STATEMENT OF THE CASE

This matter is before the Administrative Law Court (“ALC” or “Court”) pursuant to requests for a contested case hearing made by the Consumer Advocate for the State of South Carolina (“Consumer Advocate”), the South Carolina Small Business Chamber (“Small Business Chamber”), the South Carolina Chamber of Commerce (“State Chamber”), various local Chambers of Commerce in South Carolina and the Homebuilders Association of South Carolina, the National Federation of Independent Business, the South Carolina Manufacturers Alliance, and the South Carolina Trucking Association (“various chambers of commerce”), the National Council on Compensation Insurance, Inc. (“NCCI”), and Companion Property and Casualty Insurance (“Companion”) regarding the filing (“Filing”) NCCI made with the Department on July 1, 2005 requesting a 32.9% overall increase in the current loss cost level for the voluntary workers’ compensation insurance program in South Carolina.[1]

Pursuant to notice to the parties, a hearing in this matter was held before me on April 24, 2006 through April 27, 2006, at the ALC in Columbia, South Carolina. After a careful review of the file and all of the evidence presented, I find and conclude that an increase of 18.4% in the loss cost level in the voluntary workers’ compensation insurance program is necessary and will not be excessive, inadequate, or unfairly discriminatory.

PROCEDURAL HISTORY

This matter began on July 1, 2005 with the Filing made by NCCI recommending a 32.9% overall increase in the current loss cost level for the voluntary workers’ compensation insurance program in South Carolina. The Filing proposed an effective date of November 1, 2005.

The Department provided notice of the Filing (“notice”) to the Consumer Advocate and published the notice in The Post and Courier, The Greenville News, The News and Press, The Rock Hill Evening Herald, and The State newspapers as required by S.C. Code Ann. § 38-73-910(A)(Supp. 2005). The notice stated that any insured or affected party could request in writing by August 1, 2005, a public hearing upon the proposed rate increase before this Court.

On July 14, 15 and 18, 2005, and on August 1, 2005, the Consumer Advocate, the State Chamber, the Small Business Chamber, and various chambers of commerce, respectively, filed requests for a contested case hearing with respect to the Filing pursuant to the South Carolina Administrative Procedures Act (“APA”) and S.C. Code Ann. § 38-73-910 (Supp. 2005). These requests were consolidated by order dated August 30, 2005 and resulted in a contested case bearing Docket No. 05-ALJ-09-0277-CC.[2]

On August 24, 2005, the Court conducted a teleconference with the parties. During the teleconference the Department questioned this Court’s jurisdiction to conduct a hearing on this issue of the increase because the Department’s Director (“Director”) had neither approved nor disapproved the Filing. The Department then made an oral Motion to Dismiss for lack of jurisdiction.[3]

Separate and apart from this proceeding, on September 2, 2005 the Director disapproved the Filing; in the letter of disapproval, the Director stated that the 32.9% increase was excessive. Subsequently, on September 6, 2005, the Department filed a written Motion to Dismiss Docket No. 05-ALJ-09-0277-CC on the ground that the Court lacked jurisdiction because the Department had elected to extend the period for review of the Filing for an additional sixty (60) days as authorized by S.C. Code Ann. § 38-73-960 (2002). This Motion was denied on November 8, 2005.

Two additional requests for a contested case hearing were then filed challenging the disapproval of the Filing, one by NCCI filed on September 9, 2005, which was assigned Docket No. 05-ALJ-09-0355-CC, and one by Companion filed on September 16, 2005, which was assigned Docket No. 05-ALJ-09-0364-CC. These cases were also consolidated with Docket No. 05-ALJ-09-0277-CC for discovery and hearing, and all motions to intervene filed in the Voluntary Cases were granted.

In addition, on October 10, 2005, the Director issued a Corrective Action Order (“Corrective Action Order”) that addressed the rates to be charged for workers’ compensation insurance obtained in South Carolina’s assigned risk program. The voluntary and assigned risk programs are related. The Consumer Advocate then requested a contested case hearing on October 12, 2005, to challenge the Corrective Action Order; this request resulted in a case bearing Docket No. 05-ALJ-09-0406-CC (“Assigned Risk Case”). However, this case was not consolidated with the Voluntary Cases for hearing and was heard separately on April 28, 2006.

MOTION TO REOPEN RECORD

On June 23, 2006, some two months after this Court had concluded the trial of these cases, the Consumer Advocate wrote a letter to the Court, stating that on June 19, 2006 it had received information (based upon an article contained in the June 22, 2006 issue of Charleston’s The Post and Courier newspaper) that NCCI had problems with data accuracy and reliability in all the states in which it operated. It requested that the Court reopen the hearing in the Voluntary Cases to consider after-discovered evidence and what it considered to be previously undisclosed evidence by NCCI.

