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Rate Filing: Law Only

Explanation of the "law only" advisory rate filings recently filed with July effective dates.;

The Indiana General Assembly passed legislation, which increases workers compensation benefits each July 1st. This document explains the bills that became law, what impact the benefit increases have on overall advisory rates, and the advisory nature of rates filed by the ICRB.

Senate Bill 12ss
The General Assembly passed SB12ss in special session on May 29, 1997. The bill provided increased benefits for permanent partial impairments, amputation awards, and increased the average weekly wage maximum. The increase in benefits are staged over a four year time period with increases effective July 1, 1997; July 1, 1998; July 1, 1999; and July 1, 2000.

SB12(ss) is expected to have an overall impact on system costs of +9.1% over four years. We filed normal advisory rate filings effective January 1, 1998 and January 1, 1999. We made "law only" filings effective July 1, 1997, July 1, 1999 and July 1, 2000. The table below summarizes the rate impact and the advisory rate filings that contemplate the benefit increases.

SB12(ss)
Benefit Increase
Rate Impact
Cumulative Total
Advisory Rate Filing contemplating the change
07/01/1997
5.6%
1.056
07/01/1997 law only filing
07/01/1998

0.3%

1.059

01/01/1999 normal rate filing
07/01/1999

2.7%

1.088

07/01/1999 law only filing
07/01/2000

0.3%

1.091

07/01/2000 law only filing
Total

9.1%

n/a



Notes:
  1. For 07/01/2000 filing, both SB12ss and HEA 1050 contain benefit increases which impact rates at 0.3% and 3.3% respectively, for a total of 3.6%.
  2. Rate Impact Total and Cumulative Total are calculated in a multiplicative manner as follows:
1.091 = 1.056 x 1.003 x 1.027 x 1.003

House Enrolled Act 1050
On March 15, 2000, the Governor signed HEA1050 to become Public Law 193 effective 7/1/2000. The act provides increased benefits for permanent partial impairments and an increase in the average weekly wage maximum. The increase in benefits are staged over a three year time period with increases effective July 1, 2000; July 1, 2001; and July 1, 2002.

HEA1050 is expected to have an overall impact on system costs of +7.7% over three years. The table below summarizes the rate impact and the advisory rate filings that contemplate the benefit increases.

HEA1050
Benefit Increase
Rate Impact
Cumulative Total
Advisory Rate Filing contemplating the change
07/01/2000

3.3%

1.033

07/01/2000 law only filing
07/01/2001

3.7%

1.071

01/01/2001 normal rate filing
07/01/2002

0.5%

1.077

01/01/2002 normal rate filing
Total

7.7%

n/a



Notes:
  1. For 07/01/2000 filing, both SB12ss and HEA 1050 contain benefit increases which impact rates at 0.3% and 3.3% respectively, for a total of 3.6%.
  2. Rate Impact Total and Cumulative Total are calculated in a multiplicative manner as follows:
1.077 = 1.033 x 1.037 x 1.005

The following Questions and Answers walk you through a history of the benefit increases, the corresponding rate impacts, and the advisory rate filings that contemplated the benefit increases.

Are advisory rates mandatory? No!
ICRB rate filings are "advisory" so carriers have a choice. The filing is not mandatory. With each advisory rate filing that the ICRB makes on behalf of all its members with the Department of Insurance (DOI), a carrier must always make a choice at that time. The choice is to either use the advisory rates in their entirety or not. If a carrier chooses to use the advisory rates, it simply uses them and does not make a filing with the DOI. If a carrier decides to use rates other than what the ICRB filed, then it must make its own filing with the DOI.

For example, a carrier may choose to adopt the ICRB advisory filing, but for new and renewal business only, and not for outstanding policies. Or, a carrier may file a different percentage change or a different effective date. The competitive nature of Indiana's law encourages carriers to make business decisions such as these.

What does "law only" mean?
"Law only" means that the change in rates contemplates an increase due solely to the increase in benefits passed by the Indiana General Assembly. These filings do not include any new data, trend factors, or loss development analysis that are normally considered in a regular advisory rate filing. That's why we call it a "law only" filing.

