In a decision affecting businesses and insurers across Massachusetts, the Division of Insurance has ordered a substantial reduction in workers’ compensation insurance rates of 14.6% starting July 1, 2024. While the amount of reduction may say it all, this article delves into the complex ruling, examining the key factors that led to this unexpected decision.
Summary of Decision and Rate Reduction
On June 21, 2024, the Massachusetts Division of Insurance issued a final decision on workers’ compensation insurance rates. The decision disapproved the 2023 Filing submitted by the Workers’ Compensation Rating and Inspection Bureau of Massachusetts (WCRIBMA) for rates intended to take effect on July 1, 2024.
The WCRIBMA had initially proposed an 8.30% statewide average decrease, later revised to 7.6%. State law requires that proposed classifications and premiums be “ not excessive, inadequate, or unfairly discriminatory.” The Division concluded that the proposed classifications failed to meet this standard.
In a move that will significantly impact businesses across the state, the Hearing Officers exercised their authority to order a statewide decrease in average workers’ compensation insurance rates of 14.6%, which the Acting Commissioner, Kevin Beagan, approved. This unexpected ruling nearly doubled the reduction proposed by the WCRIBMA.
Introduction and Procedural History
The road to this decision began on December 22, 2023, when the WCRIBMA submitted its filing for a workers’ compensation general rate revision. The proposed rates were intended to take effect on July 1, 2024, marking the beginning of a complex regulatory process.
The Commissioner of Insurance (“Commissioner”) designated Jean F. Farrington, Esq. and Matthew A. Taylor, Esq. as presiding officers (“Hearing Officers”) for the rate hearings on the WCRIBMA filing.
A public comment hearing was scheduled for February 7, 2024. This hearing provided a forum for various stakeholders, including the WCRIBMA, the State Rating Bureau (SRB), and the Attorney General’s office (AGO), to present their views and concerns regarding the proposed rates.
The process continued with cross-examinations of witnesses from the WCRIBMA, which took place from March 19 to 21. Subsequently, the SRB and AGO submitted their advisory filings on April 3, 2024, followed by further cross-examinations of their respective witnesses. The WCRIBMA then had the opportunity to submit a rebuttal filing on May 10, with additional cross-examinations on May 16. The process concluded with surrebuttals from the SRB and AGO on May 23 and final cross-examinations on May 29.
This extensive procedural history underscores the thorough and deliberative nature of the rate-setting process in Massachusetts, ensuring that all perspectives are considered before a final decision is reached.
Statutory Framework
The decision is grounded in the statutory requirements set forth in Massachusetts General Laws, Chapter 152, §53A. This law establishes the framework for approving workers’ compensation insurance rates in the Commonwealth.
Key provisions of the statute require that:
1. Any insurance company writing workers’ compensation insurance in Massachusetts must file its risk classifications and premiums with the Commissioner of Insurance.
2. The Commissioner must conduct a hearing to determine whether the proposed classifications and rates are not excessive, inadequate, or unfairly discriminatory for the risks they cover.
3. The proposed rates must fall within a range of reasonableness.
4. The Commissioner must not approve classifications or rates that include dividends or other payments returned to policyholders, expenses exceeding the filing insurer’s needs, or unreasonable commission allowances.
5. The Commissioner must find that insurers employ acceptable cost control programs and techniques.
Importantly, the filer (in this case, the WCRIBMA) has the burden of proof to demonstrate that its proposed rates meet these statutory standards. The Hearing Officers sitting as designees of the Commissioner have the authority to analyze each element of the rate filing and may reject the proposed rates if any element fails to meet the statutory standard.
Contested Issues
The decision highlights several key areas of contention that led to the disapproval of the WCRIBMA’s filing. These issues form the core of the Hearing Officers’ reasoning and provide insight into the complexities of insurance rate-setting.
1. Loss Development Issues
A central dispute in the decision revolves around calculating loss development factors (LDFs). LDFs are crucial in estimating the ultimate value of workers’ compensation claims, as these claims often take years to reach their final settled value.
The WCRIBMA proposed using only data from 2021 and 2022 to calculate LDFs for indemnity (lost time) claims, excluding 2020 data due to the unusual circumstances of the COVID-19 pandemic. However, the Hearing Officers found this approach unreasonable, stating that it fails to capture the full historical record of loss development.
The decision argues that including 2020 data would provide a more complete picture, encompassing pre-COVID years (2018-2019), the peak COVID year (2020), and the recovery years (2021-2022). As a result, the Hearing Officers recommended using a five-year average (2018-2022) for calculating LDFs.
This adjustment is significant because the WCRIBMA’s approach, using only 2021-2022 data, produced higher LDFs, which would have resulted in higher estimated future losses and, consequently, higher rates. By including the lower 2020 values in a five-year average, the resulting LDFs are expected to be lower, contributing to the overall rate decrease.
2. Underwriting Profit Provision
Another major point of contention was the WCRIBMA’s proposed changes to the methodology for calculating the Underwriting Profit Provision (UPP). The UPP is designed to provide insurers with a fair and reasonable rate of return.