In its response filed on June 29, 2006, NCCI argued that the information contained in the newspaper article had been in the media for over one year and that the Consumer Advocate should have made specific requests concerning such during discovery and/or addressed the issue during trial. In support of its argument for denial of the request, NCCI attached to its response letter an affidavit of Peter Burton, NCCI Senior Division Executive for State Relations. In his affidavit, Mr. Burton stated that in 2004 NCCI began investigating a rate-filing related inquiry from the New Hampshire Department of Insurance relative to payroll data for a particular classification code. He stated that during its investigation NCCI found that some payroll data had been excluded from certain loss cost filings in 2003 and 2004; however, he stated that the data did not impact the financial information which provided the basis for the overall loss cost calculations for New Hampshire. Also, he stated that this payroll-based data was used solely to develop classification code relativities that determine how the overall loss cost change is allocated among the different classification codes. He stated that the calculation of classification code relativities in the Filing in South Carolina is based upon the appropriate payroll data.

The Court finds that the information concerning this rate inquiry could have easily been found by the Consumer Advocate in its research and preparation for discovery and in its preparation for trial. Furthermore, the Court finds that even if it were to reopen the Record to consider any such information, such data would not be of any meaningful benefit to the Court in deciding the loss cost level in the voluntary workers’ compensation program in South Carolina since it would not impact the financial information necessary to determine the loss cost. Thus, the request is denied.

DISCOVERY AND PREFILED TESTIMONY

The parties conducted active discovery, including submission of prefiled testimony, through April 21, 2006. NCCI, the Department, the Consumer Advocate and Companion filed prefiled testimony, as briefly summarized below, of the following individuals who were all qualified as experts in the field of actuarial science and rate making:

By NCCI

NCCI prefiled testimony and supplemental testimony of Jay A. Rosen, a Fellow of the Casualty Actuarial Society (“FCAS”), and the Director and Actuary for NCCI; testimony and supplemental testimony of Dennis Mealy, FCAS, and the Chief Actuary for NCCI; testimony of Barry I. Llewellyn, an associate of the Casualty Actuarial Society (“ACAS”), and the Senior Divisional Executive for Regulatory Services for NCCI; and testimony of Robert F. Conger, FCAS, a principal of Towers Perrin, a past president of the Casualty Actuarial Society, and a consulting actuary.

In their prefiled testimony, Mr. Rosen and Mr. Conger opined that an increase in loss costs in the voluntary market of 32.9% would not lead to loss costs that are excessive, inadequate, or unfairly discriminatory.

By the Department

The Department prefiled testimony and supplemental testimony of Matthew P. Merlino, FCAS, the owner and an officer of Merlino & Associates, Inc., and a consulting actuary.

Mr. Merlino opined that the loss costs should be increased by 22.4%. However, after reviewing materials not available when he prepared his prefiled testimony, he changed his opinion and, in supplemental prefiled testimony, concluded that an increase in loss costs in the range of 39 - 44% was needed.[4]

By the Consumer Advocate

The Consumer Advocate prefiled testimony and supplemental testimony of Martin M. Simons, ACAS, and a consulting actuary. He opined that the data upon which all parties’ actuarial calculations were based had not been shown to be accurate. He stated that he could not support an increase in the voluntary loss cost levels based on that data. However, because he concluded that the South Carolina workers’ compensation system was in a “troubled state” he recommended a 12.7% increase. He opined that an increase of 12.7% would not be excessive and that the voluntary market in South Carolina would further deteriorate if there were no increase. Mr. Martin Simons also recommended a reduction of 5.0% to the loss costs applicable to "F" classes, which was lower than the 5.9% requested by NCCI.

By Companion

Companion prefiled testimony of Jerelyn S. Boysia, FCAS, and Director of Actuarial Services for Companion. She opined that an increase of 32.9% was necessary.

STIPULATIONS OF FACT

In making certain determinations herein, the Court relies on the following stipulations of fact entered into and filed by the parties on April 13, 2006, and finds them to be established facts:

Background

1. This is a contested case to establish loss costs for workers’ compensation insurance to be written in the voluntary program in South Carolina. This case is the consolidation of three cases, all dealing with that subject. This case was also consolidated for the purposes of discovery and pre-trial matters, but not for trial, with that certain case before this Court bearing docket number 05-ALJ-09-0406-CC.

2. All employers with more than a minimal number of employees are required to provide workers’ compensation benefits for their employees. This coverage can be obtained from three sources: (i) self-insurance programs, whether individually or through self-insurance groups, (ii) the voluntary program, or (iii) the assigned risk program, also known as the involuntary program.

3. Self-insurance programs are not before this Court in this case.

4. The voluntary program consists of all employers whose applications for workers’ compensation insurance have been accepted by an agent for a workers’ compensation carrier licensed in South Carolina. The employer chooses the insurer in the voluntary program.

