An Unregulated Workers Compensation Insurance Market Poses Problems

Recently, a former Director of the Illinois Department of Insurance wrote an Op-Ed piece, decrying recently proposed legislation that would require insurers to file changes in Workers Compensation insurance rates with regulators before using those rates with insurers. The proposed legislation would also allow the Department of Insurance to disapprove rates if it was determined they were excessive.

These are not outrageous standards, yet this Op-Ed piece suggests that any tinkering with the current competitive rating system could produce undesirable impacts for businesses. In actuality, businesses in Illinois (and other states) have already been harmed by a behind-the-scenes dismantling of insurance oversight and regulation in Illinois and other states.

In Illinois, the Department of Insurance has seen a dramatic reduction in staff over the past ten years, and in particular, the agency has lost most, if not all, of its personnel who were knowledgeable about Workers Compensation insurance pricing. Even though Illinois still has some protective statutes on the books regarding unfair or improper Workers Compensation insurance pricing, these are of limited value of those at the designated regulatory agency are too overworked or inexperienced to enforce them.

Competitive pricing for Workers Compensation insurance has encouraged a considerable number of insurers to underwrite Workers Comp insurance, which is a good thing generally for employers. But since regulatory oversight has greatly diminished, it means that insurers can apply and interpret the complex rules governing premium calculation of Workers Compensation insurance as they see fit, with greatly diminished oversight from the regulatory agency that is supposed to exercise independent review of their practices.

A competitive marketplace does not protect employers when an insurer decides to impose dramatically higher charges at the time the policy is audited-that is, after the policy has expired. Since Workers Compensation insurance is routinely subject to an audit procedure that adjusts premiums after policy expiration, an employer can be unpleasantly surprised to receive an audit bill that is for far, far more than the original estimated premium.

In one recent case I saw, an employer paid an estimated premium of $1,200.00. But the insurer, after conducting an audit after expiration, claimed that premium was actually more than $30,000.00. And when that bill wasn't promptly paid, the insurer filed suit seeking that amount. The employer was understandably blindsided by this "shock audit." Yet the audit billing had not been computed in a way that was obviously contrary to the filed rates or manual rules. It did, however, violate certain established statutory and regulatory policies. But to resist and challenge this audit, the employer had to rely upon the department of insurance. And in many states, those insurance regulatory agencies are now little more than toothless tigers. Without experienced regulators working at the agencies, the best policies and statutes can be misunderstood or misapplied and employers are left at the mercy of insurers whose own financial interests generally favor higher premium charges.

Competitive pricing of Workers Compensation insurance can offer genuine benefits to employers, particularly employers with good loss records. But there also needs to be reasonably effective regulatory oversight of Workers Compensation insurance, to protect employers from mistaken and self-serving actions by insurers. Competition alone cannot provide protection from insurer overpricing, as the rules that govern Workers Compensation insurance premium calculation are dauntingly complex, and thus employers often can be misled regarding what the true ultimate cost of insurance may be when choosing from among competing proposals.

Additionally, the fact that the real cost of Workers Compensation insurance is only determined after the policy expires means that it is impossible for the employer to really know or anticipate what the cost of a policy from a particular insurer will turn out to be. This effectively negates the power of a competitive market to control pricing abuses, because the true cost of the insurance product is not known until long after the purchasing decision is made. For a Workers Compensation policy purchased in January of 2015, the actual ultimate cost of that policy will not be known until February or March of 2016, at the earliest. And even though all insurers are supposed to follow the same manual rules in computing premiums, some insurers, in my experience, are much more aggressive in interpreting these rules in their own favor than are some others. So a competitive market for Workers Compensation rates provides little or not protection for the employer seeking to avoid unreasonably high insurance costs. Only a reasonably effective regulatory agency can provide relief to employers who are on the receiving end of a "shock audit", and at the moment, Illinois and many other states have been backtracking from such regulatory protections.