STAFF SUMMARY OF MEETING
INTERIM COMMITTEE TO STUDY ISSUES RELATED TO PINNACOL ASSURANCE
|Time:||09:00 AM to 05:28 AM|
|This Meeting was called to order by|
|Senator Carroll M.|
|This Report was prepared by|
X = Present, E = Excused, A = Absent, * = Present after roll call
|Bills Addressed: ||Action Taken:|
|Colorado Workers' Compensation Insurance Market|
Rate Setting - Division of Insurance
Rate Setting for Pinnacol Assurance
Jeff Tetrick - Pinnacol CFO
09:05 AM -- Call to Order
Senator Carroll called the committee to order.
09:05 AM -- Colorado Workers' Compensation Insurance Market
Mike Taylor, NCCI, gave a presentation on trends in Colorado's workers compensation system using a power point presentation entitled Overview of the Colorado Workers Compensation System(Attachment A).
Mr. Taylor discussed the filing of rates using another power point presentation entitled Ratemaking Process(Attachment B).
Mr. Taylor responded to questions about the types of industries and their relation to the age of workers. Representative Gerou asked Mr. Taylor how Pinnacol compares nationally. There was a discussion about the recent reduction in rates in Colorado and the reasons why. Mr. Simon asked whether rates are based on paid amounts or reserves and what typically happens to the extra money that is brought in. Mr. Taylor explained that reserves are there to cover future payment of claims and expenses. Mr. Simon asked why Colorado tends to have more attorney involvement than other states. Mr. Taylor said that he does not know why and explained that there are many potential factors that could go into that.
Mr. Johnson asked about the trends in medical severity and whether it is expected to go up. He added that company surplus levels are based on projected medical severity and asked whether companies should look at increasing their surplus levels in response. Mr. Taylor said that should be looked at by insurance companies. Senator Harvey asked about Colorado's decline in frequency of claims and how it correlates to rates. Mr. Taylor said that rates are driven both by the number of claims and the type of injury. Mr. Taylor discussed the decline in frequency and stated that a recession can impact the frequency. He noted that businesses looking a layoffs tend to keep older, more experienced employers and tend to let younger, less experienced workers go, which may contribute to a reduction in injuries.
There was a discussion about the recent drop in rates. Senator Mitchell talked about the surplus held by Pinnacol in relation to the recent drop in rates. Representative Pace talked about the reduced rates in relation to the reduction in the frequency of injuries. Representative Pace asked whether the reduction could be impacted by a reduction in the acceptance of claims. Mr. Taylor agreed that could be a part of it.
Senator Carroll talked about the reduction in the amount of benefits paid. Senator Carroll asked about the incurred but not reported (IBNR) costs. Mr. Taylor explained that all states have incurred but not reported costs.
10:11 AM -- Rate Setting, Division of Insurance
Scott Lloyd, Manager of the Financial Affairs Section of the Colorado Division of Insurance, explained that he was filling in for John Postolowski, Deputy Commissioner of Finance and Administration for the division. He distributed the following handouts:
- the combined ratios from 2004 through 2008 for Pinnacol Assurance, the profit level before and after dividends, and a comparison of Pinnacol's risk-based capital (RBC) ratios and average RBC ratios to other workers compensation monoline insurers (Attachment C);
- Exhibit 1 (Attachment D);
- Exhibits 2 and 3 (Attachment E);
- the division's Workers Compensation and Employers Liability Insurance Loss Cost Multiplier Report dated June 5, 2009 (Attachment F);
- Colorado regulations regarding RBC (Attachment G); and
- an organizational chart of the Colorado Division of Insurance (Attachment H).
Mr. Lloyd talked about the role of the division in regulating the insurance industry. He explained that each insurer, including Pinnacol Assurance, must file annual and quarterly audited financial statements with the division and with the National Association of Insurance Commissioners (NAIC). These financial statements must conform to statutory accounting principles national standards developed by all the states through the NAIC. The financial statements must be accompanied by an independent actuarial opinion on the validity of certain items, such as loss reserves.