5. The assigned risk program consists of employers whose applications for workers’ compensation insurance coverage in the voluntary program have been declined by at least two carriers licensed in this State. Since these employers are unable to secure workers’ compensation insurance in the voluntary program, assigned risk insurance is the program of last resort for those employers to obtain the required insurance.

6. Policies issued in the assigned risk program are issued by servicing carriers or direct assignment carriers. The employer cannot choose its servicing carrier or its direct assignment carrier.

7. A direct assignment carrier is required to insure in the aggregate, the percentage of the risk covered in the assigned risk program that equals the percentage of that carrier’s participation in the voluntary program. Otherwise a direct assignment carrier cannot refuse to write a policy for an employee that has been assigned to it.

8. A direct assignment carrier processes, issues, and services the policies it issues to assigned risk employers.

9. All employers obtaining assigned risk coverage that is not written by direct assignment carriers are insured under policies issued by servicing carriers. The assigned servicing carrier cannot refuse to write a policy to any applicant/employer who has been refused coverage in the voluntary program, who completes the application process properly, and who pays the required premium.

10. In calendar year 2004, the last year for which the data is available, the total workers’ compensation insurance premiums reported by the insurance carriers with respect to South Carolina voluntary and assigned risk programs approximated Five Hundred Fifty-Five Million Dollars ($555,000,000).

11. By Order dated March 1, 1990, the then Chief Insurance Commissioner of the South Carolina Department of Insurance (the “Department”), acting with authority granted by S.C. Code Ann. § 38-73-1430, directed that workers’ compensation rate filings be treated differently for the voluntary and the assigned risk programs. Specifically, he ordered that rate filings for the assigned risk program propose full rates while rate filings for the voluntary program propose only “loss costs.”

12. The rate filing herein complies with that Order.

Loss Costs v. Full Rates v. Premiums

13. In the workers’ compensation field, the term “losses” means medical benefits paid to or for the benefit of persons injured in workplace accidents, and lost wages and other compensation paid with respect to those accidents. These lost wages and other compensation are sometimes referred to as indemnity benefits.

14. In South Carolina, workers’ compensation insurance “loss costs” are the sum of the medical and indemnity benefits plus the cost of providing these benefits. This cost is referred to as “loss adjustment expense” or “LAE”. Loss costs represent the costs that all insurance carriers have in common.[5]

15. Each carrier determines its own final rates in the voluntary program by combining its own expenses with the loss costs. These costs include production expenses, a provision for Second Injury Fund assessments, general administrative expenses, and a profit and contingency factor. These carrier-specific expenses are used to develop a loss cost multiplier, or “LCM”, which is applied to the loss costs to determine the carrier’s final rate.[6]

16. 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 “premium” is the dollar figure resulting after multiplying the rate by the number of exposure units associated with a particular risk.[7]

17. Workers’ compensation insurance risks may be grouped by classifications with separate rates, where those classifications can be demonstrated to have variations in hazards, or expense provisions, or both, which have a probable effect on losses or expenses. S.C. Code Ann. § 38-73-430(3). Pursuant to this statute, the South Carolina workers’ compensation insurance market is divided into approximately 550 classifications.

Parties

18. Petitioner, National Council on Compensation Insurance, Inc. (“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 contemplated in S.C. Code Ann. § 38-73-1210(A), it is the rating organization licensed to make workers’ compensation insurance rate filings in South Carolina on behalf of its members. Every workers’ compensation insurer writing business in South Carolina must be a member. S.C. Code Ann. § 38-73-510.

19. NCCI collects workers’ compensation experience and data from carriers with respect to their experience inside the State of South Carolina as well as throughout the United States.

20. The Director of the Department (the “Director”) or her designee is required by statute to approve the rate for each classification under which workers’ compensation insurance is written in South Carolina. S.C. Code Ann. § 38-73-490. The Director or her designee is authorized to disapprove any workers’ compensation rate that is not fair, reasonable, adequate, and nondiscriminatory. S.C. Code Ann. § 38-73-990.

21. The Consumer Advocate for the State of South Carolina (the “Consumer Advocate”) was admitted as an Intervenor in this case as an “affected party” pursuant to S.C. Code Ann. §§ 37-6-607 and 38-73-910(A). The Consumer Advocate has a discretionary and statutory duty to represent consumers in matters of rates. S.C. Code Ann. §§ 37-6-604(A)(1) and 37-6-609.

22. Companion Property & Casualty Insurance Company, Inc. (“Companion”) was admitted as an Intervenor in this case. Companion is a South Carolina insurance company that writes workers’ compensation insurance in South Carolina and will be affected by the loss costs that are the subject of this case.

23. The South Carolina Chamber of Commerce (the “State Chamber”) was admitted as an Intervenor in this case. The State Chamber has more than 2300 member companies and their employees in South Carolina, a number of which will pay workers’ compensation insurance premiums based on the loss costs that are the subject of this case.

