Insurers say rate cuts have hampered competition

But critics say insurance companies are still making a profit on workers' comp
Chris Mahoney - Journal Staff

A few years ago Linda Sallop considered Massachusetts' workers' compensation market to be fiercely competitive. Today she says there are only a handful of competitors giving her company a run for its money.

Sallop, president of Boston-based Atlantic Charter Insurance Co., says the signs of waning competition are unmistakable. Though there are still a large number of insurance providers, only a few are aggressively writing workers' compensation.

She's not alone in her views. Many insurers say the regulatory environment for workers' compensation is starting to put a crimp in business.

The state's workers' compensation providers have withstood one double-digit rate decrease after another for most of the 1990s, to the point where policyholders are now paying less than half of what they paid in 1994.

Insures say another decrease may further squeeze the industry - a situation that can only be aggravated if labor groups and some lawmakers succeed in their efforts to do away with some of the workers' compensation reforms passed by the Legislature in 1991.

Critics of the system are planning a concerted effort this legislative season to increase benefit levels for injured workers, allow workers more time to recuperate and extend compensation benefits to cover more types of injuries. Insurers believe that if even one of these efforts succeeds, it will open the floodgates to a slew of actions that would undo the reforms.

"It's like chess," says Sallop, whose Atlantic Charter specializes in workers' compensation coverage. "Every move you make has serious repercussions."

But labor organizations, some lawmakers and just about everyone else who has a beef against the insurance industry say workers' compensation is still an extremely lucrative business: Insurers can afford to share the wealth, they say.

"Insurance companies have ended up with far more than what was originally intended under the reforms," says state Sen. Cheryl Jacques, D-Needham. "Businesses and employees are getting crumbs."

Jacques last year released a highly publicized report charging that the state workers' compensation providers enjoy 30% profit margins - findings that have been much disputed by the insurers, who say profit levels change sporadically form year to year.

The Legislature enacted a series of 1991 reforms to shore up the state workers' compensation industry, which for most of the 1980s was in shambles. Under the reforms, the workers' compensation industry went from $2.7 billion in 1994 to roughly $1.3 billion in 1998.

The reforms reduced benefit levels, cut down on the legal costs associated with the workers' compensation industry, and did away with the backlog of cases at the state's Department of Industrial Accidents. Insurance companies, which had been losing money in their workers' compensation lines through much of the 1980s, were once again turning profits.

The state Insurance Division has authorized five consecutive rate reductions since 1994. Insurers, claiming the decreases were having a telling effect, petitioned for a 2.6 percent increase last year. Instead, Insurance Commissioner Linda Ruthhardt authorized a 20 percent rate cut.

"The commissioner's decision reflects the belief that there wasn't any proof to validate the industry's claims," said Robert McNicholl, director of the State Rating Bureau, the Insurance Division's actuarial arm.

For the most part, the state's business leaders are pleased with the rate cuts, but say regulators and legislators must stay on guard to make sure other states do not undercut Massachusetts.

"Our rates have come to a point where we're in line with the national average. That's a good place to be, but we need to look at being more competitive," said James Klocke, government affairs director of the Greater Boston Chamber of Commerce. "If we stand still we'll fall behind."

Insurers say the double-digit rate decreases cannot continue indefinitely.

"We've been in a double-digit price deflation mode for five years. You can't have that kind of price deflation long term," said Doug Nelson, senior vice president and manger of Liberty Mutual Insurance Co.'s New England division.

"While the cost structure is increasing, revenue is to some degree in freefall," Nelson said.

Liberty Mutual, based in Boston, is the largest workers' compensation provider in the nation.

In recent years, workers' compensation has been one of the more problematic lines for the insurer. The company's pre-tax operating income on its commercial lines declined from $39 million in 1997 to $27 million in 1998. Liberty Mutual has placed most of the blame for the 28 percent drop on the workers' compensation market.

In all, Liberty Mutual had $8.1 billion in direct-written premiums in 1998, and a superior rating from A.M. Best Co. Inc.

However, the Oldwick, N.J.-based rating firm said that Liberty's dominance in the workers' compensation market-the company receives one-third of its direct written business through its compensation line-presents a "challenge" to the insurer.

The five consecutive rate decreases have not deterred insurers from trying to stake a claim in the state's workers' compensation market-roughly 65 insurance companies currently provide some sort of coverage, either directly or through subsidiaries. Nor have the rate decreases stopped insurers from deep discounts to lure policyholders.

Some industry experts say some insurers might have offered deeper discounts than they can afford, and if insurers find themselves in dire financial straits before long, they have only themselves to blame.

"It wasn't enough for the state to take money away. Insurance companies have been silly with price cuts," said James Walter, chief executive officer of ManagedComp Inc. in Waltham, which has roughly $200 million in premiums nationwide.

Two years ago, discounts offered by insurers ranged fro 10 percent to 38 percent.

Last year's rate cut prompted many insurers to scale back their discounts.

Boston-based A.I.M. Mutual Insurance Co., for example, reduced its maximum discount from 25 percent to 10 percent. Fireman's Fund Insurance Co. of Novato, Calif., which has offered discounts from 10 percent to 25 percent through its subsidiaries, cut all of its discount offerings in half.

Atlantic Charter offered a credit of 36 percent last year, but has since scaled back to 27 percent. The company's direct written premium levels dropped from $19.8 million in 1994 to $7.8 million in 1998, a direct result of state-set rate reductions, according to a report by A.M. Best.

The insurance division is not expected to re-visit the workers' compensation rate for at least another year.

In the meantime, the insurers will have to face attempts by labor groups and lawmakers to roll back some of the 1991 reforms.

Efforts range from increasing benefits for bodily scarring, to increasing weekly benefits and maximum allowable weeks of missed work.

Essentially, labor is seeking pre-1991 benefits. This includes compensation levels equal to two-thirds an injured worker's average wage, instead of the current 60 percent maximum; and 20 weeks of allowable missed work time, 600 weeks for more serious cases. Current law allows for 156 weeks and 364 weeks, respectively.

How bad would a total rollback be? According to a study by the Boston-based actuarial firm Tillinghast-Towers Perrin, system-related costs could increase by as much as 15 percent if benefits were increased to their pre-1991 levels.

The report states that the figure could actually get higher, since increased benefits may prompt more workers to file claims.

Critics of the current system say it squeezes injured workers. Insurers and state officials say that while some workers may slip through the cracks, the system for the most part runs smoothly. Legislative changes may throw a monkey wrench in the system, they say.

"When you get injured, you get the benefits you deserve. That's a fact," said Mitchel Weisman, vice president of Atlantic Charter.

Reprinted with permission from the Boston Business Journal,
Volume 19. Number 52; February 4-10, 2000.
Copyright 2000, Boston Business Journal, Boston, MA.
All rights reserved.