Workers’ Compensation Capacity for Professional Employer Organizations (PEO)

Workers’ Compensation has long been a foundational pillar in the product offering of the PEO model.  Not all carriers are up to the task of offering this line of coverage to a PEO, however, mostly due to the actuaries and legislative complexities and rules that are different by State.  In no State, statute insurance regulations and actuarial rules (NCCI, WCIRB, etc.) actually integrate.  While there are added levels of complexity for carriers to administer and service PEO clients, especially with regard to master policies, there are many reasons our carrier partners have dedicated themselves to this space.  PEO workers’ compensation programs consistently enjoy lower loss ratios and shorter claims development trends that non-PEO monoline comp.  Most PEOs are sophisticated risk management and underwriting organizations with a commanding understanding of how to manage and implement a profitable workers’ compensation program.  Typically, PEOs offer robust loss control and prevention guidance to their client companies; assisting small business with attaining much safer work environments than they would otherwise be able to achieve.  They also employ internal claims management staff who are dedicated to ensuring their injured workers are treated thoroughly and expeditiously, providing the best possible outcome for all parties.  For these reasons, carriers who decide to entertain PEOs as clients are rewarded with reliable, profitable, long-term carrier/client relationships.

Recent movements

This space continues to evolve.  The last 12-18 months has borne witness to many marketplace adjustments as each carrier strives to find their ideal niche within the space.  Key Risk Insurance Company (a WR Berkley Company) is a powerful new addition to this elite club.  Having been working in the comp space for nearly 35 years, they entered the PEO arena just this year, bringing with them an impressively diversified portfolio with over $2 billion in financial prowess and an A+ (Superior) AM Best rating.

Current players

A workers’ compensation program can be structured in a few different ways, depending on the needs, client makeup and financial positioning of the PEO.  For this reason, it is very important that any given PEO has the right carrier partner at their side.  Typically, these programs can be broken up into two main categories, Guaranteed Cost and Loss Sensitive.  A Guaranteed Cost program can offer a PEO a clear and understood total liability.  Pricing is based on 100% coverage of all approved exposures and rates are understood from the onset of the policy through policy expiration.  Guaranteed Cost programs, however, can have more restrictive underwriting and jurisdictional limitations than a Loss Sensitive program.  There are many different ways to structure a Loss Sensitive program.  In general, these programs are splitting the total anticipated claims costs between the PEO and the carrier; this cost is an unknown, however our predictive pricing models have come a long way in nailing down actual program outcomes.  Benefits to this model include broader underwriting guidelines and more competitive pricing.  These programs can tie a PEO’s assets up for an extended period of time, however, as collateral is held by the carrier until all claims for a given policy term have fully matured, which can take years.  

Impacts of COVID-19 on Workers’ Compensation Market Appetite

The advent of COVID-19 has brought about major changes to the marketplace for all workers’ compensation carriers, not just PEO partners.  Many carriers have issued a moratorium on covering any healthcare exposures.  Others are now adding jurisdictional considerations to these risks, with exclusions applying specifically in presumptive states.  Some carriers have added additional underwriting requirements for industries with residential delivery exposures, such as requiring a deductible to cover smaller frequency issues such as dog bites.  Nearly all carriers have added additional pandemic screening questions to their underwriting requirements to include supplemental applications, especially for front line industries such as restaurants, nursing homes, home health and retail.  This is likely a change which will endure long after this current pandemic passes. 

These market adjustments aside, PEO carriers continue to remain engaged and enthusiastic about their PEO clients.  That being said, PEOs should look closely at their composition of clients and take care to place high risk or high exposure entities outside of their master policies as makes sense in an effort to protect their experience modification and loss sensitive positions.

Call to Action

Every PEO carrier is as different in their approach to thriving in this industry as is every PEO.  How do you know your PEO workers’ compensation program is placed with the best carrier partner to cater to your needs and methods of operations?  Thankfully, this industry has been graced with the benefit of the lifelong dedication of some really brilliant minds to help answer that question.  My mentor, Paul Hughes, for example, has successfully created 7 workers’ compensation insurance programs specific to PEO over the past 19 years.  Under his guidance, these programs have rendered nearly $2 billion in workers’ comp placements for PEOs to date, with no signs of slowing down. 

