Rate Decrease of 5.5 Percent Approved at Florida Workers’ Compensation Joint Underwriting Association Joint Annual/Board of Governors Meeting

 

The Florida Workers’ Compensation Joint Underwriting Association (“FWCJUA”) held a combined  Annual Membership Meeting and Board of Governors (“Board”) meeting  on September 8, 2010 in Sarasota, Florida.   Among the items approved by the Board included a premium level decrease of 5.5 percent, effective January 1, 2011 for new and renewal business.

 

Annual Meeting

The Annual Meeting included the following FWCJUA financial and operations highlights, among other comprehensive data:

• As of December 31, 2009, the FWCJUA had 670 authorized agencies with 1,087 designated producers.
• The FWCJUA’s 2009 book of business was comprised primarily of small contractors, small employers and those risks with poor loss histories – all high-hazard risks.
• The FWCJUA recognized an $83,729,635 surplus in 2009. The FWCJUA program to eliminate the 2009 Subplan D deficit relied on the use of monies from its contingency reserve. Total funds needed to fund the Subplan D obligations through the contingency reserve are approximately $4.7 million, which is $3.2 million less than the $7.9 million already received from the State of Florida. Thus, no additional cash needs are anticipated.
• As of December 31, 2009, the FWCJUA had 827 policies in force, with a corresponding written premium of $5,677,639.
• In 2009, application processing time averaged 5.9 days.
• Premium receivable balances decreased 54.31 percent from $3,834,509 in 2008 to $1,751,915 in 2009–a $2,082,594 change.  It was reported that the decrease in premium receivables can be attributed to continued depopulation in 2009 due largely to a “healthy, competitive” Florida workers’ compensation voluntary market.  No changes in collection activity are expected for 2009.
• FWCJUA cash and invested assets decreased 3.53 percent from $108,476,014 in 2008, to $104,648,523 in 2009–a $3,827,491 change primarily attributable to the return of premium policyholder dividends for policy years 2001 and 2002.
• Total FWCJUA assets decreased by 5.30 percent from $114,255,233 in 2008 to $108,192,174 in 2009–a $6,063,059 change.
• Non-admitted assets changed from $1,300,376 in 2008 to $1,119,076 in 2009, equating to a 13.94 percent decrease of $181,300.

 

Board of Governors Meeting

After the resignation of FWCJUA Controller Laura Lopez in June 2010, the Board voted to update administrative documents relating to the FWCJUA’s 401K Plan and certificate of deposit purchasing authorization to reflect her departure accordingly.

Also approved was the selection of an FWCJUA financial auditor for fiscal years 2010, 2011 and 2012.  The duties of this role will include preparing a full consolidated financial statement, as well as Generally Accepted Accounting Principles-based financials, if required.

The FWCJUA’s Audit Committee Charter Procedures Checklist also was reviewed, an updated copy of which is contained in the attached meeting packet.

After consideration, the Board agreed with the FWCJUA’s Investment Committee recommendation to maintain two Lehman Brothers bonds and the one CitiGroup bond that had been downgraded below the FWCJUA’s Investment Policy requirements, inasmuch as there have been no new negative developments in the outlook on these bonds. 

2011 Reinsurance Goals

The FWCJUA’s depopulation trend, which started with the introduction of tiered rating plans in 2004 and continued through 2009, appears to be changing course in 2010.  Over the last year, new FWCJUA business increased by approximately 34 percent.  This trend is expected to continue favorably through 2010, given that Tiers 1, 2 and 3 have actuarially sound rates and minimum premiums.

The cost of the FWCJUA’s reinsurance program decreased with the elimination of Subplan “D” and stabilized with the advent of the Tier Rating Plan to avoid imminent assessments (15.243 percent in 2005, 15.428 percent in 2006, 14.118 percent in 2007 and 10.437 percent in 2008).  Coverage also improved.  However, the significant decrease in the FWCJUA’s premium base over the last two years has effected a program increase to 15.07 percent in 2009 and 17.438 percent in 2010.  Due to the recession, similar pricing is expected for 2011 reinsurance, although potential exists for the FWCJUA to repopulate in 2011.