24. The SC Small Business Chamber of Commerce (the “Small Business Chamber”) was admitted as an Intervenor in this case. The Small Business Chamber is a statewide advocacy organization representing small businesses, a number of which will pay workers’ compensation insurance premiums based on the loss costs that are the subject of this case.

Rate Filing and Related Procedures

25. 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.

26. In reviewing rate filings, the Director or her designee may take into account recently passed legislation which will have an effect on insurance rates. S.C. Code Ann. § 38-73-915(A).

27. A workers’ compensation rate filing is subject to a waiting period of sixty (60) days before it becomes effective. S.C. Code Ann. § 38-73-960. The period may be extended by the Director or her designee for an additional period not to exceed sixty days if the Director gives appropriate notice within the waiting period. Id.

28. The filing herein was made on July 1, 2005 and sought an effective date of November 1, 2005.

29. The filing herein seeks an overall average increase of 32.9% to the current voluntary loss cost level.

30. An increase in workers’ compensation insurance rates may not be effective until at least twelve months has lapsed since the last increase in such rates. S.C. Code Ann. § 38-73-920.

31. The last increase in workers’ compensation rates in South Carolina was effective July 1, 2004, which is more than twelve months prior to the date the changes proposed in the filing herein would be effective.

32. S.C. Code Ann. § 38-73-910(A) requires a public hearing before the Administrative Law Court, 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.

33. Proper notice of this filing seeking an increase in workers’ compensation insurance rates was released by the Department on or about July 11, 2005, and published in newspapers of general, statewide circulation at least 30 days in advance of this hearing and more than 30 days before the proposed rate change would take effect.

34. The Director disapproved this filing on September 2, 2005.

Positions of the Parties

35. All parties who submitted actuarial evidence in this case agreed that an increase in the average voluntary loss costs was warranted. The parties’ prefiled testimony represent that the following increases are reasonable and in accordance with statutory requirements:

NCCI + 32.9%

Companion + 32.9%

Consumer Advocate +12.7%

Department + 39-44%. However, not considering the 2003 Second Injury Fund law change, +22.4%

36. One of the components of NCCI’s 32.9% increase is a .4% increase in the loss adjustment expenses. Such increase is warranted and appropriate.

37. The class code sensitivities currently in effect were established pursuant to this Court’s February 26, 2003 Consent Order and Order of Dismissal entered in the matter styled National Council on Compensation Insurance, Inc. v. South Carolina Department of Insurance, et al., bearing docket no. 02-ALJ-09-0537-CC.

38. The current class code relativities need to be updated to reflect current class relativities.

39. The following persons, all of whom submitted prefiled testimony, are qualified as expert witnesses in the areas of actuarial science and rate-making:

Jay A. Rosen

Robert F. Conger

Dennis Mealy

Barry I. Llewellyn

Matthew P. Merlino

Martin M. Simons

Jerelyn S. Boysia

ADDITIONAL FINDINGS OF FACT AND DISCUSSION

Having carefully considered all of the testimony and evidence presented at the hearing in this matter, having closely passed upon the credibility of the witnesses and having considered the burden of persuasion by the parties, by a preponderance of the evidence I make the following Findings of Fact, which are in addition to the foregoing Stipulations:

General

40. No member of the public appeared at the contested case hearing to present a protest or other position with respect to the Filing. An opportunity was offered to the public at the hearing for comment; none was offered.

41. The Filing seeks:

(a) an increase of thirty-two and nine-tenths percent (32.9%) in the overall average loss cost level for coverage written in the voluntary program for other than “F” classifications; and

(b) a decrease of five and nine-tenths percent (5.9%) in the overall average loss cost level for coverage written in the voluntary program for “F” classifications; and

(c)                a revision in the existing workers’ compensation classification code relativities.

42. None of the parties contested the revised workers’ compensation classification code relativities proposed by NCCI in the Filing.

43. All parties agreed to a decrease of five and nine-tenths (5.9%) percent in the loss cost level for the “F” classifications except the Consumer Advocate which recommended a decrease of five (5.0%) percent.

Accuracy and Reliability of the Data

44. South Carolina had the lowest workers’ compensation rates in the nation in 1998 but will become 23^rd in the United States if a 32.9% increase in the current loss cost level is approved. Before approving an increase, the Court must be satisfied by the preponderance of the evidence that the data relied upon by the actuaries was accurate and reliable. The Court inquired during the hearing how previous loss cost level increases of 17.5% (approved on April 1, 2003) and 11.3% (approved on July 1, 2004) could have been based on accurate and reliable data, especially since NCCI is now recommending an additional 32.9% increase slightly more than a year after the approval of the last increase.

Mr. Rosen testified the problem with prior filings was not with the data but that NCCI had underestimated the projected ultimate cost of claims used in the Filing. Further, he testified that he would not be surprised if NCCI’s current estimates of loss cost will increase again when future data is reviewed. Mr. Llewellyn opined that the data used was actuarially appropriate and credible. Mr. Merlino testified he had no concerns with the quality of the data, only with NCCI’s methodology. However, Mr. Simons opined that he did not believe any actuary could attest that any increase in loss costs would not be excessive, inadequate, or unfairly discriminatory based upon this data.

