Despite the near-universal joy, jubilation, and sheer relief with which the workers compensation reform legislation was met when it passed last March, just about everyone acknowledged that, in the end, the proof of the bill would be in the pudding of its implementation. And it has certainly proven true that the devil is in the details. The issues that have most preoccupied the insurance industry fall generally into two groups: those arising from deeper scrutiny of the language of particular measures in the bill, and those related to Governor Eliot Spitzers March 13 directive to Superintendent Eric Dinallo, Workers Compensation Board Chairperson Donna Ferrara, and Patricia Smith, Commissioner of Labor. Not all the answers are in, but the debate itself seems to be exposing hidden agendas, and at times, exemplifying the law of unintended consequences.

NYCIRB and Rate-Setting

Under the new legislation, the Compensation Insurance Rating Board (NYCIRB) is to sunset on February 1, 2008. Specifically, the law states that no rate service organization may file rates, rating plans or other statistical information for workers compensation insurance after February first, 2008. That certainly sounded like a death knell, although, as NYCIRB pointed out in a March 2 bulletin, since the rating board is a non-profit, unincorporated association of insurance carriers, the continuation of services performed by the rating board is determined by its membership.

But to paraphrase Mark Twain, rumors of NYCIRBs demise were not only exaggerated, but inaccurate. A requested report prepared by the superintendent and sent to the governor and the Legislature on September 4 did acknowledge concerns regarding NYCIRB, including questioning whether CIRB should continue in its current role as the exclusively statutorily delineated rate service organization.

But the report also emphasizes the absolute necessity of collecting and analyzing large amounts of data on an industry-wide basis and the consequent need for an entity responsible for [doing so]. And CIRB has, in the superintendents estimation, performed its data collection functions in a satisfactory manner, made significant improvements to its data quality systems over the past 10 years, and performed underwriting services reliably.

In other words, the report concludes, no other entity could more appropriately perform CIRBs duties in the short term and therefore CIRB should continue to be New Yorks workers compensation [rate service organization].

The report does recommend two significant changes to NYCIRB. One relates to the boards restructuring, specifically that it add to its governing committee representatives of labor, employers, and the Insurance Department. Together, the additional directors and NYSIF, the New York State Insurance Fund, would constitute a majority on the committee. This, Dinallo said in a statement, would ensure a truly independent CIRB that acts transparently from a public interest perspective.

It is hard to argue against transparency as a goal, but some in the industry have expressed concern about the committees composition. As Lynch Ryan wrote in Workers Comp Insider on September 11, New York could end up with rates being determined bya politically charged [committee].

But Monte Almer, NYCIRB president, pointed out that the restructuring is still just a recommendation. He added, We are working with the department on something both the department and we would find acceptable.

The more dramatic change has to do with ratemaking itself. In brief, under what the department refers to as its proposed competition-based system, NYCIRB would continue to collect and analyze aggregate, industry-wide data to develop the loss cost portion of the rate, which would be submitted to the department for approval. Each individual carrier would then use that as the basis for its own rate filing, using its own particular multiplier. The presumption is that, since the carriers rates would vary depending on their respective expenses and efficiencies, this would generate competition among them.

In general, there has not been much objection to the loss cost approach as a principle, but there are some concerns. In its September 2007 position paper, PIANY supports loss cost ratemaking, but with the caveat that prior approval of rate filings is maintained and the Insurance Department genuinely remains on guard against predatory pricing.

PIANY comments further that the approach should be implemented very deliberately and with due regard for its potential financial impact on insurance carriers as they transition away from the administered rate system.

PIANY cites, in support of its cautioning, the example of California, which switched to an open rating system in 1995 and experienced a subsequent period of market turmoil. Within five years, the position paper notes, that states Workers Compensation Insurance Rating Bureau estimated that the states insurers were under-reserved by about $7.1 billion, as they strove to maintain market share at the expense of sound underwriting results. Between 2000 and 2003, more than 25 workers compensation insurers were declared insolvent.

The prior approval of rate filings that helps mitigate PIANYs reservations is, on the other hand, the one element of the recommended approach that gives some carriers pause. Gary Henning, AIAs assistant vice president for state affairs for New York, said that his organization like[s] the loss cost system and he believes the change is a very positive step. However, the requirement for prior approval carries the potential for problematic delays. We talked about this with the department, he said, but they understand that this requires them to act much more quickly on workers compensation filings than they have on other filings in the past. He explained that, unlike auto and homeowners insurance rates, which can remain stable over several years, in workers compensation there are new loss costs annually, and companies would need to file their multipliers every year. You have real time pressures, he added, but the department says they will gear up to give approvals quickly.

The preferred approach, Henning said, would have been file-and-use. Nevertheless, the AIA feels that this is a positive movement toward a more competitive market.

