Advanced Insurance Management (“AIM”) was commissioned by the South Carolina Small Business Chamber of Commerce 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”). Accordingly, AIM researched how the South Carolina Second Injury Fund operates, and reviewed the impact of those operations on the Workers’ Compensation insurance costs of 201 employers in South Carolina. This review has found that a significant proportion of those 201 small employers received no direct benefit on their Workers’ Compensation insurance premiums due to the operation of the South Carolina Second Injury Fund.
In order to place these findings in context, some explanation is in order regarding how the South Carolina Second Injury Fund operates and how Workers’ Compensation insurance premiums are calculated, particularly for smaller employers.
SCSIF essentially provides partial reimbursement for the costs of certain Workers’ Compensation claims. According to the SCSIF website:
The Second Injury Fund functions within the South Carolina Workers’ Compensation System. The mission of the Fund is twofold:
To protect employers from the higher cost of insurance that can occur when an injury combines with a prior disability to result in substantially increased medical or disability costs than the accident alone would have produced. This ensures that an employer is not made to suffer a greater monetary loss or increased insurance costs because they hire or retain an employee who has a disability.
To ensure payment of workers’ compensation benefits to injured employees whose employers have failed to comply with the coverage provisions of the Workers’ Compensation statutes.
Our study has focused only on the first of the two “missions” given above, and looked at how the reimbursements made by SCSIF actually impact the Workers’ Compensation insurance costs of smaller employers. To do this, AIM obtained from SCSIF a list of reimbursed claims handled in recent years, a list that included the names of employers where those claims had occurred. AIM then cross-referenced a randomly selected sample of these employers with records available from the National Council on Compensation Insurance, or NCCI.
In this study, as we reviewed employers who had claims reimbursed by SCSIF, we attempted to exclude larger employers from our survey group. Although we randomly selected employers from the SCSIF records for review, we excluded from our sample those employers who had multiple-state operations, or who were part of larger national corporations. This was done because one objective of the study was to attempt to determine the particular impact of SCSIF on smaller employers in South Carolina.
Understanding the Operation of SCSIF for Small Employers
SCSIF is funded by assessments made on insurance companies and self-insured employers. Those funds are then used to reimburse those same insurance companies and self-insured employers for certain Workers’ Compensation claims where the injured worker had a prior disability. After reviewing such claims that are submitted for reimbursement by insurance companies and self-insured employers, SCSIF will provide partial reimbursement for the costs of those claims. This reimbursement is intended to offset any excess cost caused by the pre-existing disability, thus encouraging the employment of individuals with such disabilities.
Self-insurance is not an available option for smaller employers. Such employers must meet their statutory Workers’ Compensation obligations by purchasing an insurance policy from an approved insurance company. In theory, when an insurance company receives reimbursement from SCSIF, the only available mechanism for adjusting the Workers’ Compensation insurance premiums of the employer is through the experience rating mechanism. This is because experience rating is the only approved mechanism for adjusting Workers’ Compensation insurance premiums for employers based on the specific prior loss history of a particular employer.
A key aspect of SCSIF that needs to be understood is that, at least in so far as it deals with the claims of smaller employers, the SCSIF system does not actually reimburse those small employers, it reimburses the insurance companies who provide Workers’ Compensation insurance for those employers.
From the perspective of smaller employers, one drawback to this system is that only employers of a certain size are eligible to be experience rated. In South Carolina currently, an employer must develop $9,000 of Workers’ Compensation insurance premiums in a single year (or an average of $4,500 per year over several years) to bcome eligible for experience rating. Many smaller employers do not meet this threshold requirement, and thus are not experience rated. And since experience rating is the sole method of adjusting Workers’ Compensation insurance premiums based on specific prior loss history of a particular employer, employers who do not qualify for experience rating just do not have a mechanism to receive a direct benefit on their Workers’ Compensation insurance premiums due to the operation of SCSIF. In such instances, the insurance company will receive a benefit, in the form of the claim reimbursement from SCSIF, but will have no mechanism to directly pass on that benefit to the insured employer.
Thus for an employer that is not self-insured, the reimbursement from SCSIF is not sent to the employer, but rather to the employer’s Workers’ Compensation insurer. Since the rules governing the calculation of Workers’ Compensation insurance premiums are set forth in detailed manual rules, AIM has reviewed how those rules operate in South Carolina as part of this study. This review makes it clear that the experience rating mechanism is the only approved rating mechanism that would allow the reimbursements from SCSIF to be reflected in the insurance premiums calculated by an insurance company for an employer. It is also clear from those rules, and from the research conducted by AIM for this study, that many small employers simply do not qualify for experience rating. Thus there is no direct means for an insurance company to adjust the Workers’ Compensation insurance premiums of such small employers to reflect any reimbursements received from SCSIF. This means that for such employers, the SCSIF system can offer no direct benefit.
Even for employers who are large enough to be experience rated, our study has found a further problem. In order for experience modification factors to be adjusted to reflect SCSIF reimbursements, these reimbursements need to be reported to the organization that calculates the experience modification factors. In South Carolina, that organization is the NCCI. Our study has found a serious inconsistency in how SCSIF reimbursements are reflected in the calculation of experience modification factors.
