By Jim Sams, WorkCompCentral
June 26, 2006
At least four states have ordered insurers to refund premium overpayments caused by a problem with the payroll-data reporting system used by the National Council on Compensation Insurance, but insurance commissioners in other states have chosen not to pursue refunds and to allow NCCI to fix the problem in future rate filings instead.
That approach has already brought a strong protest by small business advocates in South Carolina, who say business owners who overpaid should be reimbursed. Similar uprisings may erupt in other states as employers learn that their money has been left on the table, predicted Gregory Krohm, executive director of the International Association of Industrial Accident Boards and Commissions.
“To the extent that the employer-stakeholders in the system find out about that, they are going to be sore,” Krohm said. “They are going to bring it to the attention of the insurance commissioners and (the commissioners) may have to backtrack on that.
“Some employers in the 36 states where loss costs are calculated by NCCI may have paid too much in premiums because of a glitch in the computer system that is used to process uniform statistical reports. Employers in New Hampshire, where insurance regulators were the first to catch the error, received $660,000 in rebates after premiums were recalculated.
Put simply, the errors were made because some insurers reported payroll for certain classification codes in ways that were not understood by NCCI’s computer, said Peter Burton, state relations executive for NCCI.
When the information could not be understood, the NCCI computer threw out the payroll data, but reported all of the losses associated with the affected classification codes. That caused an overstatement in the ratio of losses to payroll, resulting in higher rate calculations for the affected classification codes.
Burton said NCCI has already corrected the computer program, so similar errors won’t occur in the future. He said NCCI has not lost the data that corrupted its loss-to-payroll calculations, so it can go back and readjust rates for the affected classification codes. He said each state insurance department made its own decision about whether to perform those recalculations and order refunds.
“Some states just didn’t have any impact at all in their jurisdictions,” Burton said. “Each case, I guess, has to be individual. NCCI’s a regulated entity and we get direction from each insurance dept on how we address the issue.
“New Hampshire first noticed the problem in 2004 because a classification code used by the logging industry looked “out of whack,” said Fred Barrett, a market analyst for the Vermont Insurance Division.
When NCCI investigated, it discovered that one insurer had used “subcodes” within some classification codes to identify discount rates offered to certain customers. But the NCCI computer did not understand the subcodes and threw out those unit statistical reports, causing an inaccurate payroll-to-loss ratio and creating a higher rate for the classification code.
Barrett said NCCI notified Maine and Vermont of the problem with the logging classification code because both states have relatively large timber industries. He said NCCI also investigated to find out if similar errors had caused inaccurate rates for other classification codes. It discovered that other insurers had also reported data that was not understood by its computer for classification codes outside of the timber industry.
Vermont detected payroll data errors in 18 classification codes. Businesses that employed local trucking haulers, farm machinery dealers, fast food restaurant workers and garbage collectors had overpaid.
Burton said NCCI in early 2005 notified all 36 states that use its data for rate making and offered to dig deeper and identify affected policyholders if asked to. He said about a dozen states have asked NCCI to identify policyholders who were affected. Some insurance departments have not yet decided what to do, while others have decided to fix the errors in future rate filings.
Burton would not identify which states have asked for premium recalculations, but New Hampshire, Vermont, Missouri and Maine have issued public statements and ordered NCCI to recalculate premiums paid in the 2003, 2004 and 2005 policy years. Refunds will be given to any employers who overpaid in those states.
But insurance regulators in Arkansas, Georgia, Mississippi, North Carolina and South Carolina told WorkCompCentral that they decided to allow NCCI to fix the problem in future rate filings or in rate filings that had been submitted but not yet approved.
Steve Manders, a workers’ compensation analyst with the Georgia Department of Insurance, said problems were detected for about a half dozen classification codes in his state. He said errors in Georgia classification codes were the opposite of what had been experienced in New England. When companies fed NCCI their unit statistics, they supplied multiple lines of data on each report. All but the first line was being dropped, he said.
But Manders said the effect was minimal. NCCI was allowed to adjust the codes with its July 1, 2005 rate filing.
“It was pennies on the dollar,” Manders said. “We had some codes where the rates would have been higher and a few where they should have been lower.
“Similarly, only a few policies were affected in North Carolina, said Sue Taylor, director of workers’ compensation for the North Carolina Rate Bureau. North Carolina, with its independent rating bureau, has the option of using or not using NCCI data in its rate filings, Taylor said.
In Mississippi, the errors were in codes for workers involved in ceiling installation, telephone/telegraph work, grain elevator operation and the painting of ship hulls, said John Wells, director of the Property and Casualty Rating Division of the Mississippi Department of Insurance. He said the errors were corrected with an NCCI filing earlier this year.
“Any questions we had were answered, Wells said. “We opted to allow them to make the correction going forward, and we’re pretty satisfied with what they’ve done.
“Arkansas, where only “two or three” codes were affected, also allowed NCCI to fix the problem in its 2006 rate filing, said Insurance Department spokeswoman Charlye Woodard.
In Virginia, regulators learned of the problem only two months ago, said Ken Shrad, director of information for the Virginia Bureau of Insurance. He said his agency is in the process of resolving the issue.
Regulators who decide the problem is minimal run the risk of hearing from employers who disagree. In South Carolina, news about the data-reporting problems has prompted the South Carolina Small Business Chamber of Commerce to ask an administrative law judge to reopen testimony on a proposed 32.9% rate hike.
The South Carolina Insurance Department issued a brief statement after a local newspaper began asking questions about the class code problem last week. She said the department had ordered NCCI to adjust rates on a “going-forward basis.” Burton said NCCI had already adjusted rates in the current rate filing now in dispute.
But Small Business Chamber President Frank Knapp said the Insurance Department has no right to make a business decision on behalf of employers about when to adjust rates. He said businesses that have closed or use different types of workers will not be able to take advantage of the correction.
“That wasn’t their decision to make,” Knapp said.
When asked to respond to Knapp’s criticism, South Carolina Department of Insurance spokeswoman Ann Roberson told WorkCompCentral that Insurance Director Eleanor Kitzman was traveling and unable to respond to requests for comment.
The NCCI’s Burton said his organization is able to identify every policyholder who was affected by the payroll errors and to estimate overpayments. He said individual insurers would have to audit each policy to confirm the exact amount of overpayments, if any.
Burton said NCCI is willing to go back and crunch numbers for any insurance department that asks it to. NCCI will even pay for the cost of the computer runs, he said.
“That’s just part of doing business,” Burton said. “Data is our lifeblood.”
— By Jim Sams, WCC Senior Editorjim@workcompcentral.com
Southeast Bureau Chief Michael Whiteley contributed to this report