SC Administrative Law Court Decisions

On November 30, 2000, the National Council on Compensation Insurance, Inc. ("NCCI") filed an application with the Director of the South Carolina Department of Insurance ("Department") relating to (a) workers' compensation insurance loss costs and rates to be utilized by insurers transacting business in South Carolina and (b) the assigned risk rates. The Petitioner sought an April 1, 2001 effective date for the filing.

Philip S. Porter, Consumer Advocate for the State of South Carolina ("Consumer Advocate"), requested a contested case hearing in December 2000. The case was thereafter filed with the Administrative Law Judge Division ("Division" or "ALJD").

On January 24, 2001, Companion Property and Casualty Insurance Company ("Companion") filed a Motion for Leave to Intervene. By Order dated February 6, 2001, the Motion was granted. The Notice of Hearing was issued on March 15, 2001, setting the hearing date for May 7, 2001. Upon Companion's Motion for Continuance dated April 26, 2001, an Amended Notice of Hearing was issued and the hearing on this matter was held on May 31, 2001.

FINDINGS OF FACT

Having carefully considered all the testimony and evidence presented at the hearing in this matter and, having closely passed upon their credibility, and further considering the burden of persuasion by the parties, I make the following Findings of Fact by a preponderance of the evidence:

General Findings

• This court has jurisdiction of the parties and the subject matter.
• This is a contested case hearing to establish rates and premiums for workers' compensation insurance written in South Carolina.
• All employers in South Carolina are required to provide workers' compensation insurance for its employees. They do such in three forms: (1) self-insurance; (2) a voluntary program; or (3) an involuntary program.
• NCCI is the largest corporation in the United States dealing with workers' compensation data, statistics and research. It was formed at the urging of the National Association of Insurance Commissioners and is active as a nonprofit organization in 39 states. As required by statute, it serves as the workers' compensation statistical agent and rating organization for South Carolina. Every workers' compensation insurer must be a member of a nonpartisan rating bureau.
• NCCI collects compensation experience and data from carriers inside the State of South Carolina as well as from carriers throughout the United States.

Voluntary Program and Involuntary (a/k/a Assigned Risk or Residual) Program

• Employers in South Carolina can purchase workers' compensation insurance from insurance carriers through two programs - the voluntary program and the involuntary program, a/k/a the assigned risk program or the residual program. Also, employers in South Carolina may participate in self-insurance programs; however, these programs are not before the court in this case.
• The voluntary program consists of employers whose applications for workers' compensation insurance have been accepted by an agent for a licensed carrier which elects to provide employers workers' compensation coverage in South Carolina's competitive marketplace. The carrier or insurer incorporates its own underwriting guidelines and expense needs. The employer chooses the insurer and pays the premium directly to the carrier. The involuntary or assigned risk program consists of employers whose applications for workers' compensation insurance coverage in the voluntary program have been declined by at least two licensed carriers in this State. Usually these employers have greater losses than other employers, have greater risks, and the carriers refuse to insure them. Tr. p. 35. Since these employers are unable to secure workers' compensation insurance in the voluntary program or marketplace, the assigned risk insurance is the program of last resort which provides the required insurance for those employers.
• The total premiums paid for workers' compensation coverage in both the voluntary and involuntary programs for the calendar year 1999 was approximately Three Hundred Twenty-Seven Million ($327,000,000.00) and No/100 Dollars. The assigned risk premium has decreased from Seventy-Nine Million ($79,000,000.00) and No/100 Dollars in 1996 to Thirteen Million Four Hundred Thousand ($13,400,000.00) and No/100 Dollars as of February 2000. Tr. p. 29.
• The Department assigns applications for coverage in the assigned risk program to one of two specific insurers, which are commonly referred to as servicing carriers. Presently the two servicing carriers are Companion ⁽¹⁾ and Capital City. These two carriers submitted bids or opted to write these assigned risk policies.
• Companion is one of the two servicing carriers for the assigned risk plan and, as such, will be authorized to charge the rates approved in this Order.
• The servicing carrier issues its own insurance policy to an applicant who has been denied workers' compensation coverage by two carriers in the voluntary market. The assigned servicing carrier cannot refuse to write a policy to any applicant/employer who has been refused coverage in the marketplace, cannot refuse any risk, and cannot limit the number of policies it must write, nor can it limit the dollar exposure it will insure.
• The servicing carrier must pay its own expenses, losses, and assessments imposed with respect to these policies, and subjects its surplus to any underwriting losses.
• Prior to May 1, 2000, the servicing carriers in the assigned risk plan could cede or assign the premium and the losses to a national pool. Each carrier would service the policy and retain a fee or allowance to cover its expenses. Tr. p. 240. Pursuant to 1998 Act No. 291, § 1, the General Assembly added Section 38-73-540(C) to the Insurance Code. The change requires the assigned risk plan rates to be self-sustaining and creates the assigned risk plan administrator. Prior to the statutory change, the servicing risk carriers were not required to be self-sustaining. There was no real competition by carriers to be in the assigned risk market. Since the change in the statute, there is no assignment of the policy to a national pool.
• The rates the servicing carrier may charge for workers' compensation policies issued under the involuntary program are set in the filing and are calculated based upon the same components established for the voluntary program.
• The South Carolina Director of Insurance ("director") or his designee is required by statute to approve the rate for each classification under which workers' compensation insurance is written. The rate and classification must be the same for all insurers.
• Further, the director or his designee shall, in approving the rates, make use of the experience data which may be available and any other helpful information that may be obtainable.
• The director or his designee may disapprove a previously approved rate for any classification for workers' compensation insurance and may disapprove an experience modification rate for workers' compensation insurance upon a finding that the rate fails to meet certain standards. Further, the director is authorized to disapprove any workers' compensation rate that is excessive, inadequate, or unfairly discriminatory. In addition, the assigned risk rates must be sufficient to ensure that the assigned risk plan is self-funding.
• By Order dated March 1, 1990, the then Chief Insurance Commissioner of the Department, acting with authority granted by S.C. Code Ann. § 38-73-1430, directed that workers' compensation rate filings must be treated differently for the voluntary and the assigned risk markets. The assigned risk market filings should propose complete rates, and the voluntary market filings should propose only the projected losses and the projected loss adjustment expenses (i.e., the loss costs). NCCI's loss cost and assigned risk filing complies with that Order of the Commissioner.

