Posted on 12 Feb 2013 by Annie George
New York Governor Andrew Cuomo in January during his state of the state address announced Workers Comp reform as part of his 2013-2014 fiscal year budget proposal. Immediately after the proposals were announced, industry groups, including the Property Casualty Insurers Association of America (PCI) and the American Insurance Association (AIA), and the National Association of Mutual Insurance Companies (NAMIC), came out in support of the reforms, describing them as common sense. We spoke to Simon Feuer, president of Apex Services, about New York's Worker Comp reforms and what they may mean for insurance brokers and carriers in the state and their customers. Based in New York, Apex is a leading national independent compliance audit firm for Workers Compensation premium recovery.
Annie George (AG): Explain some of the reforms Governor Cuomo is proposing and their potential impact on the insurance market and employers.
Simon Feuer (SF): "Cuomo's proposals include transferring $1.75 billion of the New York State Insurance Fund (NYSIF) reserves to the state coffers. This includes a $750 million transfer from the insurance fund in his budget proposal for the coming year. Another $1 billion would be taken from the fund as part of the state's budgets in 2014 and 2015. This massive transfer of funds raises big questions that are unanswered at this point about the state fund's ability to pay an estimated $3 billion in unfunded workers compensation claims in the coming years made by state employees for which NYSIF paid benefits but never received reimbursement from the state. The governor's office argues that approximately $2 billion held in reserves by NYSIF to pay assessments as a percentage of losses to the State Workers Compensation Board will no longer be needed. NYSIF will start paying assessments based on a percentage of premium like all the other workers compensation carriers in the state.
"The proposed reform to require the State Insurance Fund to start paying assessments to the state Workers Compensation Board based on a percentage of premium is a major win for brokers and private insurance companies writing workers compensation business in the State of New York. Up until now, the State Insurance Fund has had a major competitive advantage over private carriers in New York. NYSIF writes direct business, therefore brokers are not receiving commissions, and based on their low assessments, it's hard for brokers and private carriers to compete. As of October 1, 2012 (when the new rates were published), private carriers are paying an 18.8% assessment, while the State Insurance Fund is paying a 9.2% assessment. The State Insurance Fund pays less than half of the assessment charges that private carriers pay because they claim that they have a sufficient amount in reserves to pay special funds, and have been exempt from having to pass this charge onto their policyholders. Under this new reform, it appears that the State Insurance Fund is going to be paying the same assessments as private carriers. I am sure brokers writing business in New York are thrilled with this proposed change, along with all the private carriers. This is also good for employers because they now have the option of choosing from a broader selection of carriers with competitive pricing.
"Cuomo also proposes to simplify and rationalize the assessment mechanism for the workers' compensation system; employers would be assessed on their pro-rata share of premiums, regardless of how they secure their workers' compensation coverage. This would combine all five of New York State Workers' Compensation Board's assessments on employers into a single assessment, saving carriers a lot of money in administrative costs as they will not have to deal with so many invoices and paying so many different assessments to so many different places. It appears that the Workers Compensation Board is currently sending out 14 different invoices each year to collect the assessments, some of which are billed quarterly. Hopefully, carriers will pass down these savings to their insureds. This would be another big win for the carriers and New York State, as the state will also save on administrative costs."
Simon also explained that the proposed reforms will also repeal a statute that requires insurers to make contributions to the Aggregate Trust Fund to cover future indemnity benefits when a claimant receives a permanent disability rating. "This would greatly benefit insurance carriers as it would mean much more cash left in their bank account while they pay out the claims, helping to keep them more solvent. It would also be good for employers because this increases the possibility of making a settlement," said Simon.
AG: Cuomo's proposal also includes increasing the minimum weekly benefit for injured claimants from $100 to $150. How will this impact insurers and employers?
SF: "This increase is definitely not good for insurance companies or employers. In fact, former New York Governor Spitzer, as part of his 2007 reform, raised the maximum weekly benefits which previously were capped for years at $400 a week. Today, thanks to Spitzer's increases, the average weekly benefits are now capped at $792. What this means is that you have employees who make more money being more motivated to go out of work and remain out of work. Even if the employee never stayed out of work but just received a settlement for, let's say, an injury to an extremity of their body, before the 2007 reform the amount would have been somewhere around $12,500; now they would be receiving about $25,000 due to the maximum weekly benefit increase in 2007, which has significantly added to the cost of workers comp in New York. In fact, recently I was speaking to an insurance company executive about the increase in 2007. He felt that that the only thing that prevented the system from suffering on an even greater scale from this change was a bad economy with very few jobs available. Fewer people were willing to risk being out of work and losing their jobs. However, basically, when offering people more money, some unfortunately tend to abuse the system."
AG: The proposal also includes issuing bonds to cover the $800 million in liabilities of the self-insured group trusts. How do you view this proposed reform?
SF: "This is good news for employers as this would appear to put less financial responsibility on employers that were insured with trusts and shift a good portion of the hefty bills to the state.
"What's more, the proposed reform also calls for closing the Reopened Case Fund, which is a fund that is activated when a claim reopens at least seven years after the work-related accident and three years since the last payment or award of lost wages. This is bad for employers and insurance companies because they were able to pay less for these claims. Furthermore, employers will probably not see any savings for the next several years from this fund's closure. Currently, employers in New York are paying a 4.9% assessment for this fund but as there will still be many claims to administer, this assessment will probably not decrease significantly any time soon. The same holds true for the second injury fund whose assessment still remains at 9.6% despite closing down the fund in 2007. I wouldn't be surprised if the second injury fund assessment stays high for close to another 10 years or more.
"The fact remains that since the 2007 Workers Compensation Reform Act, which attempted to reduce the costs for employers in the State of New York, rates have gone up. Prior to the passing of the Reform Act in 2007, assessments stood at 18.6%; now, they are 18.8%.
"Governor Cuomo says his aim with the proposal is to lower costs and save the state and New York employers $1.3 billion, but he did not provide any details for that estimate. Therefore, our evaluations are based on the information we currently have. There definitely seems to be some positive changes that all parties will benefit from and be happy with, but the question still remains: How will Governor Cuomo's changes show long systemic growth?
"No matter what, the facts show that currently New York's 18.8% assessment surcharges are the highest in the nation, with the average assessment surcharges nationwide at 3.8%. Ultimately, these reforms bode well for insurance brokers, as it looks like the market will continue to firm and premiums will remain high. However, as costs rise, brokers should continue to do everything they can to reduce their clients' costs and work to retain their customers."
About Apex Services
Apex Services offers brokers the quickest and most effective solutions to help maintain their current clients and win new business with its workers compensation premium recovery program for brokers. Apex's program helps to differentiate agencies in an increasingly tough insurance market. For more information about Apex, you can contact Simon at 888-380-2739 or email him at firstname.lastname@example.org. You can also visit www.apexservices.com.