Reform Retro!

Retro insurance agencies from the beginning of the program have been permitted to cherry pick who gets in to their programs based on the past safety records of the companies they do or don’t accept. This means they should have lower claims to premiums costs – at least initially - even if there is no improvement in safety… simply by carefully managing who they accept into their program.

For example, imagine you are running a private/Retro life insurance company which only accepts folks under 30. Anyone over 30 years old, you reject and they wind up in the State/Non-Retro Life Insurance program. Clearly the State/non-Retro program will have much higher claims than the private/Retro program. But despite this huge advantage for Retro insurers, the preceding charts show very little difference. And the PAF charts show that if anything, Retro programs are getting worse compared to the State run programs.

Despite all this mounting evidence of the lack of cost benefit of Retro programs, L & I continues to insist that Retro programs are saving money. There have been many “Oversight” meetings during the past 6 years wherein Labor Groups have repeatedly asked for evidence of the cost savings of Retro programs. These oversight groups include the Workers Compensation Advisory Committee (WCAC) and the Retrospective Rating Proviso Study Group (RRPSG).

For example, the Retrospective Rating Proviso Study Group was presented with the following “evidence” at the November 5, 2007 meeting that Retro programs saved money compared to non-Retro programs by having 8% lower time loss durations:

Retro programs have Time loss durations 8% lower than Non-Retro programs (slide 9):

The rise in the number of days for both Retro and Non-Retro claims is related to the aging population of the work force taking longer to recover before returning to work.

The hidden (and incorrect) assumption with the above chart is that there is a relationship between the time lost and the total cost of the claim.

However, time losses are relatively minor costs whereas medical costs are the over-whelming and skyrocketing costs. But L & I did not produce a chart of medical costs or total costs. Also the Wyman Report discussed later shows that L & I was guilty of artificially inflating non-Retro claims costs. Thus, it is amazing that the difference was not even greater than 8%.

Retro groups have lower claim frequency than non-Retro groups (slide 13):

This chart shows a significant 25% difference between Retro and Non-Retro groups. The hidden assumption is that lower claim frequency leads to lower claim costs. However, lower claim frequency is not related to claim costs. Instead, it is likely that Retro programs simply “pay off” smaller claims to prevent their being reported in order to deliberately reduce claim frequency.

This is particularly likely because many Retro insurance companies have policies to punish employers who report claims. So employers only report bigger claims as is shown on the following chart (PPD claims are Permanent Partial Disability which are among the most costly claims… they are rising because the work force is getting older).

Note from the above chart that since 2001, Retro programs have a higher frequency of the most expensive kinds of claims even though they have a lower frequency of over all claims. This likely was a factor in their PAF ratio rising above one. The real question is why Retro firms continue to get hundreds of millions of dollars in refunds even though they are more expensive.

The following chart makes this trend even clearer. Retro and Non-Retro programs had about the same ratio of PDD claims until 2002. Since then, Retro programs have had about 10% more serious accidents than non-Retro. It may even be worse because there are more non-Retro employers than Retro employers, a fact this chart does not appear to have accounted for.