To conduct this part of the study, AIM obtained from SCSIF a list of reimbursed claims from the recent past. From this list, AIM focused on claims that occurred in the period 1998 through 2003, and ultimately selected 201 employers listed has having had claims reimbursed by SCSIF. Of these 201 employers, 79 were not experience rated, per records maintained by NCCI. This means that 39% of the employers we examined who had claims reimbursed by SCIF were not eligible to receive any direct adjustment to their Workers’ Compensation insurance premiums due to the operation of SCSIF. For these 39% of the employers studied, only their insurance carriers would appear to have benefitted from the claims reimbursements made by SCSIF.
As part of this study, AIM further reviewed how often SCSIF reimbursements were reflected on experience modification factors when the employers were large enough to be experience rated. AIM examined records of 180 employers who had claims reimbursed by SCSIF, and who were also experience rated. Of those 180 experience modification factors, 89 were revised and 91 were not revised to reflect the SCSIF reimbursements. So 51% of these experience modifiers were not revised, per NCCI records, even though they should have been, to reflect the SCSIF reimbursements to insurance companies.
This large percentage of uncorrected experience modification factors would appear to be caused by the way data is reported for use in experience modification factors. Under the NCCI system (NCCI is the organization that calculates experience modification factors for use on employers’ Workers’ Compensation insurance policies) loss data is reported to NCCI by insurance companies. Thus, when SCSIF pays reimbursements to insurance companies, SCSIF itself does not make any report of these reimbursements to NCCI. Instead, it is the responsibility of the insurance companies to report loss data, including revisions reflecting reimbursements from SCSIF, to NCCI. If an insurance company fails to report these reimbursements to NCCI, the employer will not have their experience modification factor revised to reflect the lower claims costs.
Smaller employers in South Carolina therefore appear to receive significantly limited direct benefit from the operation of SCSIF. Many smaller employers who do have claims reimbursed by SCSIF are too small to be experience rated, and thus cannot receive any direct adjustment to their Workers’ Compensation insurance premiums due to the operation of SCIF. Furthermore, our study indicates that even among those employers who are experience rated, only half of those who should have received a reduced experience modification factor due to SCSIF reimbursements actually received that reduced experience modification factor.
Indirect Benefits of SCSIF Reimbursements
It should be noted that there are, at least in theory, some indirect benefits of SCSIF reimbursements that could accrue to small employers. Although experience rating is the only direct method of adjusting Workers’ Compensation insurance premiums due to SCSIF reimbursements, there are some potential indirect adjustments that might derive from SCSIF reimbursements. For example, since insurance companies use prior loss information in their underwriting process to develop subsequent quotes for Workers’ Compensation insurance, an employer might receive a lower Workers’ Compensation insurance premium if the loss runs prepared by their prior insurance company reflect the reimbursements paid by SCSIF.
However, it should be noted that many, if not most, small employers in South Carolina are insured through the Assigned Risk program rather than through the so-called “Voluntary Market”. In the Assigned Risk program, there could be no adjustment to premiums based on loss history, except for experience rating. Thus, for employers in the Assigned Risk program, there could be no indirect lowering of Workers’ Compensation premiums due to revised loss reports used in the underwriting process.
It should also be noted that the claim reimbursements from SCSIF should serve to lower the overall Workers’ Compensation claims costs that are used to calculate Workers’ Compensation rates generally, and thus the operation of SCSIF would serve to hold down Workers’ Compensation rates generally, at least to some degree. Our study has not examined the degree to which the operation of SCSIF might actually serve to hold down Workers’ Compensation rates generally in South Carolina.
In conclusion, our review of these published records of SCSIF and NCCI find that there are two significant limitations in the operation of SCSIF, when viewed from the perspective of smaller employers. The first limitation we found was that 39% of the SCSIF reimbursements reviewed were for employers who were not experience rated.
The second limitation is that our review found that 51% of SCSIF reimbursements for experience rated employers were not reflected on the actual experience modification factors of those employers.
In summary, our review of documents available from SCSIF and NCCI finds two notable limitations in benefit that the SCSIF program offers to employers, particularly smaller employers, in South Carolina:
· 39% of SCSIF reimbursements reviewed involved employers who were not experience rated, and thus could not obtain any direct reduction in Workers’ Compensation premiums due to the reimbursements;
· 51% of the SCSIF reimbursements for experience-rated employers were not incorporated into the NCCI experience modification factor calculations of the appropriate employers.
· Overall, only 30% of SCSIF reimbursements reviewed actually were incorporated into revised experience modification factors for employers.
· 70% of SCSIF reimbursements reviewed produced no revision in employers’ experience modification factors.
Taken together, these findings indicate that the current SCSIF program has significant limitations in the benefits provided to smaller employers in South Carolina. Because a significant number of smaller employers are too small to be experience rated, and because of the high error rate in incorporating SCSIF reimbursements into NCCI experience modification factors, only 30% of SCSIF reimbursements reviewed actually produced revised experience modification factors for employers. 70% of the SCSIF reimbursements reviewed therefore produced no revision in experience modification factors for the employers. And as noted earlier, the experience
modification factor is the only mechanism for insured employers to receive a direct reduction in Workers’ Compensation insurance premiums due to the operation of SCSIF.
Edward J. Priz, CPCU, APA
ADVANCED INSURANCE MANAGEMENT