Trend shapes rate outlook

Journal Record, The (Oklahoma City), Sep 20, 1999 by David Meuser The Journal Record

In years gone by, anyone involved in the annual workers compensation rate hearing could expect a two-day event replete with actuaries, economists, pie charts and, of course, attorneys. But with changes in the way rates are set in Oklahoma and with a recent agreement by the three parties to the matter, this year's hearing portends to last only one day, if that much.

The hearing is set for Sept. 28.

Larry Derryberry, representing the National Council on Compensation Insurance, an industry group which has requested a 5.6 percent increase, told the State Board for Property and Casualty Rates, which will hear the matter, that a meeting with the actuaries narrowed the topic of contention to one matter.

"The actuaries were all very interested in reviewing and taking care of what could have been some very serious business," Derryberry said.

Although the amount of interest income insurance companies should be allowed to earn has been the "grand daddy" issue, trend will be this year's topic of major concern. Trend is a forecast of the difference between the expected growth of claims and wage inflation.

If actuaries think claims losses will increase at a rate greater than wage inflation, the trend is positive. If wages are forecast to increase at a rate greater than claims, it is a negative trend.

So what does wage inflation have to do with claims? Since workers compensation premiums, the amount employers pay, are based on wages, inflation is built in. However, if the cost of settling the average claim is increasing faster than wages, insurance companies need a rate increase to pay the claims. On the other hand, if wages increase but claims don't, they could stand a decrease.

In fact, in the current filing, NCCI has asked for a 0.5 percent increase in trend for medical costs and a 2 percent decrease in the trend for the lost wages portion.

But Martin Simons, actuary for Attorney Gen. Drew Edmondson, said the proposed trend factors are too high. Instead of the 2 percent decrease in trend for lost cost wages, he said the figure should be a 4.8 percent decrease. He also recommended no increase or decrease in trend for medical-related expenses. In testimony prefiled with the board, Simons said the overall rate increase should be 0.7 percent, instead of the 5.6 percent requested by NCCI.

Dr. Mark Crawshaw, actuary for the State Board for Property and Casualty Rates, which will review the filing in the Sept. 28 hearing, said in a report to the board that the overall trend factor should be put at zero or assume that the current downward trend will continue. His suggested rate increase is 4 percent

Another reason that the hearing will be limited to one day is that in earlier years, the board actually set full rates. But about five years ago, it made a change in procedure under which it only approves the part of rates related to loss costs in the bureau filing. Later, each company will file its administrative costs and projected profits with the board.

Premiums, which employers pay, are based on rates. In turn, rates are based on a combination of loss costs, which NCCI files, and administrative costs, which companies file.

Since the board will only be reviewing loss costs in its hearing on Sept. 28, it will leave the grand daddy issue of the amount of income insurance companies should be able to keep from their investments, and thus the amount of profit they should make, to be settled later on a company-by-company basis.

David Meuser is the editor of The Journal Record's Oklahoma Business News division.