Loss Costs and Full Rates

• The "loss costs" portion of the rates for the voluntary program and approval of the "full rates" for the assigned risk program are at issue in this case.
• "Loss costs," as they impact on the rates, are regulated in the voluntary market. They are costs that all carriers have in common. ⁽²⁾ Sometimes they are referred to as "pure premiums." They are the claims portion of the premium paid by employers for workers' compensation insurance coverage. See Consumer Advocate Ex. 1, p. 8. They are also identified as the cost of medical benefits (medical care) and indemnity benefits (lost wages or loss for bodily injury) and the loss adjustment expenses in connection with those benefits. They apply to both the voluntary market and the involuntary market. However, they are not the final rates because they do not include provisions for any of the remaining expenses (including production expenses, profit and contingencies, a provision for the Second Injury Fund assessment, etc.) of an insurer.
• The proposed voluntary loss costs and the assigned risk rates are based on the same premium and loss experience reported to NCCI. Therefore, since each program's proposed values are inextricably linked to the others, any Order made with regard to the Experience, Trend, and Benefits component for one program, would necessarily and uniformly apply to the other.
• A "rate" is the charge per unit of exposure (usually $100 of payroll) levied by an insurer to cover those costs associated with providing workers' compensation insurance coverage. The resulting dollar figure after multiplying the rate by the number of exposure units associated with a particular risk is the "premium." ⁽³⁾

Intervenors

• The Consumer Advocate was admitted as an Intervenor in this case as an "affected party." It has a discretionary, statutory duty to represent consumers in matters of rates.
• By Order dated February 6, 2001, Companion was admitted as an Intervenor in recognition of its status as one of the two servicing carriers for the assigned risk program in South Carolina.

Rate Filing

• NCCI made the filing, which is the subject of this case, on behalf of all licensed workers' compensation insurance carriers doing business in South Carolina and as authorized by S.C. Code Ann. § 38-73-1210 (Supp. 2000).
• The filing is subject to a waiting period of sixty (60) days before it becomes effective. This filing was made on November 30, 2000 and sought an approval date of April 1, 2001. The period may be extended by the director or his designee for an additional period not to exceed sixty days if the director gives written notice within the waiting period to the insurer or rating organization which made the filing that additional time is needed for consideration of the filing.
• The filing herein seeks the following:

(a) a decrease of six-tenths percent (0.6%) in the overall average loss cost level for coverage written in the voluntary program for other than "F" classifications;

(b) a decrease of one and one-half percent (1.5%) in the overall average loss cost level for coverage written in the voluntary program for "F" classifications;

(c) an increase of one-half percent (0.5%) in the overall average rate level for coverage written in the assigned risk program in South Carolina for other than "F" classifications;

(d) an increase of four and seven-tenths percent (4.7%) in the overall average rate levels for coverage written in the assigned risk program for "F" classifications; and

(e) continuation of the Assigned Risk Adjustment Program and of the forty percent (40%) assigned risk loss cost differential.