45. NCCI used data it received from carriers in making the calculations in the Filing. Generally, this data is reported to NCCI in two forms. The first type of data is financial call data that is supplied by carriers at NCCI’s request. The second type of data is statistical unit data that is periodically supplied by carriers. These types are commonly used in all NCCI filings.[8]

46. The Consumer Advocate and Small Business Chamber argued that the data used by NCCI in the Filing is flawed and, by extension, the use of the allegedly flawed data casts doubt on the results it yielded. Their argument was essentially three-fold: (1) the financial call data did not include data from 16.3% of the workers’ compensation insurance carriers that write in South Carolina; (2) NCCI is unable to ensure that Second Injury Fund and subrogation recoveries are properly accounted for (deducted from losses) and reflected in the data submitted by carriers to NCCI; and (3) the error rates contained in the South Carolina test audit results cast doubt upon the accuracy of the data reported by the carriers and the resulting data used by NCCI in the Filing. NCCI, Companion, and the Department disagreed with the Consumer Advocate and Small Business Chamber’s contention that the data used in the Filing was flawed.

Missing Data; not submitted or excluded.

47. Financial data from nine insurance companies was not submitted or was rejected by NCCI because it did not meet its quality standards.

48. NCCI uses three tests to assess the quality and reliability of financial call data: (1) an arithmetic check is performed, (2) followed by a reasonableness check (to ensure all unusual fluctuations in the carrier’s data was sufficiently explained) and (3) later the data is reconciled to the annual statement data submitted by carriers to the Department.

49. The financial data of AIG Insurance Company (“AIG”) was excluded because it did not meet NCCI quality standards.[9] AIG wrote approximately 11%-12% of the policy year 2003 premium volume in the voluntary market and it is the largest workers' compensation insurer in that market in South Carolina. However, NCCI discovered “accounting anomalies” and “a couple of significant business units” that AIG was not “able to” or “had not been” reporting to NCCI and excluded its data from consideration in its Filing.[10] All parties agreed that the AIG data and that from several other small carriers, given their irregularities, should not be included in the Filing and their absence was not a reason to disapprove the Filing.

Even though the data from AIG (the largest workers’ compensation insurer in the voluntary market in South Carolina) and several other carriers was not used in the Filing, I find that even without such, the data in the financial call database used to develop the proposed increase in loss cost level was sufficient to produce a filing that was actuarially sound and appropriate. Although Mr. Simons questioned the overall reliability of the data used in the Filing, he made his recommendation of an increase of 12.7% by excluding the AIG data. Therefore, I find that NCCI’s exclusion of the AIG data and that from several other insurance companies was appropriate and the exclusion does not raise questions about the quality of NCCI’s data. Further, I find that the data used by NCCI is sufficient in quantity to base an actuarial judgment and the exclusion of the data does not materially affect the accuracy or reliability of the Filing.

Second Injury Fund; deduction of fund reimbursements and subrogation recoveries from losses.

50. The Second Injury Fund (“SIF” or “fund”) reimburses employers and/or their insurers for at least a portion of claims for injured employees whose injuries were made worse by a prior injury. It operates on an annual cash flow basis and is funded continuously through equitable assessments to each member (insurers, self-insurers and the State Accident Fund). Currently, fund reimbursements are in excess of $100,000,000 annually. Insurers are required to reduce their overall loss cost data by these reimbursements.[11]

51. The fund is not authorized to reimburse an employer on a claim unless the injured employee has suffered a previous injury. The second injury (upon which a claim is made to the fund) must combine with or aggravate the impairment from the prior injury sufficient to cause a liability or impairment that is substantially greater than would have occurred from the second injury alone. Generally, fund reimbursements occur a few years after a policy effective date and possibly years after an injury occurs. The fund normally pays a claim two weeks after it is accepted; however, a claim that was accepted in the year 2000 could have a genesis of five to ten years earlier. In fact, 26% of the claims accepted by the fund in 2006 were more than four years old. A total of 10,543 claims have been accepted since 2000.

52. NCCI offered several responses in support of its recommendation that the data it used accurately reflected recoveries and supported its recommended increase in the loss cost. First, it acknowledged that it does not audit data used in a Filing and does not audit carriers (except in a limited number of assigned risk cases) to determine whether they are properly applying and reporting fund reimbursements and subrogation recoveries. However, it argued that unaudited data may be used for actuarial purposes and that Actuarial Standard of Practice (ASOP) 23 (that relates to the quality of data) does not require data to be audited by an actuary.[12]

Secondly, it noted that insurance companies in South Carolina must certify that they have reduced their medical and indemnity reserves to the threshold limits of reimbursements as a condition for reimbursement from the fund. When the fund subsequently accepts a claim, it notifies both the carrier and the employer that the claim has been accepted. However, the Court notes that the fund does not notify the insurance agent, NCCI, or the Department of the acceptance of a claim or when actual reimbursement is or will be made.

