Six years ago, a new organization was launched to fill an important need: effective representation of the general interests of small businesses in the state governmental process. Since then The SC Small Business Chamber of Commerce has established itself as the clear, independent voice of small businesses across the state.
But this independence comes at the price of criticism from big business interests when the Small Business Chamber takes a position contrary to theirs. However, it is exactly this unflinching commitment to fighting for small business that gives credibility to the Small Business Chamber.
In this special edition of the Small Business Bulletin, the battle between big and small business interests is clearly seen on the issue of workers’ compensation. The Small Business Chamber will stay the course regardless of external, well-funded criticism and seek reforms that are truly in the best interest of our state’s small businesses.
Workers’ Compensation Issues
Opposing a 32.9% Rate Hike. On April 24th, the Small Business Chamber takes its fight against the proposed 32.9% rate increase in workers’ compensation loss cost rates into a hearing before an administrative law judge. The Small Business Chamber has been very publicly vocal in its belief that such a rate increase is not warranted based on the data used by NCCI, the National Council on Compensation Insurance that represents the insurance industry. The debate and the Small Business Chamber have even received national press attention since NCCI’s reputation, insurance industry practices and even the S.C. Department of Insurance performance will be challenged at the April hearing. The judge will hear all sides of the issue before making his decision on any rate increase.
Actuary Recommends Only a 12.7% Increase in Rates. A nationally recognized actuary, Martin Simons, has determined that because of the poor quality of the data and other problems in insurance carrier practices, an increase in workers’ compensation loss cost rates should be almost two-thirds less than proposed by NCCI and almost half of the rate increase recommended by the actuary for the S.C. Department of Insurance. Mr. Simons’ report, prepared for the S.C. Consumer Advocate (go to www.scconsumer.gov, click on Breaking News) closely resembles the criticisms raised by the Small Business Chamber in July of last year (http://www.scsbc.org/view_issue.asp?id=28). The three vastly different recommendations for a workers’ compensation loss cost rate increase (12.7% by the Consumer Advocate, 22.4% by the Department of Insurance and 32.9% by NCCI) will be put to an administrative law judge in the April 24th hearing. While the Small Business Chamber would prefer no or a lesser rate increase, it will support Mr. Simons’ analysis and the Consumer Advocate’s efforts to protect small businesses from an unjustified larger rate increase.
A 25% Increase in Premiums Is Not Reform. Bucking the insurance industry and other big business interests, the Small Business Chamber is also opposing legislation to terminate the workers’ compensation Second Injury Fund (SIF). Such a move would result in the need for a 25% increase in workers compensation loss cost premiums according to NCCI, which represents insurance carriers. These additional premiums would be used in the distant future by insurance companies to pay claims that would have previously been paid by the SIF. Based on 2003 premiums, such a rate increase would take over $112 million dollars from small businesses and put it into the pockets of insurance carriers to invest until the funds are needed to pay claims. For this reason and the fact that the SIF does offer small businesses some protection from becoming a “dumping ground” for injured workers from big businesses, the best business decision for small business is to retain the Fund.
Second Injury Fund Assessments To Drop By 70%. When the annual assessment for the workers’ compensation SIF is completed later this year, the assessment should drop far below the 2004 level. This actuarial projection by Mr. Martin Simons is good news for the business community, which saw SIF premiums increase by nearly 100% in 2005. According to Mr. Simons, the reasons for the spike last year are now gone and the SIF should stabilize in the $80 million range for the foreseeable future without any changes to the SIF (http://www.scsbc.org/view_issue.asp?id=32)
But SIF Premiums Aren’t Guaranteed To Drop. Unfortunately, the SIF rates are buried in the insurance company’s “loss cost multiplier”. This multiplier contains the carrier’s taxes, costs, SIF assessment and profit. As the name implies, carriers multiply the approved loss cost rates by this multiplier to arrive at a final premium. Until a few years ago, this loss cost multiplier had to be approved by the Department of Insurance. That procedure was changed to allow carriers to simply file the loss cost multiplier and use it. Consequently, there is no guarantee that any reduction in SIF assessment will be passed on to employers even though carriers were eager to pass on last year’s higher SIF assessments.
State’s Largest WC Carrier Admits Cooking the Books. American International Group (AIG) has admitted fraudulent practices and agreed to pay $1.64 billion in a settlement agreement with federal and state securities and insurance regulators (http://www.insurancejournal.com/news/national/2006/02/10/65250.htm). This scandal has serious implications for the NCCI proposed workers’ compensation rate increase in South Carolina.