Historically, the UPP has been calculated using an Internal Rate of Return (IRR) model based on industry-wide data for casualty insurers. However, the WCRIBMA proposed a new methodology weighted by market share, focusing specifically on insurer groups writing workers’ compensation in Massachusetts.
The Hearing Officers found that the WCRIBMA failed to demonstrate that this new approach was more appropriate than the longstanding industry-wide model. The decision noted several issues with the proposed methodology:
– The sample group used by the WCRIBMA contained incomplete data for many companies.
– The WCRIBMA’s estimation of the cost of debt was not supported by evidence.
– The new method for calculating asset allocation appeared to artificially reduce the overall asset rate of return.
The Hearing Officers concluded that the WCRIBMA did not meet its burden of proving that the new methodology would ensure rates conform to the statutory standards. This finding significantly impacted the final rate decision, as the UPP is a key component in determining overall insurance rates.
3. Calculating Rates for Certain Business Classifications
The decision addressed a specific issue related to Class Code 9033, which covers housing authorities. This classification is unique because a single Self-Insurance Group (SIG), Massachusetts NAHRO Self Insurance Group, Inc. (NAHRO), conducts approximately 85% of all business within this code.
The Commissioner designated Class Code 9033 as a “state special” code, meaning that the use of Countrywide Data as a complement to credibility is inappropriate for this classification. Instead, the decision ordered the use of SIG Data from NAHRO as the complement to credibility for Class Code 9033 in future rate filings.
This decision was based on the finding that the historical differences between the Massachusetts Data and the Countrywide Data for this class code were significant enough to warrant special treatment. The Hearing Officers rejected the WCRIBMA’s concerns about data quality and auditability, finding them insufficient to exclude the use of NAHRO’s data.
4. F-Class Rate Omission
The Hearing Officers’ decision took issue with the WCRIBMA’s omission of rate calculations for F-classes, which cover employees regulated under the United States Longshore and Harbor Workers Compensation Act. The WCRIBMA had proposed no change to the F-class rates from those approved for use as of July 1, 2023.
The Hearing Officers found this omission unacceptable, noting that it would effectively maintain 2023 rates for F-class employers while all other classes received a rate decrease. The decision states that the WCRIBMA failed to demonstrate that the 2023 F-class rates are not excessive or unfairly discriminatory for 2024.
5. Data Adjustments
The decision also addressed several data adjustments made by the WCRIBMA in its filing. Notably, the Hearing Officers found the WCRIBMA’s exclusion of AIG’s commission and brokerage data from the expense calculation to be unreasonable.
The WCRIBMA had excluded this data on the grounds that AIG’s commission and brokerage ratios were “outliers” compared to the rest of the industry. However, the Hearing Officers found that the WCRIBMA failed to explain this exclusion satisfactorily, particularly given that AIG’s data was consistent with its own historical trends.
The decision orders the restoration of AIG’s data to the set used to develop the industry-wide expense provision, which is expected to result in a lower overall rate indication.
Additionally, the decision addressed the issue of swing limits, which cap the allowable range of rate changes by industry group. While the WCRIBMA proposed maintaining its +/- 20% swing limit, and the AGO suggested reducing it to +/- 15%, the Hearing Officers declined to approve either proposal. Instead, the decision suggested that averaging recently stipulated values would produce a result that better reflects the historical record.
Cost Containment
An important aspect of the rate approval process is the assessment of insurers’ cost containment efforts. The decision found that the WCRIBMA’s Cost Containment Filing was sufficient to support a finding that insurer cost control programs are effective.
The filing included survey responses from the ten largest NAIC insurer groups writing workers’ compensation insurance in Massachusetts. These responses detailed various cost control measures, including adaptations made during the COVID-19 pandemic.
Insurers reported significant shifts to virtual operations, affecting claims processing, medical procedure approvals, and communication systems. Many of these changes, such as increased use of telemedicine and virtual inspections, have been retained post-pandemic due to their cost-saving benefits.
The decision concludes that these adaptations have allowed insurers to maintain their level of pre-COVID operations while simultaneously demonstrating cost savings through virtual methods.
The Final Ruling of the Hearing Officers
The two hearing officer’s final ruling providing for the 14.6% reduction of rates stated:
We find that, on the record of this proceeding, the WCRIB’s 2023 Filing for rates effective July 1, 2024, contains proposed classifications or premiums that cannot be approved in accordance with M.G.L. c.152 §53A (2) as “not excessive, inadequate, or unfairly discriminatory for the risks to which they respectively apply, and within a range of reasonableness.” We, therefore, disapprove the Filing in this matter. In addition, as each of the parties has advocated for a rate reduction, we must conclude that the rates now in effect are excessive and exercise our authority under M.G.L. c.152 §53A (8) to order a statewide decrease in average workers compensation insurance rates of 14.6%.
Future Filing Date
The decision directs the WCRIBMA to submit its next filing in December 2024 for rates to take effect on July 1, 2025. This continues the recent practice of annual rate filings, ensuring regular review and adjustment of workers’ compensation insurance rates in Massachusetts.
