Dorothy Parker on Insurance Workers’ Comp Experience Modification Change Certificates Of Insurance—Are The Bad Old Days Coming Back?

And Now For Something Completely Different— Dorothy Parker on Insurance

Dorothy Parker, the doyenne of the Algonquin Round Table in the 1920s and the quintessential New Yorker, has always been one of my heroes. How could you not love someone who said the two most beautiful words in the English language are ‘cheque enclosed’?1

However, an NPR piece the other day was news to me. When she died in 1967, Parker left her estate to Dr. Martin Luther King, whom she had never met. When King was assassinated on April 4th of the following year, the estate, according to the terms of her will, went to the NAACP. I never knew that side of Parker. And it explains why her ashes are interred in Baltimore—the headquarters of the organization. I think she’d have appreciated the irony.

There is an insurance connection to Dorothy Parker:

Bohemia

Authors and actors and artists and such

Never know nothing, and never know much.

Sculptors and singers and those of their kidney Tell their affairs from Seattle to Sydney.

Playwrights and poets and such horses’ necks

Start off from anywhere, end up at sex.

Diarists, critics, and similar roe Never say nothing, and never say no.

People Who Do Things exceed my endurance;

God, for a man that solicits insurance! 2

Not exactly a compliment, but I’ll take any scrap from her table. I wonder if Parker was inspired by a vaudeville ditty of the day entitled “There’s No One With Endurance Like The Man Who Sells Insurance” by Frank Crumit?3 Or was Crumit inspired by Parker?

Workers’ Comp Experience Modification—The Best Will Get Better, the Worst Will Get Worse and the Fairly Good May Get Fairly Bad

The NY Compensation Insurance Rating Board is at it again. The split point, a key part of experience modification calculations, will change from $10,000 to $15,000 on 10/1/15.4 Don’t just groan, “Why should I care,” and move on to the next topic. The change in the split point increases your ability to provide value to your clients. It pays to learn about it.

The theory underlying experience rating holds that multiple claims are more indicative of future probable losses than a single large loss and that’s what experience rating is all about. It’s not intended to punish the insured for having claims or to enrich insurers at the expense of insureds. Experience rating plans are revenue neutral for insurance companies. The amount received from those with poor experience is offset by the reduction in premium to those with good experience.

All experience rating plans reduce the impact of large losses and increase the impact of small, frequent claims. Liability experience rating plans usually handle this by capping the losses used for experience rating purposes at a low amount, such as $50,000 per loss. Workers’ compensation employs a more sophisticated system. Only that portion of each loss below the split point, called the primary loss, is used in full to calculate an insured’s experience modification. The amount in excess of the split point is recalculated in part based on the insured’s actual experience and in part on losses that a typical insured is expected to incur. The sum of the actual primary losses and the calculated excess loss is compared to the total expected primary and excess losses to derive an experience modification. Thus, an insured will be charged with losses in its experience rating calculation even if it has had no claims at all. The weight given to the insured’s own excess loss experience increases with the size of the premium.

For all but the largest insureds, reducing the reserve for a loss from $5,000 to $10,000 can produce a noticeable improvement in an insured’s experience modification because the entire $5,000 will be removed from the experience calculation. Reducing the reserve for a $100,000 loss to $95,000 will not have the same effect. That’s good news for producers because it can often be simpler to find errors in small reserves.

About eight months before a client’s experience modification date, request a loss run. Look first for claims with open medical reserves where no payment has been made in the last six months. Some of those losses may be ready to close for the amount paid to date. Next, review the remaining open claims. Ask the insured for information about the current status of claims with open reserves. That may give you information that supports your argument that the reserve should be reduced. It will also alert the insured to your efforts to improve its experience modification. Ask the claims handler for current status of open claims and whether any claims with open reserves can be closed for the amounts paid to date. Check with the insured to see if they have anything to add. For larger accounts once you’ve picked the low-hanging fruit, you might suggest one of the contingent fee services that review experience modifications.

Something else you’ll want to do is alert your clients to the change. The change will be revenue neutral for insurers; it’s designed so that increases in experience modifications will be offset by the ones that decrease. However, it won’t be revenue neutral for insureds.

Here’s an example that will baffle your insured: Unlucky Inc. has incurred three claims in the experience modification period of $15,000 each. Under the $10,000 split point in effect when the modification for its current policy renewed on 1/1/15, its experience modification was 1.20, that’s a 20% increase over standard premium. If there are no changes in exposure or claims, the rating on 1/1/16 will be 1.38—a 38% increase over standard premium.

That’s caused by an increase in the insured’s primary losses from $30,000 to $45,000 due to the change in split point, even though the total amount of the losses didn’t change. (Because all the losses were $15,000, the excess losses dropped from $15,000 to zero, but excess losses have much less effect on experience modifications.) The actuarial rationale for this is that groups of insureds with higher primary losses, and therefore higher claim frequency, will have worse claim experience in the future than groups of insureds with lower primary losses. That may make actuarial sense, but it’s a hard sell to an irate insured.