AIG’s deceptive business practices go back nearly two decades and include underreporting workers’ compensation premiums to state regulatory agencies including South Carolina’s. AIG was accused of hiding workers’ compensation premiums under other income to avoid paying state taxes and assessments. South Carolina is to receive part of the AIG settlement for these accounting gimmicks.
AIG’s acknowledgements of wrong doing threatens to undermine the insurance industry’s argument that in South Carolina it loses $1.25 for every dollar of workers’ compensation premium it takes in.
“If AIG easily fooled state regulators for years about their workers’ compensation premium income, how do we know that other insurance carriers aren’t also misreporting income?” says Frank Knapp, Jr., president of the Small Business Chamber. “AIG has poked a big hole in the insurance industry’s credibility when it cries about losing money.”
Support for this concern also comes from Mr. Simons’ analysis of NCCI’s workers’ compensation rate filing. According to Mr. Simons, insurance carriers may not be properly reporting revenue they receive from reimbursements from the SIF and from subrogation (receiving funds associated with a claim payment from a third party who is determined to be liable).
“The whole argument used by NCCI, insurance carriers and even our Department of Insurance that insurance companies are loosing money and thus need a big rate increase may be nothing but accounting smoke and mirrors,” says Knapp.
Many Small Businesses Pay More Just For Being Small. Businesses that are required to have workers’ compensation insurance but who are rejected by at least two insurance carriers can be placed in the state’s assigned risk plan and consequently pay much higher rates. The number of businesses in the assigned risk market, handled by selected insurance carriers, increased by 1600% from 2000 to 2004. Carriers can turn down a business for any reason including that the group is just too small. That explains why 73% of the assigned risk policies are under $2500 annual premium.
According to Mr. Simons, the lack of appropriate loss cost data for the assigned risk plan means that the current rates approved by the Department of Insurance might be excessive, inadequate or unfairly discriminatory. As a result, according to Mr. Simons, “The potential additional cost to South Carolina employers … is extremely high.”
Assigned Risk Plan Carriers May Benefit From Running-Up Costs. Insurance carriers compete for the assigned risk plan business. Five are awarded a contract by the Department of Insurance. Why do carriers want businesses that nobody else wants? Because they are guaranteed a profit based on a percentage of the premiums collected. If the balance of the premiums is not enough to pay claims to their book of assigned risk business, the payments then come out of the assigned risk plan pool contributed to by all carriers.
It is clear that not only is there no apparent incentive to try to control claim costs in the assigned risk market, there is a big incentive to let those costs rise. The result is then higher premiums and thus higher profits for the carriers.
Where Do We Go From Here? There is no doubt that reform is needed in South Carolina’s workers’ compensation system to stabilize and decrease premiums for small businesses. However, current legislative proposals either do not address the serious problems cited in this newsletter or worse would result in higher premiums.
To be fair, legislation proposed prior to mid-December of last year did not have the benefit of much of the information now available. Now the question is does our state continue to press for change that primarily serves the interests of big business or does it take a hard look for solutions to major systemic problems that can yield significant benefits to our small businesses. The Small Business Chamber will continue to fight for the latter course of action.
Training & Seminars
FastTrac Entrepreneurial Training Programs Now Offered at $150 via State Sponsorship. Until June 2006, FastTrac Entrepreneurial Training programs will benefit from a South Carolina State Sponsorship, providing aspiring entrepreneurs and small business owners with the opportunity to take the FastTrac NewVenture and FastTrac GrowthVenture programs for only $150 each, covering application and materials. The value of these programs is normally $695 and $895 respectively. Interested participants can apply online at www.fasttracsc.org and will find programs offered in Charleston, Columbia, Greenville, Beaufort and Aiken beginning in February.
A Conversation on Minority Entrepreneurship. On Wednesday, March 1, you are invited to hear Dr. John Sibley Butler, Executive Director of the Institute for Creativity and Collaboration. The Institute is an internationally recognized “think and do” tank devoted to solving unstructured problems to accelerate wealth, job creation and prosperity. Dr. Butler’s research is in the area of new ventures, immigrant and minority entrepreneurship and organizational behavior and entrepreneurship. The program starts at 9:30 a.m. at the Columbia Metropolitan Convention Center. Register at www.newcarolina.org. Admission is free.