The 2nd meeting of the Interim Joint Committee on Labor and Industry was held on<Day> Thursday, August 21, 2008, at 10:00 AM, in the Gheens Room at The Louisville Zoo. Representative Mary Lou Marzian, Chair, called the meeting to order, and the committee assistant called the roll.
Present were:
Members: Representative Mary Lou Marzian, Chair; Senators Julian M. Carroll, Julie Denton, Brett Guthrie, Denise Harper Angel, Ray S. Jones II, Richie Sanders, Jr., and Jack Westwood; Representatives Will Coursey, Myron Dossett, Bill Farmer, Tim Firkins, Joni L. Jenkins, Adam Koenig, Charles Miller, Tom Riner, and Brent Yonts.
Guests: Commissioner Sharon Clark, Department of Insurance (DOI); Cathy Booth, National Council on Compensation Insurance (NCCI) State Relations Executive; Natasha Moore, NCCI Actuary; Randy Peppers, DOI; Jon Stewart, Kentucky Employers’ Mutual Insurance (KEMI); Rebecca Mullins, LRC; Sanny Togretti, MR; Kevin Ickes, KEMI; Tim Price, KEMI; Karan Hisle, DOI; Frank Goins, DOI; Mary Margaret Sutherland, KY AGC/SIF; Mona Carter, NCCI; Ron Bell, The Underwriters Group; Robin Coombs, DOI; Maresa Fawns, KJA; and Geoff Pinkerton, GOPM/OSBD.
LRC Staff: Linda Bussell, Melvin LeCompte, Adanna Hydes, and Betsy Bailey.
Rep. Marzian welcomed members and guests and announced that Sen. Kerr sent regrets that she was unable to attend the meeting. Rep. Marzian recognized and expressed the committee’s appreciation to those who facilitated the meeting at the Louisville Zoo. She also reminded members that the September meeting would be at Kentucky Dam Village on September 9, at 2:30 pm Central Time, during the annual Labor-Management Conference, and urged members to finalize their arrangements for attending the conference.
Rep. Marzian introduced and congratulated Sharon Clark, the new commissioner of the Department of Insurance. She called on Commissioner Clark to discuss the 2008 NCCI workers’ compensation loss cost filing. Commissioner Clark introduced several members of her staff, and Cathy Booth and Natasha Moore, representatives of NCCI.
Commissioner Clark called members’ attention to a handout and briefly stated that the filing recommends a decrease in workers’ compensation rates and this is the third consecutive year in which a decrease has been recommended. This type of trend has not occurred since 1997. The filing was received on July 1 and following a review by Milliman & Co., a decision on the filing is expected by September 1. The filing recommends a decrease of 5.1% for industrial classes and 10% for the coal classes.
Rep. Yonts asked for an explanation of the recommended decrease. Ms. Moore said the primary reason is a continued decline in claim frequency. Also, the average cost of indemnity claims has been moderating and has started to decline. NCCI expects the average indemnity cost to decline a percent each year relative to payroll inflation. The converse of that decline is that medical costs are still increasing although at a slower rate. Medical costs are expected to increase 2% to 3% annually above and beyond payroll inflation. The downward trend in claim frequency is a national and international trend.
Rep. Marzian asked the NCCI representatives to continue with their presentation, but to start the presentation by explaining the role of the NCCI in Kentucky. Cathy Booth explained that NCCI is the rating and advisory organization for most states and a data collection entity for injury and workers’ compensation claims throughout the country. NCCI is the largest source of workers’ compensation data and statistics. Ms. Booth said one of the main responsibilities of NCCI in Kentucky and many other states are the preparation and development of loss cost or rate filings. In Kentucky, a loss cost filing contains the base factors required to cover workers’ compensation losses. Workers’ compensation insurance carriers file with the Department of Insurance their own loss cost multipliers and expense factors that are applied to the loss costs to arrive at the final workers’ compensation rates. In addition, NCCI prepares cost analyses to proposed workers’ compensation legislation to determine the potential impact of proposed legislation on the workers’ compensation system in Kentucky.
Ms. Moore continued the presentation by referring to the state advisory forum presentation presented in Frankfort the day before and to the executive summary of the loss cost filing included in members’ folders. She called members’ attention to a slide that showed the accident year combined ratio results which measured underwriting results or losses and expenses compared to premium. The five-year history shows that in 2003, the combined result was 118% which means there was an underwriting loss. In 2006, there was an underwriting gain. In 2007, the underwriting gain was less but the results were still positive. These results are similar nationwide. Ms. Moore said another piece of good news for Kentucky is that in 2004, the combined ratio was the 3rd highest of any other NCCI state. By 2006, Kentucky was more in the middle which means that Kentucky has improved compared to other states.