Notice of the Filing and a Public Hearing

• S.C. Code Ann. § 38-73-910 (A) (Supp. 2000) requires a public hearing before the ALJD, upon a request received by an insured or affected party within fifteen (15) days of public notice of such filing, as a condition for approval of an increase in workers' compensation insurance rates.
• Notice of NCCI's filing seeking a change in workers' compensation insurance rates, including notice of the hearing, was published by the Department, in newspapers of general, statewide circulation at least 30 days in advance of this hearing and more than 30 days before the proposed rate changes would take effect. I find that proper notice of a hearing concerning the revision in the voluntary loss cost and assigned risk rates was given to the parties hereto as well as to the public.
• The Consumer Advocate is an affected party and requested a public hearing (contested case hearing) within 15 days of the public notice of the requested increase. The Consumer Advocate's request was timely made and filed.
• No member of the public appeared at the contested case hearing to present a protest or other position with respect to the filing. Further, no member of the public has contacted this tribunal about this hearing or the subject matter. An opportunity was offered to the public for comments at the hearing but none were received.

Positions of the Parties

• The Petitioner, NCCI, sought an overall average decrease of -0.6% for voluntary loss costs and an overall average increase of +0.5% in assigned risk insurance premium rates for policies written on or after April 1, 2001.
• The Department concluded that the loss cost portion of NCCI's filing complied with all statutory requirements and would not produce loss costs that were excessive, inadequate, or unfairly discriminatory. Further, the Department concluded that the assigned risk part of the filing complied with all statutory requirements, that it would not produce rates that were excessive, inadequate, or unfairly discriminatory, and that it would produce an assigned risk plan that was self-sustaining.
• NCCI used the same calculations and methodologies to calculate the changes in experience, trend, benefits, and loss adjustment expense for both the voluntary program loss costs and the assigned risk rates. Tr. p. 42.
• NCCI included in the assigned risk portion of the filing an assigned risk loss cost multiplier, which also included an expense factor and a profit and contingencies factor of +0.5%. This multiplier was not developed by NCCI. This factor was developed by the Department and included in the filing by NCCI upon the request of the Department. Included in the loss cost multiplier were values for the following expense components: (a) production expense, (b) general expense, (c) premium-based taxes, (d) second injury fund assessment, (e) profit and contingencies. See Pet. Ex. 3 (prefiled testimony of Jay Rosen, pages 16 - 18) and Consumer Advocate's Ex. 2 (letter dated 11/29/00 from Dean Kruger to Cathy Booth).
• NCCI, the Department, and Companion each produced expert testimony that the loss costs filing complies with all statutory requirements and would not produce loss costs that are excessive, inadequate, or unfairly discriminatory. Both the expert witness of the Department ⁽⁴⁾ and the expert witness of Companion ⁽⁵⁾ testified that the assigned risk filing would not produce rates that were excessive, inadequate, or unfairly discriminatory; and that it would produce an assigned risk plan that was self-sustaining. NCCI's expert witness ⁽⁶⁾ also presented the same testimony on the assumption that the values mandated by the Department were not excessive, inadequate, or unfairly discriminatory. Thus, neither the Department nor Companion opposed either the loss costs filing, the assigned risk filing, the continuation of the Assigned Risk Adjustment Program, or the assigned risk loss cost differential, as sought by NCCI in its filing.
• The Consumer Advocate did not oppose the use of the same calculation and methodologies in both the voluntary and the assigned risk portions of the filings, nor did the Consumer Advocate oppose continuing the Assigned Risk Adjustment Program or the assigned risk loss cost differential. It presented no testimony regarding loss costs or rates applicable to the "F" classification. The Consumer Advocate opposed the trend factors selected by and used by NCCI for both the voluntary and assigned risk program and the profit and contingency factor to be used with the assigned risk program (the inclusion of the loss cost multiplier, including expense and profit factors in the assigned risk rates). See Consumer Advocate Ex. 1, p. 9. Further, its expert witness, Martin M. Simons, ⁽⁷⁾ opposed the trend factors used for both the voluntary and assigned risk program and the profit and contingency factor to be used with the assigned risk program.