If you would like to better understand all market and program offerings available to your PEO, we would love to help.

Paul Hughes321.217.7477phughes@libertateins.com
Sharlie Reynolds305.495.5173sreynolds@libertateins.com
David Burgess321.436.8214dburgess@libertateins.com

NAPEO White Paper on How PEO Clients Fared in the First Months of the COVID-19 Pandemic: A Comparative Analysis

Laurie Bassi and Dan McMurrer
McBassi & Company
September 2020

The National Association of Professional Employer Organizations has completed a comprehensive review of the impacts a PEO partnership has had in benefiting small businesses during the first few months of the COVID-19 Pandemic.

The full report can be reviewed at the following link:

https://napeo.blob.core.windows.net/cdn/docs/default-source/white-papers/2020-white-paper-final.pdf?sfvrsn=992b2bd4_16

Overview of the Proposed Florida Workers Compensation Rate Filing Effective January 1, 2021

The NCCI has released the following publication discussing the proposed rate filing for Florida workers’ compensation rates effective January 1, 2021.  This discussion includes a summary of the proposed filing, an overview of the methodology behind the rate-making process, a review of the impact of the Castellanos v. Next Door Company et al Supreme Court decision from 2016 and assumed impacts of COVID-19 and other communicable diseases on the workers’ compensation system.

The attached power point authored by Dawn Ingham and Jay Rosen was released by the NCCI and provides many meaningful datasets considered by the bureau in the rate-making process.

Florida January 1, 2021 Workers Compensation Rate Filing Power Point

Overview of the Proposed Florida Workers Compensation Rate Filing Effective January 1, 2021

  1. Summary of Filing

The purpose of this overview is to provide context and further explanation for the accompanying proposed workers compensation insurance rate filing that was filed under separate cover by the National Council on Compensation Insurance (NCCI) on August 27, 2020, with the Florida Office of Insurance Regulation (OIR) for its review and approval. NCCI is a licensed rating organization authorized to make recommended rate filings on behalf of workers compensation insurance companies in Florida. NCCI’s filing is objectively prepared, in compliance with actuarial standards. The filing proposes a -5.7% average rate level decrease in the voluntary market effective January 1, 2021.

This filing comes at a time when, nationally, the workers compensation system is experiencing unprecedented results. The combination of underwriting discipline, moderating severity, declining frequency, and adequate reserves has resulted in six straight years of combined ratios under 100% (below 100% is indicative of an underwriting profit). For decades, with few annual exceptions, frequency has continued on a clear downward path driven by technology, safer workplaces, improved risk management, and a long-term shift from manufacturing to service sectors. NCCI has no expectation that this trend will change course. For the last several years, severity trends have remained fairly moderate, tracking very closely with wage inflation. For these reasons, NCCI’s analysis has indicated decreases across most of its jurisdictions in recent years.

The filing is based on experience data as of year-end 2019 from Policy Years 2017 and 2018. Favorable experience has been observed in each of these years. Florida’s lost-time claim frequency continues its decline while the state’s average indemnity and medical costs per lost-time claim have exhibited relatively more year-to-year volatility. The final proposed rate level change results after incorporating changes to several expense components.

 

  1. Overview of Ratemaking Methodology

NCCI’s approach to determining the proposed overall average rate level change utilizes widely accepted actuarial ratemaking methodologies. The approach employed in this filing includes the following steps:

  • Premium and loss information is adjusted to the latest approved rate and benefit levels
  • These adjusted losses and premiums are used to calculate a loss ratio for each historical year (loss ratio = losses / premium)
  • Loss ratios, along with other information, are analyzed in order to determine trend factors. Trend factors are applied to historical loss ratios to estimate loss ratios for the effective period in this filing.
  • As a final step, any proposed benefit and/or expense changes are applied to the projected loss ratios

The average rate level change indicated by the data is calculated for the years in the filing’s experience period. If the final projected loss ratios are greater (less) than 1.000, then an increase (decrease) in the average rate level is indicated.

Once the proposed voluntary rate level change is determined, NCCI separately determines rates for each workers compensation job classification (class); the rates and year-over-year changes vary by class and are based on the available data for each job class.

