong; you've got greater losses that you're having to pay for and you cannot get additional premium," he explained. The aforementioned is a serious financial problem for insurance companies and it has played a role in why AIGA is struggling with workers' compensation insolvencies today. Number 0690 MR. NOOTTVEDT turned to the second problem caused by loss cost inadequacy, which is that when carriers lose money they slow down and even stop writing workers' compensation business in Alaska. The aforementioned results in employers having no choice but to move into the more costly Alaska Workers' Compensation Assigned Risk Pool, which has exploded in growth by over five fold to nearly $50 million in the last few years. The [Alaska Workers' Compensation Assigned Risk Pool] is approaching 25 percent of Alaska's total workers' compensation market, which is one of the largest and worst market share percentages in the nation for an assigned risk pool. Moreover, because the [Alaska Workers' Compensation Assigned Risk Pool] must use the same inadequate loss cost for its rates, it has been losing tremendous amounts of money over recent years. Those losses are passed on to insurers, which worsens the negative spiral. MR. NOOTTVEDT turned to the third problem caused by inadequate loss cost, which is that employers are eventually hit with a large shock rate increase in one year. Employers can't easily pass through shock rate increases into their costs of goods and services. [Passing through shock rate increases] could probably be achieved if there were modest increases over a number of years. MR. NOOTTVEDT explained that HB 540 works to remedy the problem by improving the public information exchange among all the workers' compensation stakeholders. Furthermore, the legislation makes NCCI more accessible and more accountable through a mini-hearing process that is attended by Alaskan insurers, employers, and others who better understand what is occurring in Alaska. This legislation works because it requires the division to detail all of its findings and conclusions in a written order when a filing is approved or disapproved. Mr. Noottvedt acknowledged that determining loss cost isn't easy to do because the division and NCCI are predicting tomorrow's costs using yesterday's data. In fact, the 2005 filing will be based on 2000-2002 policy year data. This legislation will help them do a better job. He noted that to use 2002 data to [make predictions for 2005] means that NCCI must make a number of assumptions and select key trends. However, NCCI is only comfortable making assumptions and selecting trends based on what it considers to be visible from the data, data that is old. By contrast, Alaska insurers have much more than what is visible in 2002 and older policy years. By the time of the filing next fall, Alaska insurers will have already lived through 2003 and most of 2004. There will have been experience in new claim trends, such as new medical treatments and new drugs and the costs for both; new rulings from the Workers' Compensation Board and the courts and the affects on the workers' compensation system. Alaska insurers will have seen many of developments that impact the current loss cost in Alaska. As with the old C&R Committee, insurers operating in Alaska are in a good position to provide extremely valuable input to the workers' compensation loss cost review and analysis process. Furthermore, Mr. Noottvedt opined that employers and other interested parties can contribute useful trend information into the workers' compensation loss cost review process. Additionally, the mini-hearing process and timely public disclosure of all workers' compensation loss cost filing information will raise the general awareness and understanding of the true cost benefits under Alaska's workers' compensation system. The aforementioned will create a greater resource for considering any needed improvements to Alaska's workers' compensation system by everyone, including the legislature. REPRESENTATIVE ROKEBERG inquired as to the definition of loss cost. Number 0318 BARBARA THURSTON, Independent Consulting Actuary, Alaska National Insurance Company, explained that loss cost is the portion of the premium that goes to pay claims. The loss cost is exclusive of the portion of the premium that pays insurance company expenses, commission, or profit. She, too, acknowledged that the claim portion is the hardest part to predict, which is why the data from many insurance companies is aggregated by NCCI. In further response to Representative Rokeberg, Ms. Thurston addressed the graph entitled, "Comparison of the Ultimate Average Indemnity per Time Loss Claim Between 2001, 2002, and 2004 NCCI Filings." She highlighted that above 1994 there are four different points on the graph and those are different estimates, ultimate average cost per claim, from NCCI. The term "ultimate" means once everything is paid, which may be many years for workers' compensation. She clarified that the triangle in the bottom is the estimate of the final average loss cost per claim for 1994, which was made in 2001. She confirmed that the aforementioned is used to build up the rate filings. The other objects refer to each year after 2001 when the NCCI says that the 1994 estimates were wrong and should have been higher. Ms. Thurston said that it's expected that there will be errors in these estimates. Theoretically, the errors should jump around and be a little high one year and a little low another year. However, this graph illustrates a consistent underestimation. MR. NOOTTVEDT remarked that although the graph illustrates that it's leveling off in 1999-2001, if this trend continues, the next filings will be corrected up even more. The leveling off only occurs because that's where the prediction is now. REPRESENTATIVE ROKEBERG turned to the 2004 filing on the graph, and asked if the back years estimate the actual cost. MS. THURSTON replied yes, and clarified that as part of the 2004 filing the old years are reviewed and the average cost in those old years is estimated. She confirmed that the numbers for the past years are more accurate because more time has passed. MR. NOOTTVEDT highlighted that unfortunately the premium has to be charged based the year [the loss cost estimate] is set. REPRESENTATIVE ROKEBERG related his understanding that Mr. Noottvedt's testimony was that next year only the data from the past three years will be reviewed and there's a big gap. MS. THURSTON confirmed that there is a delay. Number 0059 REPRESENTATIVE GUTTENBERG surmised then that these are guesstimates with regard to what will be paid out in claims over the years. Some claims can be many years old, he noted. Therefore, these rates don't seem to be self-correcting and thus one can't, the next year, make a charge because the estimate has increased rather "you get recharged on something that happened last year." MS. THURSTON clarified that in insurance it's not permitted to recoup past losses. TAPE 04-39, SIDE A MR. NOOTTVEDT reiterated the need to have more current data [from] people living in Alaska who see the trends in Alaska and to put that in the review process for NCCI and the director to consider. He reminded the committee that the aforementioned was done under the C&R Committee system, which hasn't been available to the industry and the division for over a decade. In response to Representative Guttenberg, he confirmed that [putting the C&R Committee system] back in place is what is being [proposed with this legislation]. Number 0063 REPRESENTATIVE ROKEBERG pointed out that the C&R Committee was disbanded due to fears of anti-trust actions. He asked if the aforementioned fears "will out in case law." He inquired as to why this could be accomplished now. MR. NOOTTVEDT clarified that it's a different system due to the inclusion of the public hearing and question and answer [period]. He pointed out that the C&R Committee was different in its process, including NCCI bringing a range of rates to the C&R Committee, which would set the filing for the division. REPRESENTATIVE ROKEBERG surmised then that the C&R Committee actually participated in the ratemaking process through recommendation. MR. NOOTTVEDT agreed and emphasized that due to anti-trust fears Alaska has shifted from a ratemaking process to a loss cost filing practice. Therefore, "we" are no longer dealing with the actual setting of the final rates, but rather with the underlying raw material costs. Number 0235 LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development, said that she would only address the process in this legislation, not the complexities of ratemaking. However, she noted her belief that the ratemaking process could become more open. Therefore, she said she is willing to accommodate a method of allowing more input and review. "So, on the surface I don't have a problem conceptually with the bill," she stated. However, she mentioned serious concerns with timelines and other areas in the legislation. REPRESENTATIVE ROKEBERG suggested that Ms. Hall could make some recommendations to the committee and the sponsor. MS. HALL agreed to do so. CHAIR ANDERSON announced that HB 540 would be held over.