Trend

• The trend component of the insurance rate formula is used to actuarially estimate future changes in the underlying historical claim costs from the time period of the historical data underlying the filing to account for the period that the proposed rates will be in effect. Whereas loss development estimates the adequacy of current reserve estimates, trend estimates the change in the loss ratio from the historical period to a future period. Trend accounts for the impact of inflation on both losses and premiums over this time period. The trend factors are calculated separately for indemnity and medical loss ratios. ⁽⁸⁾
• NCCI computed the final annual trend factors separately for indemnity and medical losses as a simple average of the trend estimates based on: (a) an eight-point policy year loss ratio exponential trend model; (b) a seventeen-point policy year loss ratio exponential trend model; (c) a frequency/severity trend analysis; and (d) indicated countrywide annual trend factors. See Pet. Ex. # 1 (prefiled testimony of Jay Rosen, page 11).
• Based on the above methodology, the indemnity losses in the current filing have been trended by -1.8% per year and the medical losses were trended by +0.8% per year.
• Mr. Simons testified that the NCCI had presented several different trend factors in its filing and that most of the factors presented were not indicative of the short term future expectations for South Carolina workers' compensation loss cost experience. See Consumer Advocate Ex. 1, p. 13.
• Mr. Simons stated that the seventeen-year trend factor was irrelevant for estimating future loss costs (or loss experience) because of the substantial differences in the workers' compensation market in South Carolina between the current time period and that which is covered by the seventeen-year trend. He stressed that since 1982, the underlying laws have changed, the types of businesses in the State have changed, the occurrence of workplace accidents has changed, insurance company claims practices and work safety practices have changed, and the types of employment in South Carolina have changed. Further, he stated that as indicated by the NCCI's experience, these changes have been significant, and the workers' compensation loss experience from 1982 is unfit for projecting loss ratios in 2001 and 2002. Consumer Advocate Ex. 1, p. 14.
• The Consumer Advocate objected to the inclusion in the filing of the trend factor based upon frequency/severity analysis because that analysis was incomplete. That trend factor consisted only of an analysis of severity; it did not include the results of NCCI's analysis of frequency. Id. The Consumer Advocate's expert witness opined that to ignore the frequency trends completely distorts the very data from which we are attempting to calculate future loss expectations. Id. He stated that the NCCI analysis assumes that the frequency trend is flat whether the frequency loss ratio trend is flat or not. However, he noted that the frequency reductions played the major part in bringing about the loss ratio decreases in South Carolina during the past several years. Thus, in his opinion, to ignore the frequency trends would produce a biased estimate of the trend because a significant portion of the data is excluded in the calculations. Mr. Simons considered this to be especially true in South Carolina where claim frequencies for workers' compensation insurance have been decreasing. He stated that for the above reasons, it was inappropriate to include this factor in the fashion used in the current filing; it provides an incomplete analysis to project workers' compensation insurance loss costs.
• Mr. Rosen opined that the rapid decline in loss ratios in South Carolina "has almost exclusively been driven by a decline in claim frequency, or the number of work comp claims filed per unit of premium." Tr. p. 61.
• Mr. Simons testified that the indicated "countrywide annual trend factors," as used by NCCI , were biased on the high side because they were derived from "filed" information from other states who had revised NCCI's trend calculations based upon their own actuarial calculations. Further, he opined that some states revised NCCI's trend calculations and such is not accounted for in its usage of that factor in its calculations in this filing. Further, the factor does not reflect the fact that some other states approved lower loss costs than those filed by NCCI in those states. Also, the factor does not include the data from any state in which NCCI is not actively involved. NCCI continues to use these trends in spite of the fact that some of the trends have not necessarily been included in the loss costs approved by some of the regulators in those states.

The annual countrywide trend factor assumes that the experience for states like Oklahoma and Illinois is applicable for projecting South Carolina loss costs. However, the experience in those states is much different. Mr. Simons opined that this trend factor has been rejected by regulators in some states where disagreements arose with NCCI. Further, he noted that this factor uses trends only from a select number of NCCI states. It is his opinion that it is inappropriate to use this factor in this proceeding to determine the indicated loss costs, except in a most minor manner. Consumer Advocate Ex. 1, pp. 9 and 15. The court so finds.

