Dual Classification By Wage Level Study Governing Committee Meeting August 15, 2012

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1 W o r k e r s C o m p e n s a t i o n I n s u r a n c e R a t i n g B u r e a u o f C a l i f o r n i a Dual Classification By Wage Level Study Governing Committee Meeting August 15, 2012 WCIRBCalifornia Dual Wage Classification Program History Established in 1986 Issue Addressed Concerns that large variations in wage levels produce premium inequities among similar employers Result Establishment of dual classifications based on wage level for six (6) trades to more equitably distribute the cost of insuring employers in those trades Only established for classifications that met specified criteria for dual wage program Currently 16 construction classifications in program WCIRB California. All Rights Reserved. WCIRBCalifornia 2 1

2 Background of Study Concerns with Current Program Potential for fraud Costly to administer Small change in hourly wage could result in large premium change Threshold changes can affect hourly wages Not used in any other jurisdiction Remnant of minimum rate law environment when insurers had very little pricing flexibility 2011 study results for some dual wage classifications were problematic WCIRB California. All Rights Reserved. WCIRBCalifornia 3 Background of Study WCIRB Governing Committee Meeting of August 10, 2011 Study continued viability of dual wage system in lieu of proposing significant changes to several dual wage thresholds Continue multi-year study of wage thresholds Review premium fraud issue WCIRB California. All Rights Reserved. WCIRBCalifornia 4 2

3 Study Outline Study Objective Conduct a comprehensive review of the dual classification by wage level program that includes an analysis of the program s strengths and limitations, a review of potential alternative programs to address inequities by wage level and recommendations as to whether the program should be maintained, modified or eliminated. Information Gathering: November 2011 February 2012 Alternative programs used in other states: November 2011 Stakeholder outreach session: December 2011 Wage level surveys: December 2011 February 2012 Outreach session on potential fraud February 2012 WCIRB California. All Rights Reserved. WCIRBCalifornia 5 Study Outline Analysis of Disparity in Loss to Payroll Ratios by Wage Level: November 2011 May 2012 Reflect impact of experience rating and insurer pricing Include both dual wage and non-dual wage classifications Evaluate Continued Viability of System: May 2012 June 2012 Strengths and limitations of current system Impact of insurer pricing flexibility in open rating Impact of disparity in loss levels by wage level Ramifications of eliminating dual wage classifications WCIRB California. All Rights Reserved. WCIRBCalifornia 6 3

4 Study Outline (Cont.) Evaluation of Alternative Plans: December 2011 May 2012 Administration and potential impact on fraud Strengths, limitations and usage Impact on equity by wage level Preliminary Recommendations: May 2012 Should dual wage system be modified or eliminated Any recommended alternative plans Input on Preliminary Recommendations: May 2012 July 2012 Status Report to Governing Committee: August 2012 Finalize Recommendations: December 2012 WCIRB California. All Rights Reserved. WCIRBCalifornia 7 Actuarial Analysis General Description Combine Wage Level Information Gathered from Survey with Employers Historical Loss and Payroll Data Categorize employers by size and average wage level Include both dual wage and non-dual wage classifications Assess Disparity in Loss Experience by Wage Level Interval Extent reduced by dual wage system Extent further reduced by experience rating Extent further reduced by insurer pricing adjustments Impact if dual wages classifications combined Analysis of disparity in loss experience by wage level in non-dual wage classifications WCIRB California. All Rights Reserved. WCIRBCalifornia 8 4

5 Actuarial Analysis Findings Significant Differentials in Loss Experience by Wage Level Limited Correlation of Wage Level by Size Differentials by Wage Level Reduced (but not Eliminated) by Dual wage system Experience rating (X-Mod) Insurer pricing adjustments If Dual Wage Classes Combined X-Mod Corrects for Some but not all of the Impact Corrected for By Dual Wage System Results Fairly Consistent Across Class and Size Grouping Non-Dual Wage Classification Analysis Some Differential in loss experience by wage level Generally less than in dual wage classifications Significant amount of differential eliminated by X-Mod Some further differential eliminated by insurer pricing adjustments Significant differential by wage level remains WCIRB California. All Rights Reserved. WCIRBCalifornia 9 Study Findings WCIRB California. All Rights Reserved. WCIRBCalifornia 10 5

6 Study Findings Dual Wage vs. Non-Dual Wage Classifications Dual Wage Classifications A. Loss to $100 Payroll Indexed to Average (0.761) B. After Pure Premium Rate (0.420) C. After X-Mod Application (0.376) D. After Insurer Rating Adjustment (0.355) $3 or more below Threshold Between $3 less to $5 above Threshold $5 or more above Threshold Non-Dual Wage Classifications A. Loss to $100 Payroll Indexed to Average (0.571) B. After Pure Premium Rate (0.592) C. After X-Mod Application (0.431) D. After Insurer Rating Adjustment (0.395) $22 or Less Greater than $22 and Less or Equal to $30 More than $30 WCIRB California. All Rights Reserved. WCIRBCalifornia 11 Fraud Analysis Process Meetings with employer, labor, insurer, CDI representatives involved in fraud related to dual wage classifications Individual meetings with insurer SIU representatives Employer & Labor representatives provide list of potential fraud indicators or red flags Consider potential regulatory changes WCIRB California. All Rights Reserved. WCIRBCalifornia 12 6

7 Fraud Analysis Findings Few dual wage fraud cases reported to CDI Anecdotal evidence of significant fraud & abuse Limitations of insurer audits as fraud detection tool Most fraud and abuse believed to arise from smaller employers Number of potential fraud indicators involve time cards Potential fraud often discovered when claim is filed WCIRB California. All Rights Reserved. WCIRBCalifornia 13 Systems Used in Other Jurisdictions Other State premium discount programs Contractor or Construction Premium Adjustment Program (CCPAP) Based on the average hourly wage for an employer - the higher the wage, the higher the credit factor Calculated based on payroll from the third quarter of the calendar year preceding the policy inception Verified at time of insurer s audit for policy period Individual State Requirements: 50% of the premium must be in construction classifications vs. only having one construction class on the policy. Minimum average hourly wage for all employees including part time Experience rated Experience modification less than 100% Experience modification or additional premium adjustments WCIRB California. All Rights Reserved. WCIRBCalifornia 14 7

8 Systems Used in Other Jurisdictions Other State premium discount programs Feedback Potential for fraud and abuse is significant Policy discount must be applied, but cannot be verified, until time of final audit (For example, a maximum discount is often applied, but adjusted unfavorably for the employer at the time of final audit) Discounts may not properly reflect employer s business operations - based on only 3 months of data from a prior policy period Indicated Adjustments Based on Actuarial Analysis of Wage Data are Large WCIRB California. All Rights Reserved. WCIRBCalifornia 15 Principal Recommendations Retain Dual Wage System Significant differentials by wage level Dual wage system significantly corrects for differential Any systems to improve have significant limitations Adjust Thresholds to Reflect Inflation Further Refinements Should be Considered on a Case-by-Case Basis Considering Limitations of Further Refinement Augment WCIRB Training Materials to Address Potential Fraud Red Flags Require Physical Audits of Smaller Policies with High Wage Payrolls WCIRB California. All Rights Reserved. WCIRBCalifornia 16 8