As for NYCIRBs February 1 sunset, Henning said, Im very confident that the Legislature will do something. If they dont, the marketplace becomes a mess.

Almer, too, expressed confidence that the board will not be allowed to expire, saying that the Insurance Department, the legislators, and everyone else involved recognizes the urgency of making some decision before the sunset date, because, he said, they need the system to continue. And the superintendents report, in fact, recommends that the relevant portion of the legislation be eliminated and rewritten.

The Aggregate Trust Fund

The industry has also expressed concern regarding payments into the Aggregate Trust Fund (ATF). The payments, which private carriers are obliged to make, are lump sums intended to cover permanent partial disability (PPD) awards. One bone of contention is that NYSIF is excluded from making these payments, and that has led some to claim that the State Fund enjoys an unfair competitive advantage over private carriers.

Insurance companies are not especially pleased about the ATF to begin with. Jamie Deapo, member advocate and assistant vice president of member products for IIABNY, described a scenario in which a 30-year-old is determined to have suffered a PPD. If the guy dies a year later, he said, the carrier doesnt get the leftover money back. But if he lives longer than the mortality tables project or the costs rise significantly, it has to put up more money.

Henning put a different slant on the issue, offering the hypothetical example of a manufacturing company that assumes a large deductible and whose employees suffer a catastrophic accident. Under the old system, he explained, you would pay out the benefits and medical costs on a regular schedule over the lifetime of the claim. Under the ATF provision, if a settlement isnt reached within the specified time frame, the carrier deposits millions of dollars into the ATF and effectively walks away.

The problem, he said, is that the insureds payments for the deductible, instead of being spread out, are now due in one lump sum as soon as the carrier pays into the ATF.

Excluding NYSIF from the ATF provision is disadvantageous to carriers, Henning said, adding, Ive yet to get a good, substantive reason [for that portion of the legislation].

The department certainly is not going to offer one. Hampton Finer, the Insurance Departments deputy superintendent and chief economist, said the department is not enamored of the ATF provision. Its hard for us to see that theres a security rationale for that fund, he added, [and] I dont know that theres an insurance reason that we can point to. While the ATF may, as it is intended, encourage more settlements, Finer described it as a blunt tool.

Interestingly, over the summer two bills sponsored by the State Senates Rules Committee attempted to address, and redress, the ATF issue, though from opposite perspectives. One proposes that NYSIF and self-insurers be required to pay into the fund; the other effectively dismantles the fund entirely. Neither appears to have met with any real support, and many in the industry seem unaware of their existence.

Finer said the bills were certainly not the departments idea, but thinks the Legislature should indeed take another look.

Not in Our Backyard

While there are numerous other issues of implementation and interpretation still to be worked out, some of them requiring legislative action, one in particular has everyone shaking their heads in disbelief. As Stephen Ruchman, past president of PIANY and president of Ruchman Associates, reported in his Insurance Advocate column, there is a provision of the reform act requiring that non-New York State employers cover employees working in the state. In the past, he writes, it was a normal and accepted practice that the New York Workers Compensation Board would accept an insureds policys Other States coverage for short stints of employment in New York. Now that employer must obtain New York State workers compensation coverage.

Henning said that the WCBs lawyers have offered the opinion that the provision could be interpreted to mean that an out-of-state companys employee who changes planes at JFK would need New York workers compensation coverage. Should that employee be injured, say on one the airports moving walkways, absent the coverage the employer could be declared uninsured and thus subject to penalties.

It isnt necessarily a laughing matter. An April 15 article in The New York Times reported on a study by the Fiscal Policy Institute that found a growing number of off-the-book construction workers in New York City. It is not in the least uncommon for general contractors doing work in the state to be based elsewhere, and construction, especially on small and mid-sized projects and in residential construction, is notoriously dangerous.

David Dickson, immediate past president of PIANY, describes an accident in early October in Niagara Falls, in which one worker was killed and another seriously injured. The latter admitted to authorities that he had been working seven days a week and was paid in cash.

There has been a lot of discussion about out-of-state coverage, Dickson said. The question is, are we going to enforce the rule? If so, to what degree? Some possible answers, he suggested, are that it would be enforced on jobs requiring a permit; that the requirement would be linked to time spent in-state; or that the provision take effect where an unemployment insurance filing is required.

Debate, Not Despondency

The implementation pudding clearly has its pits and lumps; and the workers compensation reform legislation itself needs, if not further reform, at least greater specificity and clarification. But no one seems to be in doom-and-gloom mode, nor does the debate have the acrimony and finger-pointing that characterized previous reforms. Instead, nearly everyone expressed confidence that, sooner or later, collaboration would lead to consensus.

But no one should forget that this is New York State. Were not at the bottom of the ninth yet " and the fat lady hasnt even picked her song.