• Mr. Simons further testified that he requested and received from NCCI information about the five-year exponential trend factors. This data provides information relative to a more recent time period than that which is provided for in the eight-year trend data. Further, he testified that the indications based on the five-year data were very similar to those derived from the eight-year data. Notwithstanding, the Consumer Advocate considers the eight-year exponential trend model to be the more reliable estimate of future loss costs expectations because it best reflects current conditions and the substantial improvements that have occurred in the South Carolina workplace.
• The Consumer Advocate's expert witness further opined that the loss costs should be determined by utilizing a trend based upon an average of the eight-year exponential trend on a paid and paid-plus case basis. Paid loss data projects the expected total losses for each policy year based on an analysis of the underlying historical patterns of paid South Carolina workers' compensation losses. Further, this data projects the expected total losses for each policy year based on an analysis of the underlying historical patterns of insurance company loss reserves along with the paid South Carolina workers' compensation claim data. To add conservatism to these projections, the paid plus case data was taken directly from the NCCI's responses and includes some effect of the countrywide trend. According to Mr. Simons, this technique produces results that provide for higher loss costs than those that would have been developed using only South Carolina data. Consumer Advocate Ex. 1, p. 16.
• Employers in South Carolina have experienced substantial reductions in their workers' compensation loss ratios, and these reductions have continued to occur over an extended period of time. These loss ratio reductions have resulted from legislated changes as well as efforts by employers to reduce workplace accidents and injuries. In addition, insurers have reduced claim costs by initiating claim management techniques designed to close claims more quickly and more efficiently. The percentage of South Carolina businesses written under the assigned risk plan has been decreasing throughout the time period under which the experience was generated. As insurers increase their voluntary writings, the incentive increases for them to manage their claims more effectively. The loss ratio reductions in South Carolina brought about by these initiatives have been significant.
• The Department's expert witness, Mr. Kruger, did not indicate that any actuarial analysis was performed by the Department with respect to either part of the filing. Rather, the witness opined that the loss costs proposed by NCCI were set appropriately. On direct and cross examination, Mr. Kruger described a multitude of programs aimed at improving work place safety (e.g., the drug-free workplace program with its five percent credit for employers who implemented the program), claim practices, etc., which were instituted since the early 1990s. Also, he described a new program the benefits of which are expected to be realized in the future (fraud program with quarterly meetings to identify fraud in the workplace and to identify fraudulent claims). Tr. pp. 109-110, 113, 115, 119-120.
• Mr. Simons suggested the following factors replace those listed on line 25 of the NCCI filing:

Consumer Advocate Ex. 1, p. 18.

• The filing contains data through policy year 1998, which was the latest policy year that data was available at the time the filing was prepared. The Consumer Advocate's witness testified that NCCI performed at his request an actuarial analysis of the 1999 calendar-accident year data. This calendar-accident year data is a reasonable estimator of future loss costs. Mr. Martin opined that it has been used in calculating the approved workers' compensation loss costs and rates in some previous South Carolina proceedings.

Mr. Simons stated that the 1999 calendar-accident year indications produced substantially greater decreases than those produced in either the NCCI's filing or in his analysis, even though NCCI included in the data country-wide factors as the complement to their perceived credibility of South Carolina experience. In his opinion, this provided additional evidence that the loss ratio reductions have continued at a substantial rate subsequent to the time period used in either the Consumer Advocate's analysis or in the NCCI filing. Finally, he expressed an opinion that these data also provide substantial evidence that the loss ratio reductions may reasonably be expected to continue into the near future. He further opined that if a change was based solely upon the most recent South Carolina calendar-accident year experience as analyzed by the NCCI actuaries, (including the countrywide experience as described earlier), that indicated change would have been a decrease of 18.9% versus the Consumer Advocate's recommended 10.4% decrease. Consumer Advocate Ex. 1, pp. 19-20.

• Conflicts regarding the trends result from a disagreement among the actuaries about the improvements in the market and whether it has "bottomed out." This disagreement is exacerbated by the fact that the latest data underlying this filing is 1998 policy-year data and the actuaries are using that data to predict results for 2001-2002.
• Despite the concerns of the actuaries in the previous rate proceeding regarding whether or not the improvements in the market have bottomed out, both the indemnity and medical loss ratios continued to improve in the two years subsequent thereto, albeit at a lower rate than in the past. Consumer Advocate Ex. 1.
• During the course of the hearing, the expert witness for Companion discussed two excessive losses ("shock losses") ⁽⁹⁾ Companion recently suffered in the magnitude of approximately Three Million Dollars each. Tr. p. 243. Further, she stated that Companion could not obtain reinsurance from a carrier for the year beginning June 1, 2001. Ms. Boysia testified that she participated in assembling information incorporated in the NCCI filing, that the 0.5% overall rate increase is necessary, that it will not result in a rate that is either excessive, inadequate or unfairly discriminatory and that it is appropriate. Tr. p. 246. Such increase will produce an approximate $100,000 premium increase for Companion and an additional approximate $100,000 premium increase for the other assigned risk servicing carrier, Capital City.