The FWCJUA’s 2011 reinsurance program goals include:

• Designing the program based on projected 2011 earned premium level of $8.0 million and a policy count of 800
• Determining whether an effective alternative structure or mechanism exists to fit the FWCJUA from 2005 to 2010, such as creative combinations of risk transfer products and reinsurance
• Conduct a risk assumption analysis that describes how much risk the FWCJUA could assume at various attachment points
• Determining if a new profit share valuation/computation feature is advisable or available
• Obtaining alternate collateral arrangements to be implemented in the event of reinsurer financial difficulty
• Where possible, obtaining reinsurers’ commitment that any letter of credit requirements must be issued through banking institutions with a “stable” rating.  This would include any and all banks with corresponding commitment shares.  The rating method to be used to identify a “stable” rating shall be defined such that the bank maintains or exceeds two of the following minimum ratings:  S&P: no less than an A-rating; Moody’s: no less than an A-rating; Bauer Financial: no less than a 3-star rating.
• Attempting to secure Nuclear, Biological, Chemical and Radiological coverage in the regular reinsurance program by removing the applicable 2010 contract exclusion

The FWCJUA anticipates that, in 2011, subplan claims will continue to run-off with closings increasing as the claims mature.  During that time, the FWCJUA expects to write between $8 to $10 million in premium.

The FWCJUA will continue to write several accounts that are currently in Chapter 11 bankruptcy proceedings.   However, to be eligible for coverage, the account must pay the entire Estimated Annual Premium prior to binding.   The 32-34 percent midterm cancellation rates will continue into 2011.

Certain classes of business, such as small aviation exposures, charitable organizations and other exotic exposures that are unattractive to reinsurers of voluntary market carriers will continue to be placed in the FWCJUA.

Further, the 2003 claim reforms effected by the passage of SB 50A, the 2004 rating plan adjustments created by HB 1251 and more the FWCJUA’s keep-out/take-out programs are expected to continue to have a positive impact on the FWCJUA in 2011.  The 2003 legislation addressed concerns of particular relevance to the FWCJUA, such as illegal alien activity, prior injury contributions and claim handling efficiency.

The keep-out/take-out program, which allows an insurer that writes an FWCJUA applicant or policyholder to charge the FWCJUA rate for three years, has helped reduced the FWCJUA’s policies in-force in 2010 and is projected to continue to place employers in the voluntary market in 2011. Further, within the last 15 months, the FWCJUA recognized a five percent success rate in placing applicants in the voluntary market through its “Market Assistance Plan (‘MAP’) Partnership Program,” which provides producers with direct access to multiple voluntary markets that they may not otherwise have available to them contractually prior to submitting a MAP application to the FWCJUA.   

The FWCJUA now has a consistent history of rate adequacy and annual reductions in reserves, primarily due to a consistent conservative loss development posture, but also to aggressive claims management. Notably, since its inception, the FWCJUA has experienced only 288 claims of $100,000 or greater total incurred and, of those, only 26  exceeded $500,000; 10 exceeded $1 million and one exceeds $5 million.

Although the FWCJUA currently has little or no known exposure to exotic risk such as cumulative trauma, asbestosis, aviation, strip mining and mold it was stated that this more expensive, casualty-based coverage is important, inasmuch as the Board indicated that, as the Florida residual market, the FWCJUA could not exclude those coverages should corresponding employers meet all other eligibility criteria.

As part of its discussion on reinsurance matters, the Board reviewed the status of a commutation matter involving PMA, a reinsurer that was purchased by Armour Re on December 28, 2009.  As a result, Armour’s liabilities associated with the FWCJUA now reside in Armour’s United States operation, Excalibur Reinsurance Corporation, a Pennsylvania-domiciled company.  The FWCJUA believes that Excalibur, a run-off company, is possibly motivated to accept a commutation.  While the FWCJUA’s liabilities related to Excalibur are relatively modest, a commutation could lead to a $1 million “hole” in the FWCJUA’s reinsurance program for several accident years.  

