Date: 08/14/2009
Final
Rate Setting for Pinnacol Assurance
INTERIM COMMITTEE TO STUDY ISSUES RELATED TO PINNACOL ASSURANCE
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11:13 AM -- Rate Setting for Pinnacol Assurance
Mark Isakson, Associate Vice President for Pinnacol Assurance, using a power point presentation, spoke to the committee about Pinnacol's lost cost multiplier and its duty regarding rates as provided in Section 8-45-106, Colorado Revised Statutes (C.R.S.). The statute requires Pinnacol's board to fix and maintain, for each class of occupation, the lowest possible premium rates consistent with the maintenance of a solvent Pinnacol Assurance fund, and the creation and maintenance of a reasonable surplus after the payment of legitimate claims for injury and death for the benefit of injured or killed employees. He also discussed Section 8-45-107, C.R.S., regarding Pinnacol's rates, reserves, and surpluses and Section 8-45-111, C.R.S., regarding the surplus as set by board. He explained that rates are projected forward and that it is a prepaid system.
11:22 AM
Mr. Isakson outlined the framework for developing loss cost multipliers. He noted that there is a lot of actuarial judgement involved and one of the most important judgements is trend assumptions. Mr. Isakson explained that once the loss cost is set, Pinnacol's pure premium is set taking the division's loss cost times an insured's payroll. Mr. Isakson talked about the loss cost multipliers in the competitive market.
11:34 AM
Mr. Isakson responded to questions regarding the number of policies that fall in in each of Pinnacol's six tiers and Pinnacol's competitors. Mr. Isakson said he would provide that information to the committee, but that he did not have it with him. Senator Carroll asked how much Pinnacol has historically held in surplus. Mr. Isakson explained that the surplus is looked at annually based on the level of risk. There was a discussion about incurred but not reported (IBNR) costs and Pinnacol's surplus. In 2009, Pinnacol's board determined that a surplus of between $450 and $600 million was needed to stay solvent. Senator Carroll asked how the range is decided and how often the surplus has been used. Mr. Ross explained the process in determining the surplus and said that there are many factors that go into it, including market conditions, statutory requirements, the fact that Pinnacol cannot raise capital, can only write workers compensation insurance policies and only in Colorado, medical inflation, and catastrophic risk. Mr. Ross stated that each year the board determines an adjustment to the surplus. Senator Tochtrop asked why Pinnacol was under-funded back in the 1980s and 1990s. Mr. Isakson stated that from a general insurance standpoint it was from rate inadequacy. Senator Harvey commented on the years Pinnacol was a state agency and its $500 million deficit.
11:46 AM
Representative Ryden asked about the state Guaranty Fund. Mr. Ross explained that it is a fund that all carriers except Pinnacol pay in to and can use when facing insolvency. He stated that Pinnacol does not pay in to that fund and therefore cannot receive money from it. Senator Carroll asked how Pinnacol ensures there are no conflicts between an injured worker and incentives that might encourage the reduction or denial of claims. Mr. Isakson stated that there are no incentives for reduction of claims or benefits and that the rate setting process removes that concern. Mr. Ross responded to the previous question by Senator Harvey about Pinnacol's deficit and the surplus recovery plan filed by Pinnacol with the insurance commissioner. He explained that in 2003, Pinnacol's surplus hit the recovery level. Mr. Simon asked about the holding of surplus for a possible catastrophic event and how it relates to catastrophic coverage under a federal program. Mr. Ross explained that the federal Terrorist Risk Insurance Act does provide a backstop for most insurance companies in the event of a catastrophic event. The federal program is paid out of a surcharge on premiums. He explained that there is a high deductible associated with it. Mr. Simon asked about reinsurance. He also asked how the expenses for dinners relate to loss costs and drive loss cost multipliers and premiums. Representative Ryden asked why expenses have increased. Mr. Isakson said as premiums reduce, the ratio of expenses to premiums increase.
11:58 AM
Senator Carroll asked whether the tax exemptions gives the company a competitive advantage. Mr. Isakson said he feels that Pinnacol is competitive at a 57 percent market share. Mr. Isakson also mentioned that in exchange for the tax exemption, Pinnacol is required to provide coverage to the uninsurable market. Senator Carroll asked whether Pinnacol sees itself as a private, quasi-governmental, or public company. Mr. Isakson stated that they are a political subdivision, created in statute, and that they operate as a mutual insurance company. Mr. Ross added that Pinnacol views itself as required by statute - a political subdivision of the state operating as a mutual insurance company. Senator Tochtrop asked whether other competitors provide insurance to last resort types of employers. Mr. Isakson explained that other companies are allowed to write those policies, however, they are not required like Pinnacol. There was a discussion about Pinnacol's market share growth and its goals.
12:15 PM
The committee recessed for lunch.