Carrier Windfall Reports Bring More SIF Scrutiny

By Michael Whiteley, WorkCompCentral

September 20, 2006

More than $34 million in reimbursements made from South Carolina’s Second Injury Fund (SIF) went to insurance carriers — but not employers — during the past two fiscal years because the deadline for calculating experience ratings on old accidents had expired, a prominent actuary told a state Senate committee Tuesday.

Martin M. Simons, the state’s former deputy insurance director and chief casualty actuary, told the Senate Workers’ Compensation Study Committee he has concerns that insurers are reaping a “windfall” as employers miss out on refunds because of miscalculations in experience ratings and a four-year cutoff on experience rating adjustments for the employers.

“While the Second Injury Fund was established to provide assistance, mainly through the experience-rating plan, to employers who hire disabled employees, these older reimbursements provided benefits to the insurance providers but not necessarily to employers, since the time period used in the experience rating plan had expired,” he said.

Simons warned that South Carolina’s workers’ compensation system faces a rate crisis and should examine why other states have closed their second injury funds. But he stopped short of calling for abolition of the fund in South Carolina and said the problem is far broader.

“South Carolina is losing ground at an extraordinary pace as our insurance rates increase by greater amounts than in any other state, and as the industry requests rate increases exceeding those requested in any jurisdiction over the past 15 years,” Simons testified.

He called theories that blame the troubles on workers’ compensation loss costs that were too low in previous years “misguided and limited at best.”

“In summary,” he told the lawmakers, “you are in control of a long, fully loaded freight train traveling at full speed on a snaky, downhill grade, and your goal is get that train to go in the opposite direction. I wish you the best of luck.”

The four-member ad hoc committee held its second meeting Tuesday and scheduled a third for Oct. 10, while the state’s chief administrative law judge considered a request for a workers’ compensation rate increase of 32.9%.

Committee Chairman Larry Martin, R-Pickens, said after the meeting that testimony by Simons and others showed the need to examine the way the fund handles lingering claims.

Lawmakers during the 2005-2006 session rejected workers’ compensation reforms that would have phased out the fund, which was established to protect employers who hire workers previously injured on another job.

The move was triggered by predictions that loss-based assessments in 2005 would double from $127 million a year to $253 million. Fund managers later found ways to reduce the assessments.

But Simons credited 2003 legislative reforms with substantial reductions in the number of new claims filed with the fund in the last half of 2005. Excluding a temporal adjustment, he said, assessments actually dropped from $250 million to $110 million last year, Simons said.

He predicted assessments will drop to $85 million in 2007, to $69 million in 2009 and then climb back up to $83 million by 2011.

Simons and Frank Knapp, president of the South Carolina Small Business Chamber of Commerce, said miscalculations and other problems with the Second Injury Fund have triggered a major impact on overall loss costs used to calculate South Carolina workers’ compensation rates.

Knapp’s group commissioned a study last year that concluded experience modifiers were not applied to ratings for South Carolina businesses in 51% percent of the cases where they should have.

“Any SIF claim that is ‘perfected’ or accepted by the SIF four years or more after the date of the accident results in the business’s experience modifier not being adjusted downward to reflect an SIF claim,” Knapp said. “Thus, the business does not benefit from premium reduction after such an SIF claim.”

But Knapp called upon lawmakers to abolish that policy and adjust experience modifiers for old claims.

He said the Second Injury Fund has begun to correct itself amid predictions by the National Council on Compensation Insurance Fund that scrapping the fund would boost workers’ compensation rates by 17% to 25%.

To eliminate high reserves in the fund, the Small Business Chamber also is calling on the state to lower the formula by which it calculates assessments. The Second Injury Fund now sets the assessments by multiply the previous fiscal year’s payouts by 1.75 and subtracting the balance of the fund at year’s end.

Martin said the committee will tackle the question of adjustments on old claims. Its agenda has grown to include a look at previous court decisions affecting future rates, the acceptance of medical evidence into the record and opening lines of communication between doctors, carriers and doctors, he explained.

Martin said he expects those issues to surface in reforms when lawmakers return to Columbia the second Tuesday in January. The panel is a long way from recommending that the SIF be abolished, he insisted.

“We’ve got a lot of ground to cover,” Martin said.

–By Michael Whiteley, WorkCompCentral Southeast Bureau Chief

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