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BOCA RATON, Fla.-The decision by the National Council on Compensation Insurance's board to sidestep a vote on converting to a for-profit entity from a not-for-profit is making the former monopoly more vulnerable to competitors.
After a year of study, the board's recent decision to establish a task force to further examine the organization's needs and options was motivated by the strong opposition of six major workers compensation insurers-only half of whom had seats on the board-according to board and industry sources.
The impact of the board's postponement may be encouraging to buyers of NCCI services and workers comp coverage who seek cost-effective services at the lowest-possible price.
Increased competition in providing ratemaking and residual market services may help to drive down overall workers comp system costs and provide states with programs more tailored to their individual needs.
If those savings occur, employers may ultimately pay less for coverage or self-insurance services, regardless of who provides them.
State regulators have complained that it is inappropriate to allow a for-profit ratemaking and statistical agent to be in a position to make money from providing services essential to a state-mandated coverage such as workers comp (BI, Oct. 7, 1996).
In addition, regulators have expressed concern that the cost for new insurers to become members of a for-profit entity might be so high that it would hinder competition.
"At the end of the day, regulators have signed off on the concept of a for-profit statistical agent and ratemaking organization, as evidenced by" their licensing of competing for-profit ratemaking entities, said William Hager, president of the Boca Raton, Fla.-based NCCI.
NCCI's ratemaking competitors include U.S. Rating Bureau Inc. of Wayne, Pa., and Insurance Data Resources Inc., which also has a non-profit affiliate that provides statistical services. IDR recently moved all its operations to Boca Raton, where the NCCI is based, from Fort Lauderdale, Fla.
In addition, the Insurance Services Office Inc. in New York, which is licensed as a property/casualty statistical organization in most states, recently converted to a for-profit entity (BI, Nov. 25, 1996).
Mr. Hager considers ISO a competitor. An ISO spokesman disagreed, saying that it considers the NCCI to be "a strategic ally."
However, regulators have expressed concern over possible hindrances to competition.
Depending on the state, a regulator issues licenses to individual companies to act as a rating organization, advisory organization or rate-service organization.
For most of this century, the non-profit NCCI has held most of the licenses in most states. It was considered almost an adjunct to state insurance departments because it supplied rate-related information to regulators, who were required to pre-approve workers comp insurance rates. It also administered most states' residual market mechanisms, which are the market of last resort for employers needing the state-mandated coverage.
In the past decade or so, efforts to inject more competition into the workers comp system changed the NCCI's job in many states. It went from filing advisory rates, which reflected a profit component for insurers, to filing rates based merely on "loss costs," which requires insurers to determine their own expense ratios.
In addition, competitors emerged, seeking to provide some of the services the NCCI had provided for decades.
The challenge regulators face is to protect consumers by making sure the companies providing workers comp-related services are doing so on a cost-effective basis that meets a state's needs without creating excessive profits for those companies.
The NCCI, established in 1919, still is the largest ratemaking and statistical organization in the United States. It has been a non-profit entity since its inception, though it became a taxable non-profit entity in 1994 under Florida law.
In fiscal 1996, the NCCI had gross revenues of $134 million and employed about 1,000 people in 20 U.S. locations.
However, the board's postponement of the proposal to convert to a for-profit stock company based in Delaware stymies-perhaps for a year or so-an anticipated infusion of up to $150 million in new funds to improve its data delivery system.
For-profit status would make it easier for the NCCI to borrow money or form strategic partnerships to fund a more efficient database, the NCCI says.
Mr. Hager declined to discuss the dollar amount and type of upgrades the NCCI needs, considering those proprietary.
According to board and industry sources, Liberty Mutual Insurance Co. led the opposition to the for-profit drive. Other opponents included American International Group Inc., Kemper National Insurance Cos., Nationwide Insurance Enterprise, and Travelers Property/Casualty Co.
Those companies declined to comment or did not return calls.
In addition, ITT Hartford Group Inc. also opposed a vote at this time so the NCCI can better explore its needs and options, confirmed Linda Bell, the company's senior vp and chief actuary.
Kemper, Nationwide and Travelers were the only three opponents to hold seats on the NCCI board, which recently shrunk to 11 from 16 as part of the last stage of a preplanned reorganization.
"A limited number of companies were concerned about keeping 100% of the control of the NCCI within the insurance industry," said Mr. Hager.
The decision to postpone consideration of a for-profit move "was made with the understanding that the board will study NCCI's capital investment needs, explore alternative methods of funding NCCI, and in that context, continue to review and support its strategic direction," said Ernest A. Lausier, outgoing president of the NCCI board. Mr. Lausier is executive vp and chief underwriting officer of diversified operations at CNA Insurance Cos.
Meanwhile, competitors will have an increased opportunity to chisel away at its former near-monopoly.
"The NCCI continues to position itself for the competition that is surely coming, and we will be a voracious competitor," Mr. Hager said.
However, the NCCI is now "absolutely" more vulnerable to competitors in all its roles, he said. Those include statistical agent, ratemaker, experience rating calculator and producer of information products such as claims costs comparisons.
The NCCI has two major competitors for workers comp-related services.
The for-profit U.S. Rating Bureau is licensed mostly as a rating organization in 12 states and has applications pending in 14 additional states, said Robert Malooly, vp-marketing.
It is owned by Chicago-based Aon Group, which also owns Alexander & Alexander Inc.'s operations, including its Kansas City, Mo., workers comp team.
That A&A unit provides various residual market services, teaming up with various insurers in Alabama, Missouri and Nebraska, according to Dennis Donahue, executive vp of Aon Risk Services' Missouri office.
The for-profit Insurance Data Resources Inc. is licensed as a rating organization in eight states and has applications in about two dozen other states, said president Michael Camilleri, a former NCCI executive. The company, owned by Peterson Consulting L.L.C. in Chicago, also operates a non-profit unit that provides statistical services.
The NCCI is appealing a federal district court ruling that last fall dismissed its allegation that it had intellectual property rights to classification, experience rating and statistical plans that IDR planned to use in Florida (BI, Dec. 16, 1996).
One option NCCI should consider is operating its statistical agent services on a non-profit basis-as IDR does-while other services may move to a for-profit basis, said Hartford's Ms. Bell.
"While there may be differences of opinion about NCCI's corporate structure, the workers compensation community stands united in its unqualified commitment to the long-term success of the NCCI," said Mr. Lausier, the former board chairman.
Mr. Hager is optimistic about the board's willingness to establish a task force to study its needs and sources of capital. "The companies have made it clear they are prepared to meet all our reasonable capital needs," he said."
"I remain confident that the NCCI will be able to obtain the money and remain state-of-the-art," said Ira S. Lederman, senior vp and assistant general counsel of the W.R. Berkley Corp. in Greenwich, Conn. Mr. Lederman is a member of both the former board and the newly formed one.
The downsized board may help the process.
"The point of downsizing the board is to make it a more manageable size and streamline its workings," Mr. Hager said.