Mr. Lloyd talked about the Financial Analysis Section, which he manages, that analyzes the Quarterly and Annual Statements and the independent audit report. He explained that the section looks for proper ratios between various factors, trends in investments, assets, costs, profitability, and whether minimum capital and surplus requirements have been met. Mr. Lloyd talked about the minimum capital and surplus requirements for all insurers. Mr. Lloyd explained that Colorado does not require prior approval of rates except for loss cost filings; instead, insurers simply file their rates with the division, a system known as “file and use”. Mr. Lloyd briefly explained the process to get at the loss cost.
Stephanie Pastwaters, Rates and Forms Analyst, talked about the divisions process in reviewing workers compensation filings. She directed the committee to Exhibit 1 (Attachment D). She walked the committee through the filing process and explained that the Division requires all insurers to submit workers compensation filings on-line via an electronic application called SERFF (the System for Electronic Rate and Form Filings). Companies are required to submit all supporting documentation for their filings including policy forms, justification for rates, justification for expenses, rating manuals, classification codes and any other information necessary to review the filing.
Ms. Pastwaters explained that unlike rates, workers’ compensation form filings are subject to prior approval by the division. The National Council on Compensation Insurance (NCCI) files forms on behalf of the insurance companies writing in the state and the division reviews the forms for compliance and approval. Ms. Pastwaters stated in 2008 there were 260 workers' compensation form filings for review and approval.
Ms. Pastwaters discussed loss costs. She explained that all companies writing workers’ compensation insurance in Colorado are required to submit a filing to the division adopting the NCCI’s approved loss cost. If companies are modifying their loss cost multiplier, the filing must include the company’s justification of their general operating expenses, three years of written premium history, incurred losses for the specified time period, the development of their loss ratios, justification for the profit and contingency load, underwriting provisions, and taxes, licenses, and fees. This data is used to calculate the loss cost multiplier. Ms. Pastwaters explained that Mr. Knepler would be going into further detail on the review of loss cost multiplier filings.
Ms. Pastwaters noted that in calendar year 2008, the Division received 189 loss cost filings for workers’ compensation. In the same year, Colorado had 212 companies writing workers’ compensation insurance with premiums totaling over $843 million. Of that $843 million, Pinnacol had over $484 million in premium and submitted 19 filings for the year. She added that over the past three years, Pinnacol has submitted 40 loss cost filings with an average rate decrease of 27.64% overall.
10:28 AM -- Patrick Knepler, an actuary with the Division of Insurance, explained that he is responsible for reviewing property and casualty rate filings and participating in financial examinations of property and casualty companies. He talked about loss costs and loss cost multipliers, the two main components to workers' compensation premiums. He directed the committee to Exhibit 2 for an explanation of the difference between loss costs and lost cost multipliers (Attachment E). Mr. Knepler explained that although there are other factors used to calculate the workers compensation premium charged to an employer, the premium is primarily calculated by multiplying the salary of the employees, the final loss costs that have been approved by the Commissioner of Insurance for each classification of employees, and the loss cost multiplier filed by the insurer.
Mr. Knepler talked about loss costs which represent the portion of the premium that is estimated to be required to pay for losses and loss adjustment expenses. Loss adjustment expenses (LAE) are costs incurred by the company to pay and manage claims, such as fees for claims adjusters, attorney defense fees, and the costs associated with the insurer’s claim cost containment programs. He explained that loss costs are calculated by the NCCI and filed for approval with the division. Each fall the division holds a hearing to discuss the NCCI’s loss cost filing. Mr. Knepler stated that Exhibit 3 (Attachment E) summarizes the overall loss cost changes filed by NCCI, the consulting actuary’s recommendations, and the overall change approved by the Commissioner of Insurance dating back to 2004.
Mr. Knepler talked about loss cost multipliers which includes other fees and expenses that are included in the premium. These include commissions, other acquisition expenses, general expenses, and taxes, licenses and fees. Mr. Knepler explained that the insurance companies file loss cost multipliers with the division that are multiplied by the approved loss costs to determine the final rate charged to policyholders. The company’s profit is included in the loss cost multiplier. He explained that the division reviews the profit provision to ensure that it will not result in long run profit that is unreasonably high for the insurance provided. Mr. Knepler mentioned that in general, the profit provision in workers compensation loss cost multiplier filings is between 5% and 7%.
