Workers’ Compensation Insurance—Regulatory Protection and Legislation

Workers’ Compensation Insurance—Regulatory Protection and Legislation

The SC Small Business Chamber of Commerce (SCSBCC) is recognized as the primary organization fighting on behalf of small businesses regarding Workers’ Compensation Insurance in the regulatory and legislative process.

In 2004 in an effort to stabilize or reduce Workers’ Compensation Insurance premiums, the SCSBCC held a series of workshops and convened a task force of stakeholders. As a result of these efforts, the SCSBCC recommended that the Legislature adopt systemic changes to produce more efficient and faster handling of workers’ compensation claims, better oversight of the rating process and reduce fraud. Premium fraud had been conservatively estimated to run $40 million a year.

The reforms proposed by the SCSBCC were included in the 2005/06 state budget – funding for upgrading the Workers Comp Commission computer system and essential additional employees, funding for an Insurance Fraud Unit and the establishment of a Workers Comp Advisory Board.

SCSBCC also began fighting workers’ compensation rate hikes in court in cooperation with the State Consumer Advocate. In 2005, the state’s workers’ compensation rating organization, National Council on Compensation Insurance (NCCI), proposed a 32.9% increase in workers’ compensation loss cost levels. The SCSBCC intervened in this process to fight the rate increase.

In addition, the SCSBCC retained Advanced Insurance Management (AIM) to perform a study regarding the impact on the Workers’ Compensation insurance costs of small employers from the operation of the South Carolina Second Injury Fund (SCSIF). The SCIF was established to hold businesses harmless in workers’ compensation claims by employees whose injuries were made more costly due to pre-existing injuries. This fund reimbursed insurance companies for these excess costs and thus was supposed to protect businesses from individually being rated more risky and thus have higher premiums.  The SCSBCC suspected that small businesses were not receiving the benefits from the SCIF and thus were paying higher premiums than they should have been.

AIM research found that not only did a significant proportion of small employers received no direct benefit on their workers’ compensation insurance premiums due to the operation of the SCIF but the insurance companies were inappropriately receiving compensation from the SCIF and possibly not reducing reported losses accordingly. The result would be specific individual and all small businesses having higher premiums than they should have.

As this research was being performed, the SCSBCC, represented by pro bono attorneys from the Injured Workers Advocates, went to Court and along with the Consumer Advocate fought this increase and proposed only a 12.7% increase. The SCSBCC was the only business organization to fight the big increase in Court. The AIM research results were presented as part of the SCSBCC case against the rate hike proposal. On Oct. 3, 2006, the Court issued an order supporting much of the position of the Small Business Chamber and ordering only an 18.4% increase, a 44% reduction in the industry proposed hike.

Also in 2006, the SCSBCC discovered and made public that an unknown number of small businesses may have been over charged for workers’ compensation due to a computer glitch at the NCCI. The S.C. Department of Insurance had been aware of this problem for a year but had not asked that measures be taken that would get refunds for the small businesses affected. Under pressure from the SCSBCC, in August of 2006, the Department of Insurance issued an order that resulted in the appropriate premium refunds being given to businesses.

As a result of concern the SCSBCC had raised about the integrity of the data presented by the insurance industry in the worker’s compensation regulatory process, in 2007 the South Carolina General Assembly required more regulatory oversight of the process. As a result small businesses have seen stabilization in their individual workers’ compensation premiums.

However, before this new regulation could have an impact, NCCI in December of 2007 again requested an increase in workers’ compensation loss cost. This time the proposed increase was 23.7%. Again the SCSBCC, with lawyers from the Injured Workers Advocates, was the only business organization to intervene to oppose the increase. In May 2008, NCCI, the Consumer Advocate and the SCSBCC reached an agreement for a 9.8% increase thus saving at least $130 million in premiums for small businesses. In addition, NCCI was required to file for a rate adjustment within one year in hopes that a rate reduction would then be justified based on recent data trends.

As expected from the SCSBCC revelations of insurance carriers possibly not accurately reporting losses, the aggressive opposition from the State Consumer Advocate and the SCSBCC and other legislative fixes mentioned above, subsequent proposed loss cost rate adjustments have been -0.3% (2009), -9.8% (2010), -3.7% (2011), +3.0% (2012),  +1.1% (2013), -7.4% (2014), +1.9% (2015) and 2.5% (2016).  The latter increase, according to NCCI, was a function of higher medical expenses not claim frequency which had been flat over the recent eight years used in forecasting.

In 2015, a bill was introduced in the South Carolina Legislature that posed a serious threat to the state’s workers’ compensation insurance system.  The bill would allow large businesses to opt out of the state’s workers’ compensation system if they had an internal program to provide benefits to injured workers.   If enacted and larger businesses did pull out of the state’s workers’ compensation system, small businesses would be hurt in three ways.

    1. INCREASED PREMIUMS FOR SMALL BUSINESSES: Allowing big businesses to opt out of the state’s Workers’ Compensation Insurance System will have the effect of increasing premiums on the small businesses required to have workers’ compensation insurance. The big businesses that opt out will not provide the data for ratemaking and to the degree that the employees of the big businesses have less risk of being hurt on the job the remaining employees in the pool will be considered to have higher risk for injury. Thus premiums will go up on small businesses.
    2. SMALL BUSINESSES WILL BE LESS COMPETITIVE AGAINST BIG BUSINESS: Allowing big businesses to opt out of our state workers’ compensation insurance system will allow them to reduce their workers’ compensation costs. While these businesses (most of which are already self-insured) on paper will be required to offer similar workers’ compensation benefits to their injured workers, those workers will be less likely to actually receive those benefits when injured on the job. This will result from the big businesses not covering the same injuries or having the same benefits as the state’s workers’ compensation program. Plus, the big businesses that opt-out make their own internal decisions about whether an employee deserves to receive any benefits instead of the independent South Carolina Workers’ Compensation Commission. With less workers’ compensation costs, these big businesses will be able to price their goods and services lower and thus have an unfair competitive advantage over their small business competitors.
    3. TAXPAYERS PICK UP THE COSTS SHED BY BIG BUSINESS: Allowing big businesses to opt-out of our state workers’ compensation insurance system allows them to reduce injuries they cover and benefits received thus forcing injured employees to receive some healthcare through Medicaid, Medicare or seek Social Security Disability benefits. Thus, these big businesses reduce their workers’ compensation costs by transferring some of the costs to the public.

The SCSBCC, Injured Workers Advocates and property/casualty insurance trade associations formed a coalition to oppose opt-out legislation.  The legislation did not pass in 2016.