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PENNSYLVANIA INSURANCE COMMISSIONER ORDERS REDUCTION IN WORKERS' COMP RATES

 HARRISBURG, Pa., Oct. 26 /PRNewswire/ -- State Insurance Commissioner Cynthia M. Maleski today ordered rate reductions for workers' compensation insurance that can lead to a decrease of $300 million in the costs Pennsylvania businesses pay to insure their workers against job-related accidents and lost wages.
 In an order issued on a pending rate filing, Maleski directed an across-the-board reduction of two percent in current workers' compensation premiums. Her order also set an adjustment figure that will reduce rates an additional 4.7 percent. The adjustment figure covers factors such as company profit margins, investment yields, surplus rates and reduced medical reserve savings.
 Maleski said the rate directives in her order would save businesses $300 million in annual premiums over current rates. The rates are $500 million below the rates requested by the Pennsylvania Compensation Rating Bureau (PCRB) last Aug. 31, she said.
 "With this significant rate reduction, Pennsylvania businesses get a real break from the high premiums they've been paying for workers' compensation insurance, and Pennsylvania becomes an even better place to do business," Maleski said.
 "This rate reduction proves that the state's workers' compensation reform law will indeed bring rates down fairly. It also proves that the fight launched two years ago by Gov. Robert P. Casey to reform the state's workers' compensation system will bring rates down quickly," she said.
 The new rates go into effect Dec. 1.
 The across-the-board reduction covers so-called "loss costs," that part of a workers' compensation policy that covers and pays actual workers' compensation claims. "Loss cost adjustments" cover insurance companies' overhead and administrative costs. Each company's rate will be based on a combination of the two figures.
 The workers' compensation reform law, signed on July 2 by Acting Gov. Mark S. Singel, created the two-step rate-making process.
 The Pennsylvania Compensation Rating Bureau (PCRB) filed on Aug. 31 for a rate increase of 4.66 percent, but amended its filing on Oct. 1 for a two percent reduction.
 PCRB is the private-industry cartel that represents some 300 insurance companies that write workers' compensation insurance.
 In a companion order, Maleski directed PCRB to expedite completion of a classification study that will compare rates for particular job classifications to ensure the rates are fair.
 Maleski gave the bureau a June 1, 1994 deadline to complete a draft of the study and a final completion date of Sept. 16, 1994. She originally ordered the bureau to conduct the study in October 1992.
 ------
 A copy of Commissioner Maleski's rate reduction opinion and order follows.
 BEFORE THE INSURANCE COMMISSIONER
 OF THE
 COMMONWEALTH OF PENNSYLVANIA
 IN RE: : Pursuant to the Act of
 : July 2 1993, P.L. 190,
 PENNSYLVANIA COMPENSATION RATING : No. 44
 BUREAU :
 1993 Loss Costs Filing :
 :
 Proposal C-333 : Docket No. R93-10-30
 MEMORANDUM OPINION
 I. 1993 Loss Costs Filing
 Before the Commissioner is the Loss Costs Filing submitted
 by the Pennsylvania Compensation Rating Bureau ("PCRB"). In
 order to understand the nature of this filing, it is necessary to
 place it in its legislative and historical context. By Order
 dated October 23, 1992, the Pennsylvania Compensation Rating
 Bureau's requested rate increase of 52 percent was modified by
 the Insurance Commissioner and a 24 percent increase was approved
 effective December 1, 1992. 1/ The modified rate was the result
 of weeks of expert testimony presented during a public hearing
 process spanning eight and one-half months and incorporating
 thousands of pages of testimony and documents, followed by
 voluminous briefs submitted by the parties and Interveners. The
 magnitude of the PCRB's request (as well as the approved rate)
 capped an ever escalating spiral of
 1/ More precisely, the PCRB's 52 percent request was
 based on an effective date of January 1, 1992. The Commissioner
 approved a 17.03 percent increase which, when trended forward 11
 months, produced an increase of 24.26 percent effective December 1,
 1992.
 increasing workers' compensation rates over the past five
 years. 2/ The public outcry over the adverse impact of
 substantial annual rate increases on the business climate in the
 Commonwealth generated an effort to reform the workers'
 compensation system in Pennsylvania, a system that was treating
 injured employees inefficiently and at great cost to employers
 and insurers.
 Governor Robert P. Casey led the efforts to reform the
 workers' compensation system when he submitted a sweeping reform
 package to the Legislature in October 1991. The reform efforts
 culminated in Act 44, which was signed into law by Acting
 Governor Mark Singel on July 2, 1993. The Act changed the
 workers' compensation system in many ways, particularly with
 regard to rate filings by the PCRB. Under Act 44, the approved
 rating bureau now files a loss costs filing. 3/ The Insurance
 2/ The following chart lists the PCRB requested rate
 increase and the approved rate for the past four years:
 Policy Yr.3 1992 1991 1990 1989
 3
 Requested 3 51.82 pct. 25.55 pct. 27.03 pct. 26.27 pct.