 

III. Impact of the Castellanos Decision

In 2016, a Florida Supreme Court decision in the case of Castellanos v. Next Door Company, et al. brought about retroactive changes to claimant attorney fee levels for workers compensation insurance. An assessment of the emerging impact of the Castellanos decision on Florida’s workers compensation marketplace was undertaken as part of last year’s rate filing pursuant to the Order on Rate Filing issued by the OIR on October 31, 2017. As part of this year’s filing review, NCCI again reviewed insurance company feedback, the change in claimant attorney fees, and the change in loss ratios that have occurred since the Castellanos decision.

Insurance Company Feedback

Individual feedback was obtained from the state’s largest workers compensation writers reporting financial data to NCCI. Feedback received this year was very consistent with and largely unchanged from that received last year. Most carriers said they experienced claim cost increases after the Supreme Court’s decision. Since 2016, increases in claimant attorney fees were reported by all carriers interviewed. The carriers reported that over the last couple of years claimant attorneys have increasingly become involved with:

  • relatively smaller claims, such as those focused on obtaining a slight change to the injured worker’s average weekly benefit
  • types of claims that went without representation prior to the Castellanos decision

Carriers reported that litigated claims generally take longer to close and are costlier when compared with non-litigated claims. Some carriers reported that litigated claims now represent a relatively larger portion of their book of business versus their experience prior to the Castellanos decision.

Claimant Attorney Fees

Claimant attorney fees are reported as indemnity losses in the NCCI Financial Call data on which this filing is based. An analysis of these loss development factors shows a marked increase for valuation dates before and after the Castellanos decision. The increase in claimant attorney fees communicated by the carriers is supported by data obtained from the Florida Division of Administrative Hearings (DOAH). DOAH data received through the middle of June 2020 shows that claimant attorney fee percentages have increased from 13% prior to the Castellanos decision to more than 20% in recent years. The derivation of the claimant attorney fee percentages by year is shown in the rate filing.

Loss Ratios

A review of Florida’s historical indemnity paid loss ratios illustrates two general patterns. When focused on a single year, results are worsening over time. The impact of the Castellanos decision has likely contributed to this pattern. When looking across years, results are improving over time. This pattern is consistent with the very favorable WC industry results observed countrywide over this period.

The combination of two counteracting impacts has contributed to the current state of the Florida WC system. To date, the especially-favorable WC industry results observed across the country have more than offset the observed cost increases associated with the Castellanos decision.

 

  1. COVID-19

The COVID-19 virus (coronavirus) is the latest in a series of infectious diseases that have emerged over the last 20 years. Since 2003, the world has seen the emergence of SARS, H1N1, Ebola, and Zika viruses. While the overall impact of each of those diseases has been well documented, potential impact of COVID-19 to the workers compensation system is in the very beginning stages of being understood; therefore, the data underlying this filing does not include claims from COVID-19. Due to the lack of this COVID-19-related ratemaking data and the current level of uncertainty, NCCI has not yet assessed the potential impact on future rate levels. As such, no explicit adjustments have been made in this filing for COVID-19. While it is possible that COVID-19 may result in significant adverse loss development and deteriorating loss ratios, the impact on overall system costs could be small.

It is reasonable to believe COVID-19 will give rise to component changes that may, to some extent, have offsetting impacts on system costs. For example:

  • There could be an increase in the number of compensable workers compensation claims arising in frontline, COVID-19-related occupations
  • There could be a decrease in workers compensation claims due to the increased number of employees who are teleworking

Short- and long-term COVID-19-related impacts may also differ. For example:

  • In the short term, during the COVID-19 pandemic, there may be a reduction in the number of physical therapy sessions attended by injured employees and/or a deferral in the number of workers compensation-related surgeries that are not deemed to be immediately critical
  • Over the longer term, an increase in these types of services may be expected as the current burden on medical-related personnel and facilities is lessened
  • In economic downturns, workers may forego filing claims for relatively minor injuries to maintain active employment as the economy navigates these uncertain times—leading to temporary downward pressure on claim frequency

NCCI has begun researching and gathering information to preliminarily gauge the pandemic’s direct and indirect impacts on claim frequency, severity, and durations. More in-depth analyses related to COVID-19’s impact on frequency and severity will be conducted over time as additional aggregate data becomes available. It is anticipated that assessing the impact of the pandemic on claim durations will likely take longer, as claim-specific data would be required.

