Workers' Comp Reform

Florida Business Groups Push for Comp Reform

With meaningful reform stalled and premiums rising, employers want their concerns to be heard.
By: | May 26, 2017 • 6 min read

Employers are expected to pressure Florida lawmakers to agree on workers’ compensation reform next year.

The Florida Supreme Court ruled unconstitutional significant components of the state’s workers’ compensation statutes in 2016, triggering a rate spike for employers. Attempts at reform — House Bill 7085 and Senate Bill 1582 — sputtered out in May, after lengthy debates.

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While next year’s legislative session starts Jan. 8, business groups believe the pressure will start in late summer or early fall, when the National Council on Compensation Insurance is expected to recommend significant rate increases — likely double-digit rate increases for two years in a row, said Carolyn Johnson, director of business, economic development and innovation policy at the Florida Chamber of Commerce.

“That should force the Legislature’s hand to act — at least that’s our hope,” she said.

This year’s rate increase of 14.5 percent followed two significant rulings. Castellanos vs. Next Door Company invalidated current caps on attorneys’ fees in workers’ comp claims, said Johnson.

The current system in Florida requires that the employer and carrier pay for an employee’s attorneys’ fees in workers’ comp claims.

In Westphal vs. the City of St. Petersburg, the court invalidated the length of time an injured worker could receive temporary total disability and temporary partial disability under current law, removing the cap on benefits workers could potentially receive, Johnson said.

Carolyn Johnson, director of business, economic development and innovation policy, Florida Chamber of Commerce

Following the rulings, the National Council on Compensation Insurance (NCCI) filed for a 19.6 percent increase. The Florida Office of Insurance Regulation disapproved the filing, but approved the amended increase of 14.5 percent.

The attorney fee decision resulted in about 10 percent of the 14.5 percent rate increase, and the invalidation of the cap on benefits resulted in about 2.2 percent, with the remaining portion due to the Florida Legislature having to ratify any rulemaking that has a significant impact on the business community.

“The key thing for the Florida Chamber of Commerce and Florida’s business community is how do we put constraints on how much claimant attorneys can make under the system of the post-Castellanos world,” Johnson said.

“We started out last year’s legislative session suggesting that the state move to a claimant-pay attorney fee system, but the political reality was that no one wanted to touch that.”

The Florida House’s initial proposal was to cap attorney fees at $150 an hour if the fee that the claimant’s attorney was making was 40 percent below or 120 percent above what the average defense attorney was making on a workers’ comp case.

The bill would not only have controlled costs, but would have also tied the cap to defense attorney fees, Johnson said.

The Florida Senate took a much different approach to solving the workers’ comp problem, as lawmakers believed it was time to move from an administered rate system to a loss cost system, she said. Florida is one of the few states that still has administered pricing.

“But we believe that is a red herring and will not reduce rates,” Johnson said.

Senate legislation would have codified the court’s decision but with one caveat — capping claimant attorney fees at $250 an hour, but business groups contended that would not have resulted in any real savings to the workers’ comp system.

“We believe any reforms to the workers’ comp system should first focus on making sure the injured worker is getting back to work as quickly as possible, while getting the benefits they deserve under the workers’ comp system,” she said.

“We also need to control and reduce the amount of litigation, and really take a look at what’s driving litigation.”

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One cost driver is the amount of claimant attorney fees, and business groups are now looking at how to derive an attorney fee schedule in which a “departure fee” from the current statutory fee structure is narrow enough to control the amount in attorney fees, but meets the Florida Supreme Court’s decision in Castellanos, Johnson said.

There are also other areas for reform, such as requiring a good-faith effort to resolve the dispute before it goes on to a hearing, which includes requiring more information about what benefits are being sought, Johnson said.

“If it’s an average weekly wage issue, we would like for the claimant to let the employer know what they think the number should be, and what formula is being used to calculate that number,” she said.

“That way, claims can be resolved faster. We should try to make our workers’ comp system fully self-executing.”

Pressure to Build

Tom Feeney, president and chief executive of Associated Industries of Florida, said that 2016 was largely “an educational process” for lawmakers about the state’s workers’ comp system.

Out of the 160 lawmakers, likely only five had ever voted on a comprehensive workers’ comp reform bill before.

The last reform occurred in 2003, which Feeney said took Florida from being the most expensive workers’ comp state to being in the top half of the least expensive states, with an annual savings of more than 60 percent for the average business.

“Legislators will soon get an earful from their constituents going into an election year, and maybe we’ll go back to a system of putting the focus back on getting injured workers healthy and not making lawyers wealthy.” — Tom Feeney, president and chief executive, Associated Industries of Florida

“The consequence of those cases is that lawyers who are now getting into the business know they can run up bills that their client won’t have to pay — it will be the employers paying,” he said.

“We estimate that the increased costs to the system because of these decisions will ultimately be between 30 percent and 40 percent, after two or three more rate increases.”

When rates rise again this summer, small businesses will likely start talking to legislators and the pressure will continue to mount, Feeney said. That’s what happened during the last crisis that came to a head in 2003, which drove reform efforts.

“Legislators will soon get an earful from their constituents going into an election year, and maybe we’ll go back to a system of putting the focus back on getting injured workers healthy and not making lawyers wealthy,” he said.

Shifting the Burden

A simple way to fix the problem would be for the claimant to pay their own attorney fee — presumably Floridians would not hire a lawyer for a frivolous claim if they had to pay a lawyer, Feeney said.

Tom Feeney, president and chief executive, Associated Industries of Florida

Thirty-one states have some version of a claimant-pay system, with some having the employer paying a fixed amount and the claimant paying the overage. The claimant pay could be a contingency fee.

“However, in Florida we’ve never had a workers’ comp system where claimants pay their own lawyers, so politically it could be unpopular,” he said. “But if we build in some additional benefits and more pay, we could likely get more support from more advocacy groups.”

There are other things that can be done to lower costs, Feeney said. For example, before a lawyer files a claim for an injured worker, the claim should detail exactly what that claimant is entitled to.

If a worker twisted their ankle, what kind of specific treatment do they want, and if they need psychotherapy, what kind of specific therapy do they need and why.

“Right now, lawyers are filing dozens of unrelated claims, which puts pressure on Florida employers and insurance companies to settle claims that have no value,” he said.

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What are the chances for such reforms?

“I’m an optimist and I think we made progress this year,” Feeney said. “When the next rate increases start generating enormous grassroots heat from small businesses, I could see landscape contractors, manufacturing facilities with 15 employees, and others telling lawmakers that they can no longer make a profit because of the rising rates,” he said.

“At that point, it will be crucial for lawmakers to do something to help Florida’s employers that are being crushed by alarmingly high costs.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]