Date: 08/14/2009

Rate Setting - Division of Insurance


Votes: View--> Action Taken:

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:
  • Attachment C.pdf Attachment D.pdf Attachment E.pdf Attachment F.pdf Attachment G.pdf Attachment H.pdf

    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.

    10:23 AM

    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.

    Attachment D.pdf

    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.

    Attachment E.pdf

    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.

    Attachment E.pdf

    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.

    10:38 AM

    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.

    Attachment C.pdf

    10:53 AM

    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.

    11:00 AM

    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.

    11:11 AM

    Commissioner Morrison commented on the fact that data provided regarding insurance can be looked at many different ways.