Thirdly, NCCI asserted that licensed insurance companies in South Carolina are required to file annual statements and that the overall loss cost indication in this matter was based on the reported financial data reconciled to the carriers' annual statement data. It noted that the Department periodically conducts financial examinations of licensed insurance companies to ensure their financial systems and records are in compliance with its insurance laws and accounting requirements. It asserted that if a carrier underreported fund reimbursements or subrogation recoveries, it would have been discovered in these financial examinations. The Department does not examine annual statements filed by carriers; it relies on certified public accounting firms (“CPA’s”) retained by carriers to examine their financial statements and to provide opinions both to the carriers and the Department. The Department was unable to confirm that the CPA’s retained by carriers (whose data was used in the Filing) verified in their opinions that fund reimbursements and subrogation recoveries were accounted for.[13]

Fourth, NCCI argued that its statistical plan requires a reduction of the gross incurred cost of a claim by the amount of any paid or anticipated recovery from a fund when the fund determines a carrier is eligible for reimbursement.[14] It noted that carriers must file a correction report identifying any recovery from a third party or a fund, and that upon receipt of the correction report, NCCI recalculates the experience rating of the carrier. The recalculation causes a decrease in the premium charged to the employer. However, the failure of carriers to reduce the incurred loss files in even a small or moderate percentage of cases will substantially overstate the loss costs and result in substantial cost to employers. Because of this incentive, it opined that carriers, their agents and employers attempt to monitor all claims and notify NCCI promptly of appropriate data to ensure they pay the appropriate premium.[15]

53. John Gardner, an insurance agent who sells workers' compensation insurance, testified that he often encounters situations where the experience rating for the past two rating periods is not corrected following a recovery. He explained that a loss goes into an employer’s experience mod file for three consecutive years. Given the fact that it may take several years from the time of injury to the processing of a claim by the SIF, the customer's experience mod might have already been impacted by the loss for several years. In such cases, Mr. Gardner stated that he has had to request a correction to the experience mod and request a refund. Also, he stated that his 70 customers have cases involving the SIF reimbursements and subrogation recoveries ten to twenty times a year.

54. Notwithstanding, NCCI was unable to verify, based upon the financial call data for the 2002- 2003 period, the procedure and process that carriers in this State use, if any, to reduce their reported experience in recognition of fund recoveries or subrogation recoveries. The rules of its statistical plan only require carriers to identify claims where there has been a fund reimbursement or a subrogation recovery. NCCI could not identify the amount of the recoveries, the date of their receipt, or whether the carriers had sought a reduction in their experience.

Based upon the preponderance of the evidence, the Court is unable to determine when or how fund reimbursements or subrogation recoveries, received or anticipated by carriers, reduced the losses utilized by NCCI in the Filing.[16] Apparently, there was no auditing or examination of the data either by the Department or by NCCI. Because of concerns over the sufficiency of the quantity and reliability of the data available and when and how reimbursements were deducted from the losses submitted in the Filing, this data should not have been considered in the Filing (if it was) and will not be considered by the Court in its decision. Since the Department has, subsequent to this Filing, instituted a new policy requiring its outside actuary in its financial audits to investigate and review for information concerning fund reimbursements or subrogation recoveries, the quality of data in future filings should have a much sounder basis for actuarial calculations for loss cost increases or decreases.

The 2003 amendment of the Second Injury Fund statute; Quantity and Reliability of the data since its effective date.

55. Prior to the amendment to the Second Injury Fund Statutes in 2003, the majority of claims were accepted by the fund under the “unknown claim” provision. The 2003 statutory change deleted the “unknown condition” claims. See S.C. Code Ann. § 42-9-400. After the passage of the amendment, the SIF commissioned Mr. Simons to prepare a study of its claims, liabilities, future liabilities, and assessments. Mr. Simons stated in his report that the amendment would cause substantial reductions in further liabilities of the fund and he expected that the fund’s accident year reimbursements would decrease by approximately 40% to 50%.

56. When NCCI learned of the passage of the amendment, it requested the fund to provide it with data relating to the distribution of “unknown condition” claims and all other claims upon which it could base an analysis of the amendment’s impact. The fund notified NCCI it could not provide the data. NCCI then contacted the carriers to obtain their opinions and expectations of the impact of the amendment on the workers’ compensation costs. Based on the information it collected, NCCI considered the effects of the amendment on the overall workers’ compensation costs to be negligible for the 2002- 2003 period and therefore did not address it in calculating loss costs in the Filing. None of the expert witnesses who prefiled testimonies on January 27, 2006 addressed the possible extent of the statutory change, either.[17]

57. During the hearing, the Department was especially concerned with the effect that the amendment (concerning SIF claims and reimbursements) could have on calculating voluntary loss costs, especially since fund reimbursements make up approximately 83% of total reimbursements. Originally, Mr. Merlino assumed that the amendment would have a negligible impact on voluntary loss costs. However, after receipt and review of Mr. Simons’ report (in which Mr. Simons concluded that fund reimbursements to carriers would be significantly reduced as the result of the amendment), Mr. Merlino submitted supplemental pre-filed testimony opining that the effect of the amendment would cause a significant reduction in carriers’ recoveries from the fund; further, he opined that the loss cost level needed to be increased in the range of 39 – 44%.