Assigned Risk Differential

• The NCCI filing is based on the data through the 1998 policy year and includes data accumulated at the time when assigned risk rates were not required to be self-sustaining pursuant to S.C. Code Ann. §38-73-540(C) which was enacted in 1998.
• In order to account for the increased risk associated with the assigned risk, NCCI developed an assigned risk differential. The purpose of the differential is to quantify the difference in the aggregate experience in the assigned risk program and the voluntary program. The differential operates in the rate-making process as a surcharge to recognize this disparity. Tr. p. 74 (prefiled testimony of Jay Rosen, p. 17). In developing the assigned risk rates, NCCI used the same underlying assumptions for both the voluntary and assigned risk programs.
• The witnesses for NCCI, the Department of Insurance and the Consumer Advocate agreed that setting assigned risk rates at 140% of the rates charged by the voluntary market, resulting in a proposed assigned risk differential of 1.4, is actuarially sound and reasonable. The expert witness for Companion did not express an opinion whether an assigned risk differential of 1.4 was actuarially sound and reasonable. According to the prefiled testimony of Mr. Rosen, the adequacy of this differential is reviewed at least annually.
• In addition, NCCI included in the assigned risk portion of the filing an assigned risk loss cost multiplier, which included an expense factor and a profit and contingency factor of 0.5%. Unlike the assigned risk differential which was designed by NCCI and incorporated by it in its computations, this assigned risk loss cost multiplier (which included the profit factor) was designed by the Department and included in the computations at the direction of the Department. Mr. Rosen expressed no opinion about this factor.
• Mr. Simons, the expert witness for the Consumer Advocate, testified that the profit factor mandated by the Department was higher than any workers' compensation assigned risk profit factor approved for use in South Carolina for well over a decade and was higher than any profit factor requested by NCCI over the same period of time. Consumer Advocate Ex. 1, p. 25. He calculated that the inclusion of the profit factor would generate a rate of return of approximately 21 percent. Id., p. 29. He also testified that the rate of return resulting from the inclusion of the 0.5% profit factor would be excessive even for businesses involved in high-risk activities. Id. at 29. Mr. Simons observed that in prior proceedings in South Carolina requested rates of return in excess of 15% have been routinely rejected. Id.
• Mr. Simons requested from the Department its calculations that resulted in the 0.5% profit factor, including, if available, the Department's calculations of the return on equity to be earned with the inclusion of that profit factor. Consumer Advocate Ex. 3 (letter dated 1/2/01 from Hana Williamson to Dean Kruger).
• The Department responded, stating that the purpose of the profit factor was to provide for "the volatility of non-standard WC business." Further, it stated that the "problem of premium fraud is more acute for the assigned risk plan then [sic] for the voluntary market." Consumer Advocate Ex. 4 (letter dated 1/20/01 from Dean Kruger to Hana Williamson). The response provided no calculations in support of the profit factor. Id.
• According to the testimony of the Department's expert witness, the expense and profit factors included in the filing at the Department's direction, were either picked, selected, or guessed at. Further, Mr. Kruger admitted that he did not include information regarding the recent losses of the servicing carriers in his response to the Consumer Advocate's request for the backup data and calculations used to produce the expense and profit factors. Further, he stated that he did not do an analysis to determine the rate of return on a 0.5% increase in premium. Tr. pp. 128-129, 131-134, 135, and 139.

CONCLUSIONS OF LAW

Based upon the foregoing findings of fact, I conclude, as a matter of law, the following:

• The South Carolina Administrative Law Judge Division is empowered to hear this case pursuant to S.C. Code Ann. §38-73-1320 (Supp. 2000) and Chapter 23, Title 1 of the South Carolina Code of Laws, as amended.
• Generally, a request for insurance loss-cost and assigned risk revisions is governed by S.C. Code Ann. §§ 38-73-10 et. seq. (Supp. 2000). S.C. Code Ann. § 38-73-540 specifically addresses assigned risk rates. It mandates that assigned risk rates be self-sustaining and provides a mechanism for corrective action in case the current rates are not adequate.
• The Administrative Procedures Act requires that a notice of the hearing be published at least thirty days in advance. S.C. Code Ann. § 1-23-320(a) (Supp. 2000). The notice of this hearing was published more than thirty days prior to this hearing. The notice set forth that the contested case hearing would determine whether the Petitioner's filing to change workers' compensation insurance rates was lawful. In light of those facts, I conclude that adequate and sufficient public notice for this hearing was provided.
• A public hearing is required as a condition of approval of an increase in workers' compensation rates. A notice of a proposed rate increase must be provided in all newspapers of general circulation at least thirty days in advance of the insurer's proposed effective date of the increase. Further, a copy of the notice must be sent to the Consumer Advocate. S.C. Code Ann. §38-73-910 (Supp. 2000). I find and conclude that all requirements of this statutory provision were complied with.
• S.C. Code Ann. §§38-73-10(a)(1) and 38-73-430(4) (Supp. 2000) require that insurance rates not be excessive, inadequate, or unfairly discriminatory. S.C. Code Ann. §38-73-430(1) (Supp. 2000). S.C. Code Ann. § 38-73-430 addresses certain provisions that must be complied with in the making of rates.
• S.C. Code Ann. § 1-23-350 (Supp. 2000) requires that a final decision in a contested case shall be in writing and shall include findings of fact and conclusions of law. The findings of fact in a contested case must be based upon the evidence and matters officially noted during the course of a hearing. S.C. Code Ann. §1-23-320(g)(i) (Supp.2000). The decision of an Administrative Law Judge who conducts and hears a contested case is a "final decision"as defined in the Administrative Procedures Act. S.C. Code Ann. § 1-23-610 (Supp. 2000).
• NCCI has the burden of proof to show, by a preponderance of the evidence, that the proposed loss costs and rates will not be excessive, inadequate or unfairly discriminatory. S.C. Code Ann. § 38-73-10(a)(1) (Supp. 2000). In civil cases, generally, the burden of proof rests upon the party who asserts the affirmative of an issue. 29 Am. Jur 2d, Evidence § 127 (2d ed. 1994). The preponderance of the evidence "is evidence which is of the greater weight or more convincing that the evidence which is offered in opposition to it." Black's Law Dictionary 1182 (6^th ed. 1990).
• By Order dated March 1, 1990, the Chief Insurance Commissioner of the Department, acting with authority granted by S.C. Code Ann. §38-73-1430 (Supp. 2000), directed that workers' compensation rate filings be treated differently for the voluntary and the assigned risk markets. Assigned risk market filings should propose complete rates, and voluntary market filings should propose only the projected losses and the projected loss adjustment expenses (i.e., the loss costs). NCCI's loss cost and the assigned risk filing complies with that Order.
• NCCI is the nonpartisan rating bureau required by statute for the workers' compensation insurance. S.C. Code Ann. §38-73-510 (Supp. 2000). The subject application is made by NCCI on behalf of all licensed workers' compensation insurance carriers doing business in the State of South Carolina. S.C. Code Ann §38-73-1210 (Supp. 2000). NCCI is also the assigned risk plan administrator pursuant to the provisions of S.C. Code Ann. §38-73-540(C) (Supp. 2000).
• I find and conclude that the improvements in the South Carolina experience have not bottomed out but continued to improve during the time frame subject to this order, albeit at a lower rate than in the past.
• The Consumer Advocate's model deriving a trend based upon an average of the eight-year exponential trend on a paid and paid-plus case basis is a reliable estimate of future loss costs expectations.
• I find and conclude that the assigned risk differential of 1.4, as discussed in the findings of fact, is actuarially sound.
• I find and conclude that the expense and profit factors added to the assigned risk portion of the filing were only estimated by the Department and are not backed by any substantial evidence in the record. Rather than stating which factors were utilized and which methods were employed, the Department merely provided its opinion on the volatility of the assigned risk market. The testimony of the expert witness for the Department is of no probative value since there was no evidentiary showing or facts to support his opinion. Hamm v. Central States Health & Life Co., 292 S.C. 408, 357 S.E.2d 5 (1987) at 6, n.1, citing Parker v. South Carolina Public Service Commission, 281 S.C. 215, 14 S.E.2d 597 (1984).
• I find and conclude that the recent losses suffered by Companion (referred to as "shock losses") are not included in this loss costs and rate filing because they occurred outside the time period under review. Further, they were not actuarially evaluated and the documentation of them is not a part of the record, except for anecdotal evidence of their existence. Consequently, they cannot be considered as a part of the rate request in this case.
• I find and conclude that the profit and expense factors included in the assigned risk portion of the filing, as mandated by the Department, are not supported by substantial evidence and are not supported by anecdotal evidence of excess losses. They are not included in the filing or otherwise appropriately documented and evaluated in the record. Consequently, the added provisions must be disapproved.
• I further find and conclude that the current predicament of assigned risk servicing carriers alluded to by several witnesses is not without redress. NCCI may file for new assigned risk rates and provide newer data which might substantiate the request for a rate increase. I also note that S.C. Code Ann. § 38-73-540(C) provides an alternate and flexible remedy. Under that section, assigned risk carriers shall report their experience to the plan administrator who shall notify the Department to enable the director of the Department to take corrective action, if necessary. Nothing in this ruling precludes the servicing carriers from having their rate needs addressed in this way.
• Under S.C. Code Ann. § 38-73-540(C) (Supp. 2000), the plan administrator is required to monitor rate adequacy and plan results, and is required to notify the director of the Department of Insurance in the event that excessive losses are indicated so as to enable the director to take corrective action.
• In recognition of the recent changes enacted by S.C. Code Ann. § 38-73-540(C), which mandate that assigned risk rates be self-funded, I find and conclude that it is equitable that the loss costs decrease of -10.4% be applied only to the voluntary program until such time when either an amended NCCI filing is submitted or a corrective action granted.