Referring to the executive summary of the filing, Ms. Moore explained the recommended reductions for the five industry groups that contain the NCCI class codes. Manufacturing, for example, would have an average decrease of 5.1% but the swing limits within those manufacturing codes are an increase of 20% or a decrease of 30%. This means that not every class code will see a 5.1% decrease. There will be some variability within the class codes but within the swing limits. This variability also applies to contracting and the other industry groups.
The recommended reduction for the coal industry is broken down by traumatic and disease for underground and surface mining. The traumatic piece represents the majority of the loss costs for the coal industry. The recommendation for the traumatic piece is a 12% decrease and a 2.4% decrease for the disease piece.
Explaining the indemnity loss ratios, Ms. Moore said these ratios measure indemnity (income) losses for Kentucky compared to pure premium developed to NCCI’s loss cost levels. This is a major component of the 2008 filing. Looking back to 1992, 2005 and 2006 are the two lowest policy years. NCCI expects a 5% drop annually compared to premium. Much of this improvement is a result of frequency decline.
Ms. Moore said looking back to 1992, the claim frequency has been dropping and this is what is driving the decreases in both indemnity and medical costs. The frequency decline is expected to continue at 3% to 4% annually in the foreseeable future. The average cost of an indemnity claim, in excess of wage growth, has declined and NCCI expects the decline to continue at a rate of 2% to 3% annually going forward.
Breaking down benefit costs, indemnity represents only about 1/3 of the total while medical represents 2/3’s of the total. Twenty years ago, indemnity benefits were the largest component of the total. This change is a result of medical costs increasing at a faster rate than wages. Workers’ compensation medical costs are outpacing the medical consumer price index. This trend is expected to continue.
Rep. Marzian asked why Kentucky’s medical cost component appears to be significantly higher than many other states’. Ms. Moore responded that Kentucky’s medical cost component is 68% compared to 32% for indemnity. The regional (Illinois, Indiana, Tennessee, and Virginia) average is 60% for medical and 40% for indemnity. Comparing medical costs distributed by injury type, Kentucky’s medical cost component is lower than the regional and national averages for medical only claims and temporary total claims. For permanent partial and permanent total claims which are the most serious types of claims, Kentucky’s average costs for medical are higher than the national average. In 2003, the average medical cost for Kentucky was $30,000 compared to $19,000. In 2007, Kentucky’s average was $39,000 compared to $25,000 nationally. Ms. Moore said a number of factors contribute to the higher costs in Kentucky including the fact that Kentucky has a more serious set of claims which are the most expensive claims. Kentucky also has employee choice of provider. Ms. Moore said NCCI has found that there is a 7% to 10% difference in medical costs in states that have employee-directed versus employer-directed medical care.
Sen. Sanders asked a question relating to comparing Kentucky’s workers’ compensation rates to other states. Ms. Moore said rates for specific class codes can be provided. She said NCCI calculates an average loss cost for all class codes in Kentucky based on Kentucky’s payroll distribution. NCCI does this for other states also and calculates regional and national averages. Kentucky looks better than Illinois. She said Indiana has one of the lowest benefit structures of all of the states making its average costs lower. Kentucky is comparable to Tennessee and other states. Ms. Moore also reminded members that the average loss cost comparison contained in the executive summary of the filing represents only the benchmarks for the carriers and the final rates charged by the carriers include expense multipliers and loss adjustment factors.
Sen. Carroll asked if the filing was based on Kentucky experience or national experience. Ms. Moore responded that only Kentucky experience was used. Sen. Carroll said he was concerned about the use of outside actuaries who might have conflicts of interests in recommending rate changes. Randy Peppers, actuary for the Department of Insurance, responded that the department conducts a rigorous review of conflicts of interests of actuaries employed to conduct the third party review of rate filings.
Rep. Marzian asked if the expense multipliers carriers charge in Kentucky are similar to those charged by carriers in other states. Mr. Peppers responded that carriers in Kentucky file loss adjustment expense multipliers to the loss costs contained in the NCCI filing to determine the final rate for each employer. He said Kentucky’s loss costs are different from those filed in many other states because the loss costs in Kentucky represent only the pure premium element. The pure premium element is only the expected loss element for the particular risk or exposure. In another state, loss adjustment expenses might be included in the loss cost calculation; therefore, the additional expense multiplier subsequently added by the carrier to develop their rates might be much lower. Because of this, the loss cost multipliers in Kentucky tend to be about 18 points higher than the average multiplier in other states. The carriers that write workers’ compensation in Kentucky and other states add in their overhead expenses which are similar from state to state, but the extra element for loss adjustment expenses that is not included in the loss cost filing in Kentucky has to be accounted for. Mr. Peppers said Oregon does a comparison of workers’ compensation rates in the states every two years. Kentucky participates in that study. In the most recent Oregon study, Kentucky was ranked as having the 4th highest loss cost multiplier of all the states. In fact, Kentucky was among the lowest states in that study but because the loss adjustment multiplier was represented separately, Kentucky’s rates appeared significantly higher.
