Surprise rate hikes
for businesses

Some companies see workers'
compensation insurance skyrocket

How rates are figured
The insurers

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By Lyn Danninger
ldanninger@starbulletin.com

For some Hawaii businesses, the envelopes from their insurance company this year brought more than the annual renewals of workers' compensation policies. They also delivered sticker shock.

Some companies, particularly in industries considered high risk by insurers, are reporting increases of as much as 300 percent to their premiums. Industries such as roofing, trucking, construction and other allied trades are taking the biggest hit.

"I know of one company that had a triple increase," said Gareth Sakakida, managing director of the Hawaii Transportation Association, the trade group representing the commercial ground transportation industry.

Such sudden increases make it difficult for any business to plan for the future, say those familiar with the situation. They also increase the cost of doing business, costs that are ultimately passed along to consumers.

"Our insurance is over 300 percent elevated this year, and it's not because it deserves to be," said Linda Fernandez of E.K. Fernandez Shows.

Fernadez believes the system is broken.

"It's close to being disastrous," she said.

For some of Hawaii's small businesses, the latest round of increases may be enough this time to force them to close their doors.

"I've had several people who have gone from $60,000 to $180,000 in one year," said Tim Lyons, executive director of the Roofing Contractors Association. "There's no doubt some of that is based on their losses, but the carrier is also basically using that as a window of opportunity to increase rates and justifying it saying 'what if the losses continue in the future?'"

As the insurance market hardens -- a cyclical event say insurers who provide workers' compensation coverage -- insurers have become more selective about who they will underwrite, said Allison Ueoka, a spokeswoman for the Hawaii Insurers Council, which represents local insurers.

"When loss costs are increasing as the cycle normally does, claims severity goes up and you see a hardening of the market," Ueoka said. "So you are in a situation where you are not getting an adequate return on your money and then you have to be more selective on the risks you take on."

Rate increases are partly determined based on what are known in the industry as "loss costs," how much things like medical claims and lost wages are projected to cost over the next year.

Both Sakakida and Lyons say the full effect of the increases will be felt over the rest of the year because companies receive policy renewals year-round.

Among those who haven't received their renewals yet, workers' compensation is a hot topic of conversation.

"Everyone is talking about it," Sakakida said of his industry.

Outsourcing

Joe Kirby, who owns Kaulana Roofing and employs eight people, said he believes more employers faced with huge costs are now turning to employee leasing companies as an alternative. But in some circumstances, it may be only a short-term solution, he said.

Kirby went that route for a while with a company based in Texas but ended up being dropped because his business was considered too small.

"It looked like a good deal, they took care of payroll, liability and workers' compensation but in the end we didn't get the customer service and we were just too small," he said.

Now back in the local insurance market, Kirby said he was lucky enough to find a good insurance agent who worked hard to find him a competitive rate.

Still, he has been told to expect what could be a hefty increase when his premium comes up for renewal in June.

"I'm not looking forward to it," he said. "It's been really hard the last three years."

Kirby said he finds it hard to understand why premium rates, at least in his industry, remain so high given increased safety awareness and efforts made in that direction.

"It's amazing to me that the rates are as high as they are. Safety is a big thing now. We have all kinds of safety programs and we go to seminars," he said. "Basically our compliance rates are very good in the roofing industry."

Kirby and Lyons are afraid that skyrocketing rates will force more companies to work without insurance and employers will resort to paying cash and keeping employees off the books.

At first blush, such an arrangement with no taxes taken out may seem an attractive idea to employees -- until they get hurt, he said.

"Some guys are saying they may as well go on a cash under the table basis in terms of paying wages. But if someone gets hurt, the employer is stuck," Lyons said.

As well as being illegal, such practices hurt the entire industry.

"It's hard to stay in business when someone who is not insured can underbid you on a job," Kirby said.

Lyons and many associated with the insurance industry note that in recent years, workers' compensation rates had been declining.

Since 1995, rates declined by 41 percent on average, according to state Insurance Commissioner Wayne Metcalf.

Those familiar with the latest upswing say it was expected.

"About every 10 years it tends to go up and down. We were at about the bottom of the trough so now we are seeing the upward swing," Lyons said.

"I think a lot of what is going on has been happening for a while and was something we expected because of the cycle of the market," said the Insurers Council's Ueoka.

Moreover, as the market has hardened more insurers are dropping discounts that had been passed on in the last few years.

"What the private sector has done has been to drop some of their credit and incentive programs, so even though the premium remained the same, the price still goes up," Metcalf said.

Still Ueoka believes the large increases are so far confined to what insurers consider high-risk businesses.

"It's not trickling down to less risky business," she said.

Fallout

Other factors have contributed to the jump in premiums, notably the events of Sept. 11 and their impact on the international re-insurance market.

"I think there is general uncertainty because primary insurers don't know what will happen in the re-insurance market," Uekoa said. "After 9/11 there was a lag time before the market reacted and started talking about limiting their exposure."

Insurer insurance

Like their customers, insurers must insure themselves. With re-insurance premium renewals occurring year-round, it will take some time for the Sept. 11 fallout to fully filter down from the global re-insurance market to the domestic insurance market.

