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TALLAHASSEE, Fla.--American International Group Inc. will pay back $13.6 million plus interest to workers compensation policyholders in Florida as part of a settlement with state authorities over the insurer's methodology of calculating rates for terrorism risks.
Florida Insurance Commissioner Kevin McCarty announced the settlement last week, more than three years after New York-based AIG submitted the disputed rates.
The submissions followed the passage of the federal Terrorism Risk Insurance Act of 2002, which allowed insurers to apply rates before they were approved or rejected, according to the commissioner's office.
Regulators in several other states also disputed AIG's methodology, which was used across the country. At issue was the insurer's departure from a methodology for calculating terrorism rates used by the Boca Raton, Fla.-based NCCI Holdings Inc., which is the agency that recommends workers comp rates for nearly 40 states.
AIG sought a terrorism charge of about 3% of manual premium while the NCCI suggested that policyholders pay about 2 to 3 cents per $100 of payroll.
Some regulators complained that AIG's methodology resulted in rate increases that might not be justified (BI, April 12, 2004).
In all, more than 20 states eventually questioned AIG's methodology, an AIG spokesman said last week. But only in Florida did the insurer face hearings that led to the agreement to reimburse policyholders, the spokesman said.
The insurer is pleased to have resolved the issue with the Florida commissioner, the AIG spokesman said.
AIG made the filing in 2003, which the Florida commissioner rejected. The insurer then requested evidentiary hearings before administrative law judges, who concluded that AIG failed to justify its charge for terrorism risks within its policies, according to the commissioner.
Florida's commissioner, in announcing the settlement with AIG, said the insurer's business units failed to justify rates "or used excessive and unfairly discriminatory rates on coverage required by the federal Terrorism Risk Insurance Act."
There are about 11,000 AIG workers comp policyholders in Florida, according to the commissioner's office.
AIG also will pay $300,000 to the Florida Office of Insurance Regulation for costs related to the settlement. And it will refund about $100,000 plus interest to policyholders that purchased lines of coverage other than workers compensation, for which AIG also sought terrorism rates deemed "unjustified" by the commissioner.
Regulators in other states either adopted AIG's methodology or they settled the terrorism rates after AIG stated its case, observers said.
In Tennessee, for example, AIG in January 2003 sought 1% to 4% of total manual premium for terrorism risk under workers comp policies, documents show. But it later agreed to drop those rates and adopt the NCCI's TRIA methodology while also increasing its loss cost multiplier.
That way, AIG insurers "are able to charge enough on business written in this state to recoup their actual and potential costs as well as receive a reasonable profit," according to an agreed order reached with the Tennessee Insurance Division.
The Texas Department of Insurance also compromised with AIG. It allowed the insurer to charge terrorism coverage rates that split the difference between those that resulted under its methodology and those that resulted from NCCI's method, a spokesman for the department said.
In Arkansas, meanwhile, regulators are still awaiting a report that AIG was to submit by July 15, showing the amount of refunds made to policyholders in the state under an April 12 consent order issued by Arkansas Insurance Commissioner Julie Benafield to which AIG agreed.
The refund amount in Arkansas, though, is not likely to match that in Florida as Arkansas regulators first approved AIG's rates then later rejected them, the Arkansas regulator said. Any refunds in Arkansas would apply only to policies incepting on or after Jan. 1, the consent order shows.
In Arkansas, the commissioner's agreement allows AIG, as of Jan. 1, to charge a rate of 2 cents per $100 of payroll multiplied by a loss cost multiplier that was 1.8% greater than the loss cost multipliers that various AIG companies had on file. For example, AIG unit Commerce and Industry Insurance Co. initially applied a loss cost multiplier of 1.875, which rose to 1.9082 following negotiations.
Florida's agreement allows AIG to collect 4.5 cents per $100 of payroll for terrorism risk covered by workers comp policies that incepted after Jan. 23, 2003.