Mr. Knepler explained that when the division reviews an insurer's lost cost multipliers, it first determines if the expense provisions used to calculate the loss cost multiplier are appropriate by analyzing each company’s workers compensation expenses from their annual statement, as well as each company’s Colorado-specific workers compensation expenses included in the loss cost multiplier filing. In addition, loss and premium data is reviewed to ensure that the filed loss cost multiplier will result in rates that are not excessive, inadequate, or unfairly discriminatory, and that the filed loss cost multiplier will result in the company’s target loss ratio. Mr. Knepler discussed companies' surpluses noted and that they are not considered in the review of the NCCI’s loss cost filing or a company’s loss cost multiplier filing.
Lastly, Mr. Knepler talked about the Workers Compensation Classification Appeals Board. He explained that the board is an appeal mechanism for employers that feel their workers compensation premiums have been miscalculated.
Representative Pace talked about rates for small business owners. Mr. Ross talked about the combined ratios provided in Attachment C and pointed out that Pinnacol shows a negative profit in 2008. He also talked about the RBC ratios and asked how many state funds were included in the top first line of the chart regarding RBC ratios that is included in Attachment C. Mr. Knepler explained that there were 10 state funds included in the chart. The committee discussed the dividends provided by the other state funds and why all the RBC numbers have increased from 2004. Mr. Simon asked about the frequency of the division's financial examinations. Mr. Lloyd explained that all companies are examined at least once every five years, however, Pinnacol Assurance, is required by statute to be reviewed once every three years. Mr. Simon pointed out that the decrease in premiums differ between the division and NCCI. Ms. Pastwaters explained that NCCI's numbers were calculated over a four year period and were weighted and the division's numbers were a three year average. Mr. Simon asked why there are six different rate filings from Pinnacol. Mr. Knepler explained that Pinnacol has 6 tiers and a loss cost multiplier is filed for each tier. Mr. Simon asked if there was a formula for loss ratios similar to health insurance. Mr. Knepler said there is none, but companies are required to justify their ratio. Mr. Simon asked if compensation is examined. Mr. Knepler responded yes, it was. Mr. Simon asked whether a private carrier can take money from its surplus and use it for profit. Mr. Lloyd explained that a mutual company cannot take the money out of a surplus except for dividends.
Representative Gerou brought up a previous discussion about small business owners and asked about the number of complaints against Pinnacol in regards to expenses compared to other companies. Dr. Parry asked for clarification on the commissions paid by Pinnacol to agents and brokers for selling a policy. Mr. Ross asked the division about the rate decreases filed by Pinnacol. Mr. Ross stated that Pinnacol's rates decreased 42 percent between 2006 and 2009. Mr. Ross asked if there were companies other than Pinnacol that can sell only one line of insurance in one state, cannot raise capital through the sale of bonds or stocks, and whose only revenue comes from premiums and interest on its portfolio. He also asked whether the recommends any specific amount of surplus that a company like Pinnacol should hold. Mr. Lloyd stated that the division requires a minimum surplus, but the actual surplus for each company is typically determined by the company's board of directors.
Mr. Simon asked for clarification on the difference between "prior approval" and "file and use". Senator Carroll asked whether loss cost multipliers are reviewed and ever changed after filing. Mr. Knepler said they are reviewed and companies have been asked to make changes. Ms. Pastwaters added that they typically do not ask for a retroactive change, but usually ask to revise the multiplier going forward. However, if it does harm policyholders, they can ask for the company to refund the money, although it usually does not get to that point. Senator Carroll asked how expenses such as trips and sky boxes are reviewed. Mr. Knepler said they do not review specific expenses, but look instead at expense on an aggregate basis for the whole company. Senator Carroll asked what the division has recommended to be an adequate surplus. Mr. Lloyd said that they have determined an adequate surplus to be 200 percent of the calculated risk based capital amount.
Commissioner Morrison commented on the fact that data provided regarding insurance can be looked at many different ways.
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.
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.
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.
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.
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.
The committee recessed for lunch.
01:25 PM -- Business Ethics
Senator Carroll called the meeting back to order
The committee watched a video of a channel 7 investigation into Pinnacol.
