Crocodile tears of insurance industry

The crocodile tears were flowing at yesterday’s South Carolina Senate Banking and Insurance Subcommittee that was hearing two bills supported by the South Carolina Small Business Chamber of Commerce (SCSBCC). 

One bill, S.31, would simply require all proposed workers’ compensation loss cost rate adjustments (increases and decreases) to be subject to a hearing before a judge if the States’ Consumer Advocate and organizations like the SCSBCC want to challenge the proposals.  The current law appears to deny such transparency if an aggregate rate decrease is requested.  But a recent Court of Appeals ruling shot that SC Department of Insurance (DOI) interpretation down.  S.31 would codify the Court of Appeals ruling.

The other bill, H.3111, would simply require all workers’ compensation insurance companies selling policies in the state to put the latest loss cost and loss cost multiplier rates approved by the state into effect within 120 days.  Presently there is no requirement to do so.

As logical as these bills are, the lobbyists for the insurance companies were there to tell the Senators and a crowded room how over-regulated workers’ compensation had become.  We were told that it is such a difficult and time consuming process for the companies to defend the rate adjustment proposals compiled by their rating organization, the National Council on Compensation Insurance (NCCI). 

The best regulation for this insurance to guarantee the lowest premiums for businesses, they said, was for competition to run free.  And, they suggested, if we have to have any regulation of the insurance industry, it should be after a rate adjustment has been put in place—a system called file and use.  Only then could the Consumer Advocate challenge the new rates in court.

Oh, and one insurance lobbyist expressed concern for the DOI saying that the department couldn’t possibly respond quickly enough to individual company rate changes and meet the 120 day implementation schedule in H.3111.

This last objection died quickly when the DOI testified that they saw no problem meeting the required deadlines.  DOI was obviously not going to be a part of that insurance industry charade.

When I testified in support of S.31, I addressed the insurance lobbyists’ objections and suggestions.

Here are the facts.  Around 2002 the South Carolina General Assembly deregulated the loss cost multiplier, the part of the premium calculation consisting of profit and all other insurance company expenses except for the actual claim payments (loss cost).  The Legislature was told at that time that this deregulation would keep premiums down because of free market competition.  Sound familiar?

But of course, that didn’t happen.  The loss cost multiplier for all companies grew dramatically after that adding over $200 million in excess premiums to the system according to estimates of one influential state Senator, Glenn McConnell, after the SCSBCC brought the problem to his attention.  In 2007, the law was changed to re-regulate the loss cost multiplier, which then started coming down for all companies along with premiums.  Pretending that competition resulting from deregulation of the workers’ compensation insurance industry, or of any insurance for that matter, doesn’t protect the consumers from winking and nodding greed.  Case closed.

But as for the industry’s complaint that defending proposed rate adjustments in court is too hard and time-consuming for them, I have a suggestion—only ask for rate adjustments you can justify with the data and it will be less likely to end up in a court fight.

In 2005, the NNCCI proposed an average 32.9% increase in workers’ compensation insurance loss cost rates. The SCSBCC went to Court with the state’s Consumer Advocate to fight this increase and propose only a 12.7% increase. The SCSBCC was the only business organization to fight the big increase in court. On Oct. 3, 2006, the Court issued an order supporting much of the position of the SCSBCC and Consumer Advocate.  The Court ordered only an 18.4% increase, a 44% reduction from the industry proposed hike.

In December 2007, NCCI once again requested an increase in workers’ compensation loss costs of an average of 23.7%. And once again, the SCSBCC was the only business organization to intervene to oppose the increase. In May 2008, NCCI, the Consumer Advocate and the SCSBCC reached an agreement with NCCI and DOI for a 9.8% increase thus saving at least $130 million in premiums for small businesses.

The workers’ compensation insurance industry has an atrocious track record on rate increase requests. A file and use system the industry also proposes would simply let companies lock in excessive rates and force the Consumer Advocate to claw them back ­– a process that would take months. It is a terrible idea for small businesses.

But surely there is no need for the Consumer Advocate and organizations like the SCSBCC to intervene in a proposed rate reduction.  Oh, yes there is.

After the colossal failure of the 2005 and 2007 giant rate hike requests, NCCI proposed an average rate decrease of 0.3 percent in 2009.  But an average means that some individual classes went own and other went up—in this case almost half of the individual rates went up.  SCSBCC and the Consumer Advocate should have had the right to intervene in this proposed average decrease not only to challenge the individual rate increases within the filing but also the proposed decreases.  Based on our 2005 and 2007 experiences, we fully expect that the decreases should have been greater—we just didn’t have the opportunity to demonstrate this in the court.  S.31 corrects this problem.

The Senators on the subcommittee gave S.31 and H.3111 favorable reports and sent them to the full committee where the fight against the insurance industry and their tears will resume.