Ueoka said she is unsure whether all the effects of the tragedy have made their way through the industry as yet.

"In this line of insurance I'm not sure that the total terrorism impact has hit yet," she said.

Others familiar with the industry say insurers' losses in the stock market over the past year have contributed to the premium increases.

Insurers have not enjoyed the kind of profits on their investments that would normally allow them to either pass on discounts to those they insure or even take losses in some cases, Metcalf said.

"What we are seeing in workers' compensation is because the stock market performance on the back end wasn't performing well," Metcalf said. "As a result (insurers) tightened up their underwriting and discount programs."

Often, he said, insurers will be willing to lose money writing an insurance policy when they know that investments will more than offset the difference.

"Nationally we are in an up cycle because the investment market was not as good. So insurers were not making as much, plus they were underpricing," said Bob Dove, president of Hawaii Employers Mutual Insurance Co., the state company set up by the Legislature in 1995 to stabilize the workers' compensation market.

While HEMIC competes directly with other insurers for business, it also insures businesses that cannot find coverage in the private sector. It can add surcharges for taking on a larger proportion of additional risks, something private businesses are prohibited from doing.

Currently there are about 400 employers who fall into HEMIC's high-risk pool, Dove said.

But Scott La Rue, an insurance broker with Sullivan Curtis Monroe/Atlas Insurance Agen-cy said he is seeing more businesses go with HEMIC after they find it difficult to obtain insurance.

Between surcharges and fewer insurance choices, it can be tough to find affordable insurance for clients, he said.

"Oftentimes the only option is HEMIC because many insurers don't want high risks," he said.

There are also fewer insurers to choose from. About five companies have either left the market or have become insolvent in the past two years and some are choosing not to write workers' compensation policies, LaRue said.

Currently, the top 10 carriers, led by First Insurance Co. of Hawaii Ltd., insure 78 percent of the local market, Ueoka said.

Solutions to current problems in the workers' compensation market depend upon who you talk to.

Insurers say if they had the ability to apply surcharges where necessary they could accept more business.

"The problem is insurers in a voluntary market don't have the same ability to charge the way HEMIC does so if we did you'd see less of a differential between carriers," Ueoka said.

Still, while the current system is not perfect, it is better than it was prior to the creation of HEMIC, she said.

Bad old days

Prior to HEMIC, businesses who could not get coverage from insurers were placed in an assigned risk pool.

Around 17,000 businesses, many of them small, were in that pool.

If premiums collected were not adequate to cover costs, insurers who wrote policies were assessed additional money based on the amount of workers' compensation insurance premiums they collected.

"The more you wrote the more you were penalized," Ueoka said. "In the end insurers stopped writing to reduce liability, so the whole system was in a downward spiral."

Annual losses under the old system were approaching $140 million a year, Metcalf said.

"Each time a carrier left the market, losses were then apportioned among the remaining carriers so there was a danger the carriers would all rush to the door to get out," he said.

While no one appears to want a return to the previous system, those affected by the current premium increases wonder how long some businesses can hold out if the trend of higher premiums continues.

They also wonder if there are any answers to solve the current problem.

The Insurance Commissioner says he is open to suggestions if anyone has a better idea.

Tighter safety practices and employers paying more attention to managing and monitoring claims are two suggestions from insurers.

But for the employer faced with a double or triple digit increase, at least this year it appears there are no quick fixes.

"There is no planning when you face something like triple the previous premium," Sakakida said.

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Insurance rates
are figured on costs,
risks and regulations

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Workers compensation insurance rate increases are partly determined based on what are known in the industry as "loss costs." Loss costs are how much things like medical claims and lost wages are projected to cost the industry over the next year.

These calculations are submitted to the state Insurance Division by the National Council on Compensation, a national data bank that collects information from worker's compensation insurance carriers and provides information to both the industry and state regulators.

The most recent state approval given allows for an average 4.6 percent increase in base premiums to cover increases in loss costs. Insurers had asked for a 9 percent hike in February.

The insurer's cost of doing business, known as a loss cost multiplier, is also submitted to the Insurance Division for approval.

Insurers were also granted an additional 3.1 percent to accommodate new federal guidelines introduced in July to determine the degree of impairment resulting from an illness or injury.

However, insurers adjust rates up and down for individual businesses based on these factors, as well as the level of risk involved in a business, previous claims and other variables.

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Insurers Hawaii's largest workers' compensation insurers: American Motorist Argonaut-Midwest Insurance Co. Dai-Tokyo Royal Insurance Co. Ltd. Eagle Pacific Insurance Co. Employers Insurance of Wausau Firemans Fund Insurance Co. of Hawaii Inc. First Fire & Casualty Insurance of Hawaii Inc. First Indemnity Insurance of Hawaii Inc. First Insurance Co. of Hawaii Ltd. Fremont Indemnity Co. of the Northwest Hawaii Employers Mutual Insurance Co. Island Insurance Co. Majestic Insurance Co. Medical Assurance Co. Inc. National Interstate Insurance Co. National Union Fire Insurance Co. of Pittsburgh TIG Indemnity Co. TIG Premier Insurance Co. Workcomp Hawaii Insurance Co. Inc. Workcomp Hawaii Select Inc. Source: state Insurance Division