Date: 08/04/2009

Residual Market Mechanisms


Votes: View--> Action Taken:

01:33 PM -- Residual Market Mechanisms

Mike Taylor, representing the National Council of Compensation Insurance (NCCI), talked about residual market mechanisms and presented a powerpoint (Attachment C). He started by explaining that a residual market is an insurance market of last resort that is created by each state to ensure that all eligible employers have some means of complying with their statutory obligations to hold workers' compensation insurance. Mr. Taylor explained rate tiers and the following types of residual market mechanisms:

Attachment C.pdf
Mr. Taylor talked about what to look at when determining the type of Residual Market Operation to use in regards to state-approved rules governing administration. He said one must look at administration, participation of carriers, eligibility of employers, quota management (random and equitable assignment), policy issuance requirements, duties and responsibilities of the plan administrator and assigned carriers.

Mr. Taylor showed some statistics on residual markets, including the percentage of state premium for each state and what makes up residual market policies. He also illustrated how policies and premium sizes are distributed based on size.

01:44 PM

Senator Carroll asked Mr. Taylor to explain the difference between residual and voluntary markets. Mr. Taylor explained that the voluntary market is when you go to an insurance agent and he gives you an insurance company to use. In the residual market, you go to an agent and no one will write a policy for you because of your loss or the industry you're in, so they send you to the residual market, or to Pinnacol if you are in Colorado. She asked how many states use the voluntary market. Mr. Taylor said that there are 30 states that use the residual market, four that have a monopolistic system, and six states that use the voluntary market. Mr. Taylor was asked to further clarify where the line is drawn between the voluntary and the residual market. Mr. Taylor explained that in Colorado, there is not a residual market, rather there is a market of last resort. Senator Mitchell asked whether NCCI had any ranking of how states perform in the residual market. Mr. Taylor stated that insurance companies are not ranked based on performance. Mr. Ross asked a few questions of Mr. Taylor regarding the line between the voluntary and residual market and explained that other states have clear definitions, but Colorado does not have that. Mr. Simon asked about surcharges for residual markets and Mr. Taylor explained that almost all states have a surcharge.

Representative Pace asked whether there are any trends in mechanisms that states use. Mr. Taylor said more states are making a residual market mechanism. There was a discussion about privatization Representative Ryden asked what is driving the reduction in the number of claims in the residual market. Mr. Taylor explained that the recession has impacted the number because as more workers are laid off, the amount of claims goes down because employers tend to lay off new employees and keep veterans who are more experienced and do not get hurt. He added that workplaces have become safer.

02:05 PM

Senator Carroll asked Mr. Taylor to explain the term lost cost. There was a discussion about other states that have open bidding for carriers in the high risk market. Mr. Taylor talked about Nevada and West Virginia that went from a monopolistic to a private system. Senator Carroll asked if there was a downside to opening up to an open bid process. Mr. Taylor said to make sure that the chosen carrier is competent and can handle that type of a market. Senator Mitchell asked Mr. Taylor to talk about the history of NCCI and its purpose.

02:20 PM

Mr. Taylor explained that he is the state relations executive and that NCCI is funded by the insurance companies; NCCI prepares a budget and the companies fund their operations. Senator Carroll asked if NCCI had any data on frequency of claims and severity of claims. Mr. Taylor said he would gather that information and provide it to the committee.