NCCI has also started accumulating pre-COVID-19-level benchmarks that will help facilitate pre- to post-COVID-19 comparisons in the future. For example, detailed medical reports along with associated metrics are being developed to analyze both the direct impacts (e.g., claim costs) and indirect impacts (e.g., whether the slowdown of medical treatments has returned to normal) of the COVID-19 pandemic.

In April 2020, NCCI published a white paper, “COVID-19 and Workers Compensation: Modeling Potential Impacts,” which provides estimates of workers compensation system cost impacts under various hypothetical scenarios. NCCI also released an interactive tool that allows users to choose their own assumptions and model the potential impact to expected losses for the associated jurisdiction and workforce under the scenario framework described in the research brief.

These and other related materials are available on NCCI’s website at www.ncci.com.

Governor Ron DeSantis Announces Florida’s Participation in the Federal Lost Wages Assistance Program

On Wednesday, Governor Ron DeSantis announced Florida’s participation in the Federal Lost Wages Assistance Program.

Contact: Governor’s Press Office
(850) 717-9282

Media@eog.myflorida.com

Governor Ron DeSantis Announces Florida’s Participation in the Federal Lost Wages Assistance Program 

Tallahassee, Fla. — Wednesday, August 26th, 2020, Governor Ron DeSantis announced that the Florida Department of Economic Opportunity (DEO) will submit Florida’s application to participate in the Lost Wages Assistance (LWA) Program.

This program, authorized by a memorandum from President Trump, provides additional temporary benefits for individuals who are eligible for Reemployment Assistance for weeks of unemployment ending on or after Aug. 1, 2020.

“On behalf of Floridians who are continuing to face challenges finding employment, I would like to thank President Trump for providing additional funding while they get back on their feet,” said Governor DeSantis. “We appreciate the opportunity to provide this temporary assistance through the Lost Wages Assistance program.”

Pending federal approval, this will allow Florida to offer an additional $300 per week to eligible Reemployment Assistance claimants. To be eligible for this benefit, claimants must be currently receiving at least $100 in an approved Reemployment Assistance program weekly benefit amount and must certify that they are unemployed or partially unemployed due to the disruptions caused by COVID-19. Pending approval of Florida’s application, payments will be retroactive to August 1, 2020.

Floridians who are currently receiving Reemployment Assistance benefits, are unemployed or partially unemployed due to COVID-19 and are currently receiving at least $100 per week in Reemployment Assistance benefits will be eligible to receive the additional $300 benefits from the LWA funds funded by the Federal Emergency Management Agency (FEMA). This includes individuals receiving:

  1. State Reemployment Assistance, including Unemployment Compensation for Federal Employees (UCFE) and Unemployment Compensation for Ex-Service members (UCX);
  2. Pandemic Emergency Unemployment Compensation (PEUC);
  3. Pandemic Unemployment Assistance (PUA);
  4. Extended Benefits (EB);
  5. Short-Time Compensation (STC);
  6. Trade Readjustment Allowance (TRA); and
  7. Payments under the Self-Employment Assistance (SEA) program.

The LWA program will be administered similarly to the Federal Pandemic Unemployment Compensation program. No additional application will be necessary. Eligible Floridians who are currently receiving Reemployment Assistance will receive their LWA benefits the same week they receive their weekly Reemployment Assistance benefits. DEO highly recommends that Reemployment Assistance claimants select direct deposit as their means of receiving benefits to ensure payments are received as quickly as possible.

Funding for this program comes from FEMA disaster relief funds. Guidance from FEMA and the U.S. Department of Labor indicates that states should be able to receive approximately three weeks’ worth of benefits upon approval, with additional weekly approval being granted on a weekly basis, depending on the remaining balance of the fund. However, funding could end at any time, and is contingent upon a required state match based on state re-employment assistance paid out during the period.

DEO is currently preparing to implement the LWA program to ensure eligible Floridians receive the additional benefits as quickly as possible.