Why are some advisory rate filings effective in July, and some in January?
Ever since Indiana enacted its competitive rating law effective January 1, 1990, the ICRB has traditionally filed advisory rates every January 1st to be consistent with the law's effective date. However, the Indiana General Assembly has historically enacted workers compensation benefit increases to start July 1st.

A timing problem arises because we don't always know in advance if the legislature will increase benefits, as was the case in 1997 and 2000, when the last two workers compensation bills passed (SB12ss and HEA1050). That's why we filed "law only" advisory rates for July 1, 1997, 1999, and 2000. Fortunately, these two bills included benefit increases three to four years into the future. So, for subsequent years contemplated by these bills, we have an opportunity to factor into a January 1st advisory rate filing, the rate impact of an upcoming July 1st benefit increase, on a pro-rated basis.

Finally, we must make a business decision if for a particular year, a July "law only" advisory rate filing would be appropriate, as we did for July 1, 1999. Going forward, we are guided by keeping things simple and factor into future January 1st advisory rate filings, the rate impacts of upcoming July 1st benefit increases, on a pro-rated basis. Ultimately, under Indiana's competitive rating law as explained above, each carrier must make its own business decision about its rates and effective dates.

What are the effects of benefit changes on rates?
Confusion easily arises regarding the effect of benefit changes on rates. This section will explain how one should interpret those effects. Specifically, let's look at the impact of the July 1997 and July 1998 benefit changes of +5.6% and +0.3% as estimated in 1997 and the cumulative rate decrease of 1.4% between then and January 1, 1999.

The decrease over that time period was based on changes in the frequency and severity of claims and was unrelated to the effect of the benefit change. In fact, if there were no benefit increases passed during that time, rates would have decreased by 6.9%. The calculation is:
(1-0.014)/1.056/1.003-1=-6.9% where 0.014 is the cumulative rate decrease between January 1997 and January 1999, and 1.056 is the law impact at July 1997, and 1.003 is the law impact at July 1998.

The confusion exists because it is assumed that the rate decreases in January 1998 and January 1999 were based on data that contained significant new information on the impact of the July 1997 and July 1998 changes. That is not the case. The January 1998 change of –4.2% was based on the latest data available at the time, namely policy years 1995 and 1994.

All of this data happened before the benefit changes. The decrease was caused by other changes occurring in the system. The data were adjusted by the +5.6% and +0.3% increases, which were the estimated benefit impacts, before they were used. The January 1999 change of –2.5% was based on policy years 1996 and 1995. Only a small portion of the data from policy year 1996 was subject to the new benefits. Capturing the impact of the changes in the data used would have required that permanent partial impairment ratings for accidents that occurred after July 1997 were identified before the end of December 1997.

There are many other changes that occurred in the system during that period. Some that may have had significant effects are greater attention to safety, medical attention geared to returning employees to work more quickly, return to work programs, etc. The decreases filed for January 1998 and January 1999 were the result of these types of changes, and were not impacted by possible differences between the estimated and actual effect of the July 1997 benefit increases.

The first filing that did have significant data from after July 1997 was the January 2000 filing. This filing was virtually flat. Future filings may show decreases or increases; it will not be easy to tell whether any differences are from the law or from other elements in the system.

For more information on WC benefit increases, please see the attached spreadsheet.

(Note: when our system asks you for a user name and password, just click on "cancel" and the spreadsheet should open.)

 

Mods change? No!
For "law only" filings, the experience ratings factors (ELR & D ratios) do not change, so we do not need to revise any experience modifications as a result.

Statistical Code
A carrier may report rate changes during the policy period by splitting the rate or reporting the rate change under statistical code 0998, "Flat Rate Increase." This amount is subject to experience rating. Source: NCCI URQ User's Guide



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The material in this document has been prepared and shared for informational purposes only and should not be relied upon as legal advice on any particular situation.