Florida businesses could see another significant rate decrease in workers’ compensation rates next year if Florida regulators approve the latest filing from the National Council on Compensation Insurance (NCCI).
But the recent trend of lower rates may not last for long as two-year-old Florida Supreme Court decisions begin to catch up with insurer loss experience.
NCCI, the licensed rating organization authorized to make rate filings on behalf of workers’ compensation insurance companies in Florida, has filed for a statewide decrease of 13.4 percent with the Florida Office of Insurance Regulation, which is now reviewing the filing. The new rates would become effective Jan. 1, 2019.
NCCI said in its 2019 filing summary that the rate filing is based on experience data as of year-end 2017 from policy years 2015 and 2016, which show continued significant improvement in loss experience, and before the cases Castellanos v. Next Door Company and Westphal v. City of St. Petersburg were decided by the Florida Supreme Court. Those decisions created panic in the workers’ compensation space because they undid a primary cost-reduction component of reforms passed by Florida lawmakers in 2003.
In the Castellanos v. Next Door Co. decision, the state’s high court found the state’s mandatory attorney fee schedule unconstitutional as a violation of due process under both the Florida and United States Constitutions. In the Westphal v. City of St. Petersburg decision the court found the 104-week statutory limitation on temporary total disability benefits unconstitutional because it said it causes a statutory gap in benefits. The court reinstated a previous 260-week limitation.
“In 2016, [the Supreme Court decisions] resulted in changes to the Florida workers compensation landscape,” NCCI said. “…However, the favorable loss experience in Policy Years 2015 and 2016 has more than offset the combined cost increases that have emerged from those Court decisions.”
NCCI said 50 percent of the data analyzed for the 2019 rate filing relates to policies that became effective after the Castellanos and Westphal decisions and that these decisions are “now exerting upward pressure on system costs, and they will continue to influence Florida workers compensation rates.”
The 2017 policy year will be the first full year since Castellanos, but NCCI said the full effects of that decision will not materialize for several years to come.
NCCI said the workers’ compensation reforms passed in 2003, namely the caps on attorney fees that were instituted and found unconstitutional in 2016 by the Florida Supreme Court, had led to a 60 percent reduction in rates by 2015.
Rate Fluctuations Since Supreme Court Decisions
Shortly after the Florida Supreme Court’s Castellanos and Westphal decision’s, NCCI filed for a 19.6 percent rate increase for 2017 workers’ compensation rates, with Castellanos accounting for 15 percent of the increase. However, OIR disapproved the filing saying it wasn’t justified and later approved a 14.5 percent increase that took effect Dec. 1, 2016. The Castellanos decision accounted for 10.1 percent of the overall rate increase, with Westphal accounting for 2.2 percent.
But just a year later in Nov. 2017, NCCI filed for an overall rate decrease of 9.5 percent that was approved and took effect Jan. 1, 2018. NCCI said at the time declining loss ratios, with a significant reduction in the lost-time claim frequency between 2001 and 2015, helped contribute to the 2018 rate decrease.
In May of this year, OIR approved an additional 1.8 percent rate decrease filed by NCCI in a law-only filing resulting from the effects of the Federal Tax Cuts and Jobs Act. It applied to both new and renewal workers’ compensation insurance policies effective in Florida as of June 1, 2018.
Emerging Impact of Court Decisions
OIR requested when it approved the 9.5 percent rate decrease last year that NCCI include an assessment of the emerging impact of the Castellanos decision on Florida’s workers comp marketplace as part of its 2019 filing. NCCI said in doing so, it reviewed insurance company feedback, the change in claimant attorney fees, and the change in loss experience that has occurred since the Castellanos decision.
“To date, observed system changes in each of these areas are directionally consistent with NCCI’s initial assessment of how the Castellanos decision would impact the Florida marketplace,” NCCI said in its filing report.
Most insurance companies said they have experienced claim cost increases since the Castellanos decision, NCCI said, while a minority of carriers have not been materially impacted. All insurers said they have experienced increases in claimant attorney fees as well as litigated claims taking longer to close and costing more than non-litigated claims. In addition, NCCI said some insurers reported that litigated claims now represent a “relatively larger portion of their book of business,” and companies are adjusting their case reserves because of the Castellanos decision.
For claimant attorney fees, NCCI reported that data from the Florida Division of Administrative Hearings (DOAH) showed an increase of 13 percent in the ratio of claimant attorney fees to benefit and settlement amounts in 2014 and 2015, a 15 percent increase in 2016, and a 19 percent increase in the ratio in 2017. NCCI said through June of 2018, claimant attorney fees have continued to rise and now represent almost 22 percent of benefit and settlement amounts.
NCCI also found that Florida’s paid loss ratios have slowed as insurers noted a slowdown in the payout of workers’ comp claims in the post-Castellanos environment and had therefore increased their case reserves.
In The Meantime…
The National Federation of Independent Businesses praised the news of the rate decrease, saying lower workers’ comp rates directly reduce business owners’ expenses, which encourages growth.
“Small business owners are reporting record high levels of optimism, according to NFIB’s Small Business Optimism Index, and news like lower workers’ comp rates fuels their confidence,” said Bill Herrle, NFIB’s executive director in Florida. “Small business owners are in the driver’s seat and Florida’s economy can look forward to the results – increased job growth, increased wages, and unprecedented expansion overall for the small business sector.”
And while Florida CFO Jimmy Patronis said the potential significant rate decrease was encouraging and a testament to the state’s “commitment to ensuring Florida is an attractive place for all business owners,” he also added “We must keep a vigilant eye on Florida’s workers’ compensation insurance marketplace to make certain we don’t return to the age of skyrocketing rates.”
The Property Casualty Insurers Association (PCI), an insurance industry trade association, noted that the Florida workers’ comp market could see a significant shift down the road.
“While we are still reviewing the proposed decrease, it’s important to point out that the NCCI data does not include the lingering impact of the Castellanos decision, which we believe will not materialize for a few more years,” Logan McFaddin, PCI Regional Manager.
OIR would not comment on the specifics of the filing but said it will review the proposed changes to ensure they are not excessive, inadequate or unfairly discriminatory and evaluate its potential effects on the insurance marketplace and employers. A public rate hearing will be conducted in October.
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