Why Lower Work Comp Rates Are Not Necessarily a Good Thing

[johntenney]

Once again, the State of Florida has overridden recommendations to the contrary and proposed lowering workers' comp rates.

Let's take a closer look.

First of all, comp costs have not declined. In fact, they have increased, mostly due to legal fees. Several legislative attempts to limit legal fees on workers' comp claims have failed (imagine that, voted down by a group of ex-lawyers in congress.)

Medical costs have certainly not declined.

Is the workplace safer? Not according to the National Council on Compensation Insurance (NCCI), who claims that there has been no noticeable decrease in the number of incidents in the last 5 years.

So why are rates being lowered?

Is it political pressure? Who can get re-elected after stating "Sorry folks, but the lawyers are driving the cost per claim up so we need to raise rates again."

I can't think of any other reason to lower rates when costs are rising.


Let's examine the cost of workers' comp. Every time an employee is injured, he is required to report it to the insurance carrier's claims department. An adjuster evaluates the extent of the injury and sets a reserve amount to cover the entire claim. Keep in mind that injury claims can last for years and years. If a worker is disabled or kept from working for more than two weeks, then lost wages are paid as well.

These reserves are set to what might at first seem unbelievably high levels. Why would a cut finger at work reserve be set to $80,000?

Well the actuaries have demonstrated that a cut finger can run to that level, particularly if the injured worker gets a lawyer. Costs escalate as soon as lawyers are involved. What a surprise.

So they set a reserve for 80k, big deal, what do I care? Here's why you care: The carrier is now required to set aside that $80,000 and not able to write coverage using that money as surplus. It corresponds to about $800,000 in premium using a 10:1 rule in Florida.

This means that they are less likely to look at YOUR company as a comp risk. Lower rates means less premium means less surplus to cover injury reserves means insurance carriers will be less likely to approve your submission.

Hence, lower rates mean it will be harder to find comp for your company. Oh sure, once you find it you will pay less, but good luck if you are a small roofing company or a local trucking firm.

People who can't find coverage are eligible to go to the Florida Workers Compensation Joint Underwriting Authority, also known as the State Fund or JUA. This is a losing venture for the state, even with the extra charges they lop on top of premium. Be prepare to pay as much as 300% of your normal rates to be covered by the JUA, and to constantly demonstrate that you can't get coverage anywhere else. They JUA wants you to be somewhere else.

These lower rates on 1-1-2010 are going to make life very difficult for the JUA employees as well. They will have an upsurge of new clients, that lose money for the state, and they will have to hire more people to handle all this, again costing the state more money.


The solution, though obvious, is painful. Raise the rates about 20 to 25% across the board and more insurance companies will be willing to take the higher risks in Florida.

This will probably not happen with politicians in control of the rate setting process sadly ...