COMMENTARY
Why Should We Care About
the Workers' Comp Residual Market?
October 2003
By Donald J. Pfundstein*
for New Hampshire Business Review
In
March 2002 I reported on the N.H. Department of Insurance's approval
of the National Council on Compensation Insurance filing. The insurance department
approved an average 6.7 percent decrease in "voluntary loss costs." What
this means is that the primary components of a workers' compensation
premium charge were on average decreased 6.7 percent. Rates in the residual
market or assigned risk pool were lowered as well. Good news? I speculated
at the time that things were not quite as rosy as the reductions would lead
employers to believe.
There were hidden risks in the form of accelerating medical costs, and the
reversal of discounting practices by carriers. A lack of reinsurance coverage
and concentration of risk issues associated with 9/11 (too many employees
in a single location) were additional concerns. It also was pointed out that
since loss costs changes generally lag real market direction by 18-24 months,
a decrease was not necessarily indicative of what was really happening.
You already know that New Hampshire law requires employers to provide wage
replacement and medical benefits for employees injured on the job. Employers
generally provide this protection through the purchase of workers' compensation
insurance policies or by self-funding their exposure individually or on a
group basis.
An employer is participating in the voluntary market (as opposed to the
residual market) when it is able to purchase workers' compensation
insurance from a licensed insurance company at the rates charged in the voluntary
market. However, not all employers are able to get an insurance company to
provide workers' compensation insurance at the voluntary market rates.
In these circumstances, employers are generally forced into the residual
market.
The residual market is a mechanism established and underwritten by the insurance
industry through what is known as the NCCI Residual Market Plan.
Every workers' compensation insurance company that writes business in New
Hampshire has to share in any
operating deficit incurred by the residual market.
Each insurance company's share of the deficit is equal to the
percentage of the total market that it insures in the
state. For instance, if Company
A writes 20 percent of the total workers' compensation
insurance market in New Hampshire, Company A pays 20 percent
of any operating deficit
incurred
in the residual market.
What is this sharing of an operating deficit all about?
The residual market is designed to be self-funding.
In other words, the premium charged
all employers in the residual market is in the
aggregate suppose to be sufficient to pay the total costs of all
claims in the residual market. Any shortfall
has to be picked up by all insurance companies.
So what's the big deal you might ask? Isn't that what insurance
companies are suppose to do?
Every dollar that is paid by your insurance company to fund an operating
deficit incurred in the residual market is a dollar that can't
be used to fund your losses. You paid a premium to your insurance company,
yet it
is required to use a portion of your money to pay for the shortfall
incurred in the residual market. This relationship between the voluntary
and residual
markets can get out of balance quickly if the residual market
is not self-sufficient. If too much voluntary market premium is needed to
pay an operating deficit
in the residual market, the entire system breaks down. An economic
disaster is then likely.
The solution is to charge appropriate premium levels to employers
in the residual market. This way your insurance company
will be able to use your premiums to pay benefits for your injured employees.
The pending NCCI filing seeks a 15.7 percent increase in the residual market
rates. The goal is to assure that the residual market can operate
without subsidies from the voluntary market.
The good news is that New Hampshire Insurance Commissioner Roger
Sevigny is expert in workers' compensation matters. He
has experienced workers' compensation staff assistance as well. I don't know
what the precise increase should be. I do know that the
department
will try hard to get it right. That's good for all employers.
A self-funding residual market will help assure the long-term stability our
employers and
economy need.
I am proud to say that MEMIC Indemnity Company, a New Hampshire workers' compensation
insurance company licensed here and in Vermont, Connecticut and Massachusetts
is a client of Gallagher, Callahan & Gartrell.
*Donald J. Pfundstein is admitted in New Hampshire.
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