ORDER

IT IS THEREFORE ORDERED that the current overall workers' compensation insurance voluntary program loss cost level, on average (other than for "F" classifications), be reduced 10.4%.

IT IS FURTHER ORDERED that the proposed changes in the workers' compensation insurance voluntary program loss costs for "F" classifications be recalculated to incorporate the trend factor that produces the 10.4% decrease for other than "F" classes.

IT IS FURTHER ORDERED that the assigned risk rates remain at their current levels.

IT IS FURTHER ORDERED that all changes ordered above shall be effective for new and renewal policies issued on or after December 1, 2001.

AND IT IS SO ORDERED.

__________________________________

MARVIN F. KITTRELL

Chief Administrative Law Judge

October 23, 2001

Columbia, South Carolina

1. Companion became a servicing carrier on May 1, 2000. Tr. p. 242.

2. To project these loss costs in the future, insurers pool their claim experience through the NCCI. This pooled experience of all South Carolina workers' compensation insurers enables NCCI to determine the loss costs. Then the insurance companies add their expenses to the loss costs in subsequent filings to derive the final rates that will be charged to employers in the future. Consumer Advocate Ex. 1, p. 9.

3. For example, an employer with an annual payroll of $500,000 written in a class code with a carrier-charged rate of $2.00 per $100 of payroll would pay $10,000 in premium (prior to the application of an experience modification factor, premium discounts, etc.). In this example, the employer has 5,000 units of exposure (= $500,000 / $100) which after being multiplied by the $2.00 rate results in the $10,000 premium total. See Pet. Ex. 1, p. 3.

4. The Department presented testimony of Dean Francis Kruger, its Property and Casualty Chief/ Director of Alternative Risk Transfer. After working for a number of years under the supervision of Martin M. Simons reviewing property and casualty filings, as well as workers' compensation, automobile and homeowners' filings, he became the chief at the Department in 1997 upon the departure of Mr. Simons. He has worked on residual market filings. He was qualified by this tribunal as an expert witness in property and casualty rate-making. Tr. p. 105.

5. Ms. Jerelyn Boysia, Director of Actuarial Services for Companion for some nine to ten months, testified on its behalf. She manages Companion's actuarial services department. She is a member of the American Academy of Actuaries and a Fellow of the Casualty Actuarial Society. She was qualified by this tribunal as an expert in actuarial sciences and rate-making. She presented no prefiled testimony.

6. NCCI presented testimony of Jay Rosen, who is a regional actuary for NCCI. He is responsible for oversight of the actuarial function including the preparation of rate filings and the presentation of actuarial testimony for jurisdictions in NCCI's eastern region which includes the State of South Carolina. Mr. Rosen has testified in other states concerning rate-making and actuarial matters and was qualified as an expert by this tribunal in the area of actuarial science and rate-making for workers' compensation insurance. Testimony of Mr. Rosen was prefiled with this tribunal on May 24, 2001; he also presented testimony at the hearing.

7. The Consumer Advocate presented testimony of its consulting actuary, Martin M. Simons, who previously served as chief actuary of the Department and as its Deputy Director for Actuarial Services. He is a consulting actuary and works for state agencies for insurance departments (public agencies) and for consumers. He was qualified by this tribunal as an expert witness in actuarial science and rate-making as well as an expert relative to economics and the rate of return analyses for workers' compensation insurance based upon his many qualifications. His background includes many years of expert testimony provided relative to profit factors for workers' compensation insurance in Hawaii, Arkansas, Delaware, New Mexico, Illinois, Minnesota, Ohio, North Dakota, Oklahoma, the Senate and Attorney General's office in Louisiana, and ABC News. Further, he has been qualified as an expert by NCCI for at least the last 12 years for both South Carolina and Hawaii and for the last 13 years in Oklahoma. Also, he has been accepted as an expert in rate of return analysis in workers' compensation cases in both Colorado and Illinois. Further, he was involved with the National Association of Insurance Commissioners in developing the program that brought about the loss cost concept. Tr. pp. 148-153. He presented prefiled testimony with this tribunal on April 6, 2001.

8. These trend factors measure anticipated changes in the amount of indemnity and medical benefits as compared to anticipated changes in the amount of workers' wages.

9. The above two extraordinary losses were not included in the filing submitted by NCCI, were not revealed in discovery responses to the Consumer Advocate's data requests and the Consumer Advocate was not aware of them until they were mentioned in the course of Companion's testimony.