At the hearing, Mr. Merlino testified that he had reviewed Mr. Simons’ supplemental pre-filed testimony and that an additional adjustment to his proposed loss cost level (in his amended prefiled testimony) was necessary to account for the reduction in expenses incurred by carriers to administer, or to contract with third-party administrators who administer claims with the SIF. This adjustment resulted in his final loss cost indication of a 37 – 42% increase and supported his conclusion that NCCI’s proposed loss cost increase of 32.9% was not excessive. Mr. Merlino agreed that if he had used the evaluation date and data used by Mr. Simons in his 2005 SIF report, his indication would clearly be different. However, he felt that the data pertaining to claims prior to 2003 was “very mature” while data postdating the passage of the legislation was immature.[18]

58. Mr. Rosen reviewed the same information considered by Mr. Merlino; however, he felt the available data concerning the effect of the amendment was too immature on which to base an actuarial opinion. Mr. Llewellyn opined that the amendment would affect loss costs but that he had not been able to calculate its impact. Mr. Conger opined that the effect of the amendment would probably be an increase in loss costs in the short term with a decrease later on. Finally, Ms. Boysia anticipated the effect to be a 60% reduction in fund recoveries. However, she testified that Companion was presently reducing its level of recoveries by only 35%. Notwithstanding, she stated that the data was immature.

59. Mr. Simons stated that the purpose of the report he prepared for SIF in 2005 was to estimate future assessments for members of the fund, not to estimate the impact of the amendment on future loss costs. Further, he testified it had only been two or three years since the passage of the amendment, and that since very few claims had been made, the data was too green and immature to be considered in the Filing. NCCI, the Consumer Advocate, and the Small Business Chamber were also concerned whether the data available since the amendment’s passage was of sufficient quantity and reliability to be considered in determining the future loss cost level.

Notwithstanding the immaturity and unreliability of the data, I find by a preponderance of the evidence that the amendment will most probably at some point in time result in a reduction of fund reimbursements to carriers, will reduce monies received by carriers to offset their losses, and will increase the losses of carriers. Further, I find that the amendment contributes to the troubled state of workers’ compensation in this state and indicates that an increase in the loss cost level is needed and required. This Court cannot discount the effect the demise of this source of reimbursement will have on the loss cost level. However, since the data is so immature and green, the Court cannot ascribe any percentage factor for usage in determining the amount of the loss cost increase that is presently needed.

Test Audits

60. NCCI uses a voluntary test audit program. The program involves NCCI reviewing selective policies and thereafter preparing quarterly reports that it sends to the carriers whose data is reviewed as part of the test program. This program is conducted in Oregon, Florida and Alaska, also. The test audits in this matter covered policy years 2002 and 2003 and addressed a sampling of policies that had annual premiums between $4,000.00 and $250,000.00.[19]

61. There were 98,620 worker’s compensation policies in effect for employers for the six quarters ending June 30, 2003. Of these policies, 18,510 were within the premium size subject to selection for the test audits. Only 690 policies (0.6% of the total policies written in this state) were selected. The selection of employers for audit is largely a random process; however, if an employer is audited in one year, he is excluded from the test audit the following year.

62. For the six quarters ending June 30, 2003 (for which financial call data was requested), 54.24% of the policies audited by NCCI had errors; further, the error ratio in South Carolina was trending upward and was more than 100% higher than the error rates in other states. Despite these high error ratios, NCCI did not increase the sample size to see if the results were an anomaly. NCCI reported that about 51% of the errors involved incorrect classifications with the remaining errors involved premium or payroll differences.[20] Because classification errors impact the premium paid by an employer to its carrier for the coverage, if an employee is classified in a position that lists functions less risky than the duties the employee performs, the carrier will collect less premium than it should.[21]

63. NCCI also uses the financial call data to determine classification relativities, loss costs, assigned risk rates, and individual employer experience rating calculations. After it completes the test audit, it notifies the carriers of any errors it found. After sixty days, a carrier may submit a report to NCCI disputing the report or listing corrections to the errors reported by NCCI. NCCI performs no follow-up with the audited carriers after it sent its reports to them. Thus, it has no data to show that any errors it found in the instant test audit and which were subsequently reported to the carriers were or were not corrected.[22]

With respect to the argument that error rates contained in the South Carolina test audit results cast doubt upon the accuracy of the data reported by the carriers and the resulting data used by NCCI in the Filing, I find that, based upon the evidence submitted in this case, this argument is entitled to little consideration. While errors of the type and magnitude described in the test audits are great cause for concern (especially the failure of NCCI to check to see if the errors had been corrected by the carriers), the Court is unable to find, based upon the preponderance of the evidence, a quantifiable impact such errors had on the accuracy or reliability of the data used in the Filing. In future years, audits by NCCI should reflect more accurate data collections and error corrections. Accordingly, I find the data used in the Filing is sufficient in quality, notwithstanding the Court’s concerns with the data used in the test filings, to make actuarial determinations.