01:38 PM -- Dr. Kevin O'Brien, Daniels College of Business at the University of Denver
Professor O'Brien gave a summary of his background and described some best practices for companies (Attachment I). He discussed the federal Sarbannes-Oxley requirement for companies to have adopted both a code of ethics and provisions for whistleblowers. His presentation included sample codes of ethics and whistleblower
provisions. He presented the federal Internal Rrevenue Service regulations for executive compensation, noting that some expenses like athletic skyboxes are not completely deductible as legitimate business expenses. He also noted that Pinnacol would not be subject to an audit by the IRS, as a tax exempt organization.
Sen. Harvey asked whether certain expenditures were unethical, even if not illegal. He specifically noted the practice of the owner of Tokyo Joe's in inviting his best employees and their families to join him at his house in Maui each year. Dr. O'Brien responded that he could not comment on the ethics, but only bona fide business expenses could be deducted under the tax code, while special fringe benefits given to employees should be considered taxable compensation to the employee receiving the benefit.
Ken Ross asked whether the professor had reviewed specific documents of Pinnacol, including the code of ethics. Dr. O'Brien replied that he had reviewed Pinnacol's annual report as well as documents on Pinnacol's and the state's website, noting that he did not find Pinnacol's code of ethics online. Mr. Ross noted that the Sarbannes-Oxley law did not apply to Pinnacol ,but he also offered to provide his company's code of ethics. Senator Mitchell asked Dr. O'Brien if he had been asked to review any of Pinnacol's information prior to the committee.
Rep. Pace asked how the state could provide for more accountability, since Pinnacol board members seemed to be accountable only to policyholders (customers) after being appointed by the Governor. Dr. O'Brien noted that one option is to make it a private entity. Another is to limit the scope of Pinnacol's activities to the residual market, and prevent it from competing with other companies. Dr. Parry and Senator Carroll asked more detailed questions about accountability. Dr. O'Brien replied that better disclosure of executive compensation is a good first step. He also noted the importance of the Open Records Act in seeking information for any political subdivision of the state.
Rep. Gerou asked about a scenario regarding professional ethics for a legislator. Mr. Simon asked about the 2003 State Auditor's Office report on executive compensation. Senator Mitchell and Mr. Ross asked whether Dr. O'Brien was aware that both the open records and open meetings laws apply to Pinnacol.
02:35 PM -- Jeff Tetrick, Pinnacol CFO
Mr. Tetrick discussed the 2008 annual filing for Pinnacol to the Division of Insurance and the components that go into Pinnacol's budget. They are currently building the 2010 budget.
Senator Tochtrop asked whether Pinnacol was accurately described as a service company, since most of it's costs are for employee salaries. Mr. Tetrick responded that employee salaries and benefits constitute a large expense, but that commissions paid to agents was even larger. Sen. Tochtrop asked whether there was any effort to scale back compensation for executives, given the current economic climate and the fact that Pinnacol is a political subdivision of the state. Senator Mitchell asked Mr. Tetrick to review the highlights of his presentation. Mr. Tetrick responded that he focused every day on benefits to employees, benefits to injured workers, solid value for policyholders, and the Pinnacol Foundation.
Rep. Pace noted the average income level of residents in his district and contrasted that with the fringe benefits Pinnacol offers. Mr. Tetrick responded that they try to provide a balance that incorporates lower expenses than other insurers and, hopefully, higher service to policyholders and injured workers insured by Pinnacol. Rep. Ryden asked whether Pinnacol was a policyholder of Pinnacol (they are), and who the board members held a fiduciary responsibility to represent. Mr. Tetrick and Mr. Ross noted the statute outlining the board members and the criteria for appointing members.
Dr. Parry asked about total premiums paid and benefits/costs paid for settled and approved claims. Mr. Meersman described his experience as a board member and as a member of the compensation committee. He noted that Pinnacol often hired outside consultants to review compensation packages, and that the goal was to pay salaries to executives that were competitive for the industry.
Mr. Simon asked about the rationale for a state political subdivision designated as the insurer of last resort to compete with the private sector. He also asked whether the fringe benefits made available to employees were reported as compensation for those employees. Commissioner Morrison talked about her past experience on a board and noted the importance of board members in governing the organization, aside from the role of paid executives.
Rep. Pace asked what Pinnacol could fetch from a private buyer. Sen. Carroll asked about the $2 million in travel expenses, highlighting the fact that Pinnacol only writes policies in Colorado. Mr. Tetrick responded that the travel figure includes $500,000 for mileage reimbursement for about 600 employees.