A quorum being present, the minutes from the August 21 meeting were approved.
Sen. Sanders commented that there is a perception that Tennessee’s workers’ compensation rates are lower than those in Kentucky and asked if it is possible to get the rate for a specific class code. Commissioner Clark responded that a breakdown for every class code could be obtained.
In response to a question from Sen. Jones, Ms. Moore said in 2006, at the carrier level, 70 cents of each premium dollar on average went for medical and indemnity costs. There was a slight deterioration in 2007 and 76 cents of each premium dollar on average went for medical and indemnity benefits. Sen. Jones said these figures mean that 30% of the premium dollar was left for profit, overhead, administrative expenses, and investment income. He asked if this information is available to the public. Ms. Moore said some of the information, including investment gain, is difficult to allocate to each state.
Sen. Jones asked what specific elements are driving the medical costs. Ms. Moore said the prescription drug share is greater in Kentucky than in other states. He asked if there is any data available on coal workers’ disease claims and awards. Ms. Moore said that information is available from the Department of Workers’ Claims and will be provided.
Rep. Marzian called on the KEMI officials in the audience. She congratulated KEMI on the wonderful job it does on safety and asked them to comment briefly on KEMI’s recent workers’ compensation rate reduction filing.
Jon Stewart, Executive Vice President and Chief Financial Officer for KEMI, informed the committee that KEMI recently sponsored a “Mine Rescue Contest” in Pikeville, KY. He said it was the first such event that KEMI has conducted. Thirty mining companies from four states participated. It was very well received and they are hopeful that it will become an annual event. Relating to KEMI’s recent rate filing, Mr. Stewart said the Board of Directors met the previous week and approved an overall rate decrease of 6.7%, noting that the reduction for the industrial classes was 5.5% and the reduction for the coal classes was 8.8%. Of the 600 classes, the top 50 classes make up 70% of the premium. KEMI wrote $150 million in premium last year and reduced rates by 7.5%. KEMI has policyholders in every county for a total of 24,000. KEMI has about 24% of the workers’ compensation market share in Kentucky. The dollar estimate for the end of this year is $140 million in premiums, giving back $10 million through the rate decrease to the policyholders. Mr. Stewart noted KEMI has observed the same trends in decreasing claim frequency reported by NCCI. He also said medical costs are the primary driver in overall costs with utilization probably being the biggest driver.
Representative Marzian asked Commissioner Clark to give a brief update on the AIK issue. She said information relating to AIK was in the members’ folders. She introduced Bill Nold, an attorney with the Department of Insurance. She said he has been involved from the beginning of the rehabilitation of AIK four years ago. Commissioner Clark said the rehabilitation plan filed with the court is going well. Over $82 million in claims has been paid. Over $80 million in assessments has been collected and that effort is continuing. The department is involved in numerous lawsuits relating to AIK in an effort to collect additional funds owed. The department does not anticipate having to make a second assessment.
Mr. Nold said he has been involved with the AIK effort on a daily basis primarily located at AIK’s office in Jefferson County. Mr. Nold said the manner in which AIK has been handled through the courts has been through a reorganization plan. The reorganization plan included a large assessment. One of the goals of the reorganization plan was to keep AIK in rehabilitation rather than liquidation. The court has agreed to this approach. The reorganization plan was approved in conjunction with a settlement agreement with many of the AIK group members. This was a large undertaking and 3,862 members were assessed under the plan. He said AIK shut down as far as new coverage or renewal coverage as of February 2005. AIK is in a run-off mode in which the source of funds to pay claims is the assessment and possible recovery of funds from third-party litigation that is pending. Referring to a handout, Mr. Nold said the department makes quarterly reports to the court and this information is available on the AIK website and the website for the department. Mr. Nold emphatically stated that he did not believe another assessment will be necessary. Mr. Nold explained procedures available to the department for group members who fail to pay the assessment and presented a status on third party litigation against the actuaries and other third parties. The information was included in a handout distributed to the members.
Rep. Marzian thanked Mr. Nold and Commissioner Clark for their presentations and the meeting was adjourned.