Methods, Assumptions, and Trends used by NCCI [23]

Paid loss method vs. paid loss plus case reserves method.

64. In calculating a proposed loss cost level increase, actuaries most commonly use the following two methods: paid loss or paid loss plus case reserves. In the paid loss method, an actuary estimates future loss costs using benefits previously paid by insurers on reported claims during a selective experience period. In the paid loss plus case reserves method or paid plus development projection, an actuary estimates future loss costs by including in the data base previous losses paid on reported claims during a selective experience period plus amounts set aside (reserves) to cover future payments on claims during the same selective experience period.[24] NCCI used an average of both methods in this Filing and normally uses both methods when preparing an analysis.

65. In the Filing, NCCI recommended a proposed increase of 32.9% based upon an equal weighing of the data, using both methods, for policy years 2002 and 2003.[25] It believed that the usage solely of the paid loss method would produce an understated loss cost indication. On the other hand, NCCI offered testimony that loss cost indications could be overstated through use of only the paid loss plus case reserves method because of recent indications of changes in the level of carriers’ case reserves. Therefore, NCCI concluded that an average of both methodologies, each of which is actuarially accepted, would produce a loss cost indication that was most appropriate. Further, it felt that because of the increased time it takes to close claims in this state along with the increasing payments on those claims, the two methods were needed.

Both Mr. Conger and Mr. Rosen stated that when reserves have been strengthened, the paid loss method is the more stable and preferable one to use to ensure that loss costs are not overstated. Mr. Conger did not believe there had been a change in the level of case reserves in South Carolina. However, Mr. Merlino testified that the reserves, particularly medical reserves, had been strengthened by 40% and had been strengthened over the last four evaluations. Mr. Simons also testified that medical reserves have strengthened by almost 50% and indemnity reserves have strengthened by 20%, for a combined strengthening of close to 30%.

66. Mr. Simons noted that NCCI had reported the industry in South Carolina was making progress on reserve deficiency and that workers’ compensation reserves had strengthened by $9 billion between 2001 and 2004. He testified that the paid plus case reserves method is directly influenced by insurance industry reserve practices and that changes in reserves directly impact data and cause significant changes in the underlying development of workers’ compensation insurance claims and in loss cost trends over time. Further, he testified that when reserves are substantially strengthened during the selective period used in a filing’s calculations, the paid plus case reserves data and the resulting indicated loss costs are distorted.

67. Mr. Merlino initially recommended an overall loss cost increase of 22.4%. Unlike NCCI, he relied strictly on the paid loss methodology and gave no weight to the paid plus case reserves methodology because he concluded that the paid plus case reserves methodology was producing a highly biased projection due to the recent case reserve strengthening. He also used five policy years of data experience instead of the two years used by NCCI.[26] He noted that the use of five years of experience increased his indications for paid projections. He opined that the latest two years of experience indicates an increase of 19.1% as compared to five years of experience that indicates a 22.4% increase.[27]

Commenting on his use of five years of experience, Mr. Merlino stated that generally two

years of experience would be reasonable for developing loss cost indications. However, in view of his concerns that NCCI was historically underestimating its projected loss costs, he opted for the experience period that raised the indications.

68. According to Mr. Conger, the paid plus case reserves method takes advantage of the knowledge of claims examiners. Therefore, in his opinion, NCCI’s use of the average of the paid loss and paid plus case reserves methods likely produces a loss cost indication on the low side of the best estimate. In addition, Mr. Conger believed that if NCCI had used the methodology advanced by Mr. Merlino, it would have indicated an increase of 26.9%.

The Court finds, based on the preponderance of the evidence presented, that there has been a significant strengthening in the case reserves, particularly in the medical case reserves, and, therefore, the use of the paid plus case reserves method overstates the amount of loss costs. The use of the paid loss method, as suggested for use by both Mr. Simons and Mr. Merlino, is the more appropriate method to use based upon the strengthening of reserves by the carriers that write the voluntary workers’ compensation insurance in this state. Further, the Court finds that the usage of more than two years of experience was needed because of the strengthening of reserves over a number of years and the need to use more experience in determining future projections.

Voluntary Experience vs. Voluntary and Assigned Risk Experience.