Sen. Harvey asked whether the state had any ownership interest in Pinnacol for purposes of a sale. The committee discussed what interest the state has in Pinnacol and whether it could be sold. Senator Carroll reminded the committee of the agenda for September 4, which includes a discussion of future options for Pinnacol. Mr. Simon asked about the $15.8 million in taxes and fees.
03:47 PM -- Policyholder Perspectives
Mr. John Berry, representing the Workers Compensation Coalition, testified along with 2 members of the board of the coalition. He noted the effect of worker safety programs on the frequency of injuries. Sonia Gunther described her role as an insurance agent in the workers compensation system. She also discussed the effort that goes into getting injured workers back to work. Chad Mathis, board member and technical advisor, spoke to the committee about Pinnacol's coverage for small and medium businesses, and the fact that Pinnacol offers training for workplace safety to these employers. (Attachment J)
Mr. Simon asked about employers that don't know they have any other option besides Pinnacol. He also asked whether SB 91-218 reduced benefits to injured workers. Mr. Berry replied that he did not believe SB 218 reduced benefits. Rep. Gerou asked about specific training activities by Pinnacol related to workplace safety. Sen. Carroll asked about the range of commissions paid to agents. Ms. Gunther responded that she thought commissions generally ranged between 8 - 15%. She also noted that the level of commissions differed by product and type of risk, and whether the business was new or old. Mr. Berry closed with a request that the committee recommend no changes to Pinnacol.
04:17 PM -- Tony Gagliardi, representing the National Federation of Independent Business (NFIB), spoke on behalf of NFIB's 7,500 members, 70% of which are Pinnacol policyholders. He noted the 42% decrease in premiums over the last 5 years and the recent dividends paid to policyholders. He read comments that were submitted to him from member businesses. Rep. Pace asked whether NFIB would support Pinnacol holding a smaller surplus if it meant lower premiums for members. Mr. Gagliardi responded that he would support lower premiums, as long as it did not affect Pinnacol's solvency.
04:25 PM -- Rick Reubelt, Director of Safety for Haselden Construction, LLC, spoke to the committee about his company's projects and the importance of having a large local company like Pinnacol handling their workers compensation insurance. He responded to questions from the committee about Pinnacol training programs, trends in worker safety, and the value of dividends.
04:40 PM -- Gail Lindley, representing Denver Book Binding, testified on the extent to which her company had paid into either the state fund or Pinnacol. She stated her opposition to the state attempting to take money that was paid by policyholders. She talked about safety meetings, which are usually held after an accident has happened, and the proactive efforts by Pinnacol to improve worker safety. Mr. Simon asked whether workers compensation costs were passed along to consumers. Ms. Lindley responded that competition prevented companies from passing all such costs along to consumers.
04:46 PM -- Pam King, representing the Better Business Bureau (BBB) of Northern Colorado and Wyoming, testified on her partnership with Pinnacol to offer workplace safety training to BBB members. Participants include 350 employers paying $7M in premiums for workers compensation. Dr. Parry asked about the process for handling complaints from business partners. Ms. King replied that complaints are a large component of all that the BBB does.
04:56 PM -- Bruce Immele, a safety coordinator representing Leanin Tree in Boulder, testified on the benefits his company has experienced with Pinnacol. Senator Mitchell asked about Mr. Immele's biggest complaint. Mr. Immele replied that Pinnacol's problems are in the past, and included both the level of service and the price paid for that service.
05:02 PM -- Dede de Percin, Executive Director of the Colorado Consumer Health Initiative, testified to difficulties she and her employees have experienced with Pinnacol.
05:08 PM -- Lonzo Vann, representing himself, testified on injuries he sustained at work and his view that workplace safety efforts were severely lacking. (Attachment K)
05:19 PM -- Joan Zivick, representing AAA of Colorado, testified to the positive experience with Pinnacol of her organization and her employees who have been claimants in workers compensation interactions. (Attachment L)
05:22 PM -- Jack Davis testified on the challenges in insuring a small business in a field that has inherent dangers in the workplace. In his case, the workplace dangers related to the use of chemicals.
05:26 PM -- Judy Nalou, representing Medved Autoplex, testified on her positive experiences with Pinnacol, especially the level of service, the dividends, and the longevity of Pinnacol employees.
The committee adjourned.