 3 8.50 pct.
 3
 Approved 3 24.26 pct. 13.03 pct. 7.49 pct. 8.44 pct.
 3 8.50 pct.
 3/ The loss costs filing represents only a portion of the
 rate to be charged by insurers and reflects the losses and loss
 based assessments anticipated by insurers. The remaining piece
 of the rate charged to employers is the loss costs aggregate
 expense factor promulgated by the Insurance Department. The loss
 costs aggregate factor reflects the experience of stock insurers
 and includes the effects of applicable premium discount programs,
 for loss adjustment, or claim management expense, other operating
 expenses, assessments, taxes, and profit and contingency
 allowances. The loss costs filing by the PCRB will serve as the
 basis for filings by individual insurers' workers' compensation
 rate filings.
 Commissioner has been directed by the General Assembly to review
 loss costs filings against specific standards set forth in the
 Act. Additionally, the Act requires the Commissioner to complete
 her review of the loss costs filing within 60 days of its
 submission. i.e., by October 29, 1993. Necessarily, this
 requires a very compressed review process. The Commissioner may
 approve or disapprove a loss costs filing; she may no longer
 modify the request as she was authorized to do under the prior
 law.
 On August 31, 1993, the PCRB made its initial loss costs
 filing under Act 44 to be effective December 1, 1993. According
 to the PCRB's filing letter, the data used to prepare the filing
 indicated that the loss costs portion of the rate should be
 increased 23.43 percent. However, when the PCRB factored into
 the equation anticipated savings under Act 44 from medical price
 controls, the elimination of the absolute minimum benefit for
 total disability payments and the increase in the burial award
 for death cases, the PCRB adjusted the loss costs increase
 downward from 23.43 percent to a 4.66 percent increase. This
 lower loss costs figure was based on the PCRB's assumption that
 the Act 44 reforms will be fully implemented, without
 modification or delay.
 At the Commissioner's request, the Insurance Department
 reviewed the filing and presented its conclusions in writing by
 memo dated September 14, 1993. The PCRB filed a written response
 to the Department's analysis. Additionally, the Commissioner
 held several conferences with the parties, both in person and via
 teleconference, in order to obtain the information necessary for a
 thorough review of the filing within the statutorily imposed time
 constraints.
 The Department validly criticized the PCRB's failure to
 include the most recent data available, i.e., financial data as
 of year end 1992, and was critical of the PCRB's failure to
 consider other additional changes under Act 44 which could lead
 to increased savings. Due to these elements, the Department
 recommended disapproval of the filing. Thereafter the PCRB
 supplemented its filing with 1992 financial data and the
 Department again reviewed the filing. In a memo dated October 1,
 1993, the Department concluded that a 2.0 percent decrease in
 loss costs was appropriate. Although the PCRB does not agree
 with the Department's analysis and continues to maintain the
 actuarial merit of its original filing, it agreed to accept a
 2 percent reduction in loss costs as recommended by the
 Department. 4/
 The Commissioner has reviewed the initial filing and
 subsequent letters and memoranda prepared by the parties. Based
 on this review, the -2.0 percent amended loss costs filing is
 approved. The -2.0 percent loss costs figure represents a
 reasonable calculation of losses offset by savings under Act 44.
 The Commissioner notes that both the PCRB and the Department
 have cooperated to the extent necessary to have the initial loss
 4/ By letter dated October 1, 1993 from the PCRB, and
 letter dated October 19, 1993 from its counsel, the PCRB agreed
 to the Department's recommended 2 percent reduction.
 costs filing in place by November 1, 1993 so that insurers could
 have approved rates in effect by December 1, 1993. Both parties
 are calculating the anticipated dollar benefits of Act 44's
 provisions. The PCRB calculation of savings generated from three
 of the Act's reforms reduced its loss costs filing by 18.77
 percent (from 23.43 percent to 4.66 percent). The PCRB
 attributes the following savings in total loss costs to each of
 the three factors:
 Medical price controls 14.91 percent
 Elimination of Minimum Benefit
 for Total Disability .32 percent
 Increase in Burial Awards from
 $1,500 to $3,000 .0045 percent
 For purposes of this initial filing only, the Commissioner
 accepts these calculations as reasonable. These reform
 provisions, especially the medical price controls, will have an
 immediate, direct and measurable impact on loss costs by driving
 workers' compensation costs down.
