Mo. WC Pool Will See Average Rates Fall

For the next year, average workers’ compensation rates will fall slightly for Missouri employers that buy coverage through the state’s “pool” of last resort, according to Scott Lakin, director of the state’s insurance department.

The rate reduction for the pool is expected to average 0.4 percent — in contrast to an average increase of 14.4 percent in the first half of 2003 for the regular workers’ compensation market.

“We are experiencing a rate spike now in the regular workers’ compensation market — largely based on the pricing recommendations from an insurance trade group — but the pool’s record indicates this overall line of business is relatively stable,” Lakin said.

The pool provides coverage for employers that, often because of past claims, cannot find this mandatory coverage in the regular commercial market. In the past four years, average rates for the pool have risen 10.2 percent altogether, or essentially by the rate of inflation (9.3 percent), despite sharply rising medical costs for treatment of injuries.

Current businesses, if they stay in the pool, are expected to save more than $523,000 from the rate change for policies renewing through June 30, 2004. The number of pool employers is expected to grow to 6,700 this year.

The 2003-2004 rate change for individual companies, however, will vary because the pool is adjusting rates to better reflect the historical costs of injuries for various kinds of jobs in Missouri. Workers’ compensation coverage for clerical staff, for example, is more expensive than for construction workers, and pool rates should reflect the same difference in cost found in the regular market.

Overall, about 40 percent of current employers will benefit from rate reductions that can range up to 15 percent. The remainder could face rate increases up to 30 percent.

The types of “pool” enterprises receiving the largest increases — based on the history of losses for their workers — include child care centers, breweries, athletic teams or parks, hair salons, telephone/cable installers and charities.

Although Lakin ordered the rate changes, they were proposed by Travelers Commercial Casualty Co., which in late April was re-awarded the contract for administering the pool.

Travelers has held the contract since it was first established in July 1995. At that time, Missouri became the first state to hire a private insurer to manage its pool and shoulder the financial risk, just as in the private sector.

Travelers in 1995 assumed the risk for pool losses – benefit payments and adjustment expenses – up to 115 percent of premium revenues.

Before those cost-saving reforms, a national industry group administered the pool on a cost-plus basis, and all the workers’ compensation insurers in the state were assessed annually for a prorated share of annual deficits, which then were passed on to other business policyholders.

After the 9/11 disaster, Travelers’ reinsurance costs would have risen sharply (reinsurers paid for more than half the World Trade Center losses) if the contract terms remained at 115 percent. So MDI last year issued an emergency rule and contract change that allowed Travelers to reduce its financial risk to only 100 percent of premium revenues, avoid buying expensive reinsurance and assess other insurers if deficits resulted; none did.

The re-award of the contract contemplates that Travelers again will assume risk for all benefit payments and loss adjustment costs up to 100 percent.

No assessments on insurers in the regular market have occurred during the eight years of the new pool structure. No state funds are involved in any aspect of the pool.

Today’s “hard market” is marked by increasing prices and the inability of many claims-prone policyholders to obtain coverage, which forces them into state pools. But Missouri still is not experiencing serious difficulties in obtaining workers’ compensation coverage, according to pool population data.

While Missouri’s pool size is expected to grow from 5,100 to 6,700 this year, it is much smaller than in 1995 when 12,476 businesses had coverage. The pool’s size peaked at about 32,000 employers in 1993, or about 40 percent of the companies then operating in the state.

The size of pool reached its low point in 2000 with 3,526 policyholders, and it has grown as mainly larger businesses with poor claims histories have lost their regular commercial coverage.
Although the pool’s enrollment has increased, neither its rates nor loss ratios have risen significantly. Since 1999, average pool rates have increased by a cumulative 10.2 percent.

Rising or falling loss ratios — the percentage of premiums paid out or reserved for claims — tend to trigger rate changes. But ratios for the past four years have been generally stable, registering at about 65 percent: 58.3 percent in 1999; 66.7 percent in 2000; 72.8 percent in 2001; and 65.1 percent in 2002. Loss ratios of about 65 percent typically are associated with profitability for most casualty insurers.