To address the situation, the FWCJUA Reinsurance Committee considered asking the Florida Office of Insurance Regulation (“OIR”) to deem Excalibur to be an unauthorized reinsurer in Florida based on its current financial statements.  Meanwhile, the OIR is reviewing Excalibur’s financial strength and reinsurer status; formulate a reasonable commutation offer; look at the FWCJUA’s reinsurance.  FWCJUA Correspondence to OIR begins on page 59 of the Board packet.

Primary Bank Selection

After reviewing the competitive selection process, the Board voted to engage Chase as the FWCJUA’s primary bank for the five-year period beginning October 1, 2010 and ending September 30, 2015, based on the Operations Committee’s August 30, 2010 recommendation. 

Additional Administrative Changes

• Changes to the FWCJUA’s telecommuting policy were made to accommodate information technology employees, who do not interact directly with the public.
• Changes to the FWCJUA Records Management and Retention Policy were approved. These will allow for more efficiency related to storing, recovering and destroying the FWCJUA’s human resource records.
• An expenditure of $11,745 was authorized to upgrade “VMware VIEW” software, which is expected to speed up end-users of the FWCJUA’s systems.

Additional Agency Authorization Process Updates To Be Finalized

After implementing previously approved revisions to the FWCJUA agency authorization submission process, it became apparent that even further revisions were necessary after at least one authorized Agency and its Designated Producers were terminated for failing to send the required Designated Producer fees. 

Inasmuch as Section 8.4 of the Agency Producer Agreement provides that all notices shall be given by electronic mail, registered or certified mail, express mail or overnight courier, it was recognized that the FWCJUA could further streamline its procedures for dealing with Agencies and Designated Producers by issuing such terminations in accordance with Section 8.4, rather than by certified mail, return receipt requested, which is costly and more time consuming.   Once the OIR has approved them, the FWCJUA Rates and Forms Committee will take up the revisions for subsequent confirmation.  The current Agency authorization process is outlined on page 82 of the meeting materials.

Clarifications Made to On-Line Application Process

After 2009 Board approval of a requirement that all FWCJUA Applications for Coverage must be submitted via a Web-based system, because of the timing involved in transitioning to an all-electronic process, the Producer Committee recommended further revisions to the FWCJUA Operations Manual that would provide Agencies and their Designated Producers with information on how to properly apply for FWCJUA coverage.  

Generally, it was agreed that the detailed instructions on how to complete the ACORD 130 FL, the summary information related to the ACORD 133 FL, ACORD 134 FL and Employment and Wage Release Agreement, along with all the related forms and endorsements would be deleted from the Manual and maintained solely on the FWCJUA’s Web site.  Further, it was agreed that the Application for Coverage section of the Manual would be expanded to include subsections on Supporting Documentation Requirements, Premium Payment Requirements and the Eligibility Review Process.   The FWCJUA’s handling of exemption or election of coverage forms at application, or during the policy term would be moved to the Exemption and Election of Coverage section of Part Six of the Manual, which is currently maintained within the same ACORD 130 FL instructions that were recommended for deletion.   The Table of Contents would be changed to reflect all of the above.

The Board will subsequently consider the approval of these revisions.

5.5 Percent Premium Decrease Approved for 2011

The  Board approved an overall average premium level decrease of 5.5 percent, effective January 1, 2011 for new and renewal business.  The rate would be adjusted to reflect any approved voluntary market rate level and class relativity changes that may also become effective January 1, 2011.

Policyholder Dividend Approved

The Board approved a gross policyholder dividend of $5,698,808 for the 2003 policy year for prior policyholders.  This amount reflects the retention of a five percent underwriting gain, resulting in a net policyholder dividend amount after expenses of $5,669,726.91.

OIR to Clarify Manual Language Relating to Employer Eligibility

The Board devoted the remaining time of the meeting to reviewing filed revisions to the FWCJUA Operations Manual as currently amended to address various OIR concerns, among which included the addition of two application forms. 

The Board authorized the filing with the OIR of a proposed revision to the Operations Manual to clarify language relating to employer eligibility.

The meeting was then adjourned.

Complete meeting materials and related documents are attached for review.