 The PCRB's calculation of savings, which produced its
 original 4.66 percent increase, did not include other provisions of
 Act 44, such as anti-fraud provisions, "quick start" compensation,
 the 30-day rule, deductibles, reinstatement of auto subrogation
 rights and the unemployment insurance offset. The PCRB's
 conclusion regarding some of these reforms is that projecting
 actual dollar savings is impossible at this time since adequate
 data are not available. The Commissioner concurs that for
 purposes of this initial filing, calculations of greater
 savings under the Act attributable to these reforms are
 speculative at this point in time. Nonetheless, the PCRB has
 agreed to amend its request from a 4.66 increase to a 2 percent
 decrease.
 The Act includes provisions that will produce benefits over
 the long term, as well as providing some immediate relief.
 Consequently, the Commissioner fully expects that the additional
 cost saving factors discussed above will also result in further
 reductions in loss costs as experience under Act 44 unfolds.
 II. Distribution of Loss Costs Saving Across Classifications
 One area where the parties continue to disagree is as to
 how the 2 percent reduction should be distributed across the
 classifications. The PCRB would distribute the decrease in
 accordance with the class ratemaking methodology which the
 Commissioner has previously found to be flawed. 5/ To do so
 would result in some employers receiving more than a 2 percent
 decrease, while others would receive less, no decrease at all,
 or even an increase. On the other hand, the Department suggests
 distributing the 2 percent decrease uniformly across all
 classifications after adjustment for industry group relativities.
 Act 44 was intended to benefit all employers in
 Pennsylvania. It would be inequitable to distribute the savings
 5/ By Order and Adjudication dated October 23, 1992, the
 Commissioner found the classification system to be unfairly
 discriminatory and ordered the PCRB to undertake a study of the
 system. By Order issued today, the Commissioner has ordered the
 deadline for completion of that study.
 unevenly, in light of the fact that in the last rate hearing the
 PCRB did not meet its burden of proving that the current
 classification system is actuarially sound. The pending
 classification study will be complete before any further rates
 are proposed. Until such time as the study is complete and a new
 system implemented, distribution of the rate decrease in the
 manner suggested by the PCRB would only further exaggerate the
 inequities in the current system. Accordingly, the PCRB will
 file and implement classification rates which reflect the two
 percent reduction equally for all classes, after adjustment for
 industry group relativities.
 III. Aggregate Loss Costs Adjustment Factor
 Pursuant to Section 24(5) of Act 44, the Commissioner is
 required to publish a aggregate loss costs adjustment factor at
 the same time the loss costs filing is approved. Consequently,
 the Commissioner is today issuing the adjustment factor for use
 in conjunction with the 1993 loss costs filing. The average
 factor approved is 1.2041, which represents a 4.7 percent reduction
 in the factor implied in the current rates. This factor is
 explained more fully in the Notice being issued today. The
 analysis employed in arriving at this aggregate adjustment factor
 is intended to encourage competition in the marketplace, while
 guarding against any potential for price gouging during the
 period of transition to the new system created by Act 44. The
 factors employed in calculating the factor are conservative in
 terms of the assumptions made regarding the
 federal income tax rate, investment yields, the expected rate of
 return, the reserve to surplus ratio, and the expected impact on
 reserves due to the medical cost containment provisions. This
 expense factor, in conjunction with the loss costs factor
 approved herein will result in an average reduction in manual
 rates of approximately 6.7 percent.
 Accordingly, the Commissioner enters the following Order.
 O R D E R
 AND NOW, this 26th day of October, 1993, upon consideration
 of the Pennsylvania Compensation Rating Bureau's 1993 Loss Costs
 Filing, Proposal C-333, the several subsequent filings for the
 Insurance Department and the PCRB, IT IS HEREBY ORDERED THAT:
 1. Worker's Compensation Rate Revision Proposal C-333,
 as amended to provide for a two percent reduction in loss costs
 effective December 1, 1993 on a new and renewal basis , is hereby
 approved.
 2. The Bureau is hereby directed to distribute the two
 percent average reduction in loss costs uniformly to the
 classifications using the industry group relativities set forth
 in Proposal C-333.
 3. Except as otherwise noted herein, Proposal C-333 is
 hereby approved for use in conjunction with the aggregate loss
 costs adjustment factor issued today.
 4. This Order is effective immediately.
 CYNTHIA M. MALESKI
 Insurance Commissioner
 /delval/
 -0- 10/26/93
 /CONTACT: Rick Schoen, press secretary of the Insurance Department, 717-787-3289/


CO: Pennsylvania Insurance Department ST: Pennsylvania IN: INS SU:

MK -- PH016 -- 6891 10/26/93 12:09 EDT
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Date:Oct 26, 1993
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