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An improving workers compensation market — including better policy underwriting, increasing comp premiums and a national decline in claim frequency — is driving the National Council on Compensation Insurance Inc. to recommend more decreases in state workers comp rates for next year.
While falling advisory rates are a sign that cost pressures are improving, workers comp experts say the filings won't necessarily translate into lower pricing for employers.
“The state insurance rates are simply guidelines ... and (insurers) — in the majority of cases, not all — have the ability to deviate from that rate” by more than 25% of the state suggested rate, said Eric Silverstein, Dallas-based senior vice president and risk management practice leader at Lockton Cos. L.L.C.
Boca Raton, Florida-based NCCI, a nationwide workers comp ratings and research organization, is the comp rating agency for 35 states and the District of Columbia. It also provides actuarial data for ratemaking agencies in Indiana and North Carolina.
NCCI has submitted workers comp advisory rate filings in 20 states so far this year.
Of those filings, 15 have been for rate de-creases and four have been for increases, said Peter Burton, Wayne, Pennsylvania-based senior division executive for state relations at NCCI. The agency requested rates remain the same in 2015 for Colorado.
Major states in which NCCI has requested decreases include Illinois, which recently approved a 5.5% decrease in workers comp rates for next year, and Oklahoma, which is considering a 7.8% decrease after the state began allowing employers to opt out of the workers comp system this year. Florida also is weighing a 2.5% decrease, the first potential workers comp rate cut for the state in four years.
Mr. Burton said the trend is expected to continue as NCCI continues its rate filing season this fall, and said he's “optimistic that the majority ... of our filings will be approved as proposed.”
“Underwriting results are good, premium is growing, and what has been one of the great stories over the years is (that) lost-time claims frequency has gone down,” Mr. Burton said of trends driving NCCI's ratemaking this year.
This is the first time in several years that NCCI advisory rates are expected to include more decreases than increases.
NCCI said at its annual conference in May that private workers comp insurers' combined ratio declined to 101% in 2013 compared with 108% in 2012 and 115% in 2011. Meanwhile, private insurers' workers comp premiums grew 5.4% year over year to $37 billion in 2013, driven largely by payroll growth and insurer pricing increases.
Mr. Burton said those positive developments now are starting to make their way into workers comp rate filings.
Pam Ferrandino, executive vice president and casualty practice leader for Willis North America Inc. in New York, agreed that NCCI's rate filings indicate favorable trends in the national workers comp landscape. She said that improved insurer profitability is allowing some to propose smaller renewal rate increases this year after years of pushing for policy pricing increases of up to 5%.
“We're beginning to see payroll growth, which also allows carriers to back off on some of the rate increases because it gives them a bigger base to spread some of the fundamental expenses across,” Ms. Ferrandino said.
Still, Lockton's Mr. Silverstein said not all companies will see lower workers comp rates.
Smaller companies' rates typically are tied closely to state rates because they don't have much claims data that can be analyzed for customized pricing, he said. Meanwhile, large employers often see workers comp policy prices fall in line with state rates because they have significant claims information that can be used to present a favorable risk profile to insurers.
But middle-market employers, whose claim experience falls between those of small and large firms, could see comp price increases from insurers and will “really have to work on their market profile to be beneficiaries” of declining advisory rates, Mr. Silverstein said.
“The market is very sensitive” to changes in underwriting, “especially within that profile in the middle market,” he said.
Decreasing rate trends haven't reached other major states that use proprietary rating agencies.
In May, the New York Compensation Insurance Rating Board proposed a 6.8% increase in state workers comp advisory rates, effective Oct. 1. However, the New York Department of Financial Services rejected the proposal in July, keeping rates unchanged from last year.
Ziv Kimmel, the New York rating board's vice president and chief actuary, told Business Insurance that the board requested a rate hike because increasing medical and indemnity costs have outpaced decreases in claim frequency. The state approved a 9.5% increase in workers comp rates last year.
The San Francisco-based California Workers' Compensation Insurance Rating Bureau has asked the California Department of Insurance to raise the state's pure premium workers comp rate to $2.77 per $100 of payroll as of Jan. 1, 2015, compared with $2.68 at the start of this year.
A WCIRB spokesman said increased workers comp claim frequency in Southern California played a role in its request for a rate hike, and the agency is researching the cause, he said.
Workers comp experts say they're not surprised that California is outside the trend of falling state workers comp rates.
They say reforms passed by the state in 2012 have helped hold down some cost pressures but haven't completely alleviated them.
Calls for comment to the American Insurance Association and Property Casualty Insurers Association of America were not returned last week.