Another apparent anomaly: Suppose our hypothetical Unlucky Inc. had only one $15,000 claim producing an experience rating of .97 under the $10,000 split point. If there are no changes in exposure or losses, its rating will be 1.01 under the $15,000 split point. Again, that’s because the primary loss increase will more than offset the reduction in excess losses.5

I’m sure that it works actuarially and I’m also sure that no insured will ever accept your explanation. Admittedly there will be many insureds with little change and others whose ratings improve, but there will definitely be pain for some. If Unlucky were lucky and had had no claims at all in either rating period, its rating would have improved from .89 to .87 with the change to the $15,000 split point.

A plain-language explanation of experience modification is available on the National Council on Compensation Insurance (NCCI) website. https://www. ncci.com/documents/abc_Exp_Rating.pdf. It’s worth looking at, even though New York is not part of NCCI. New York’s workers compensation experience modification plan is similar in most ways, but not all.

NCCI prepares filings for almost 40 of the states, but the filings do not become effective until they are filed with and approved by the individual states. One of the ways that NCCI experience modification calculations differ from New York is that NCCI adjusts the split point annually based on inflation. The NY Compensation Insurance Rating Board is considering changing to annual adjustments in the split point, but hasn’t made a decision yet. Applying small increases to the split point each year avoids the shock to some insureds than can result from a one-time $5,000 change in the split point. Anticipate the problems you’ll face. Review your clients’ claims and let them know you’re doing it. Let them know that the change in experience rating calculations may increase the experience rating modifier for some insureds, generally due to claim frequency. Offer to have a tentative mod calculated for those insureds for whom workers’ compensation is a major cost item, e.g. contractors who bid jobs with large payrolls and high workers’ compensation rates.

Also point out that insureds with low frequency may see their experience modification go down, thereby reducing their premiums. Although you won’t have done anything to bring about that change, you may get credit for it. You will certainly be blamed for any increase, for which you are equally blameless.

Certificates of Insurance— Are the Bad Old Days Coming Back?

In the June 15, 2015 issue of the Insurance Advocate, I wrote that the NY Department of Financial Services would publish a list of approved certificate of insurance forms in connection with the new legislation that outlawed using or even requesting unapproved certificates. The list is now available.6 It contains the expected ACORD forms, but the others are surprising.

ACORD received approval of 11 certificate of insurance forms (numbers 21 through 31)—including different editions of some of them—plus the 855NY New York Construction Certificate of Liability Insurance Addendum, which I was particularly glad to see. 855NY is a form that owners should require from every construction contractor.7

The surprises were the forms other than ACORD. The first surprise was that there were so few of them. There are really only two other filers at this writing (September 8, 2015): New York City and an independent agent who writes a specialty class of business. The second surprise is that the New York City filing may indicate that we’re heading back to the bad old days of public bodies imposing onerous requirements.

The independent agent, Sullivan & Strauss located in Lake Success, NY, filed a certificate of insurance and an evidence of insurance form for use in connection with its recreational boat insurance program. The certificate is a pared-down version of an ACORD certificate. The leadin language states that the policy listed has been issued and is subject to that policy’s terms and conditions, any other document or contract to the contrary notwithstanding. Like the ACORD form, it states that the “certificate does not amend, extend or alter the coverages afforded by the policy.”

It does not contain the misleading language the ACORD forms use with regard to cancellation notice. ACORD forms say “should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.” I’m glad that language is not included. It’s at best misleading and at worst dishonest. A typical layperson would assume that the insurance company has agreed to provide notice to the certificate holder, when, in fact, the opposite is true. The overwhelming majority of insurance policies call for notice of cancellation to be given to the first-named insured and no one else. There’s no provision for a certificate-holder to receive notice unless the policy is specifically endorsed. I’ve never seen a policy endorsed in that way. On balance, I’m comfortable with Sullivan & Strauss’s certificate.

The filings on behalf of New York City Agencies, Departments, and Offices are more problematic. They require the agent or broker to sign the following statement when submitting a certificate of insurance: “The undersigned insurance broker or agent represents to the City of New York that the attached Certificate of Insurance is accurate in all material respects.” The name and title of the signing official is required and his or her signature must be notarized.

I don’t like that. Aside from the added work to have the certificate completed and notarized, what does the phrase “accurate in all material respects” mean? If the policy contains a non-standard endorsement limiting coverage that is not mentioned and a claim is denied that would otherwise have been covered, is that a material misrepresentation? Is a clerical error in completing the certificate a material misrepresentation? How do you prove it was a clerical error and not a deliberate act? You may want to increase your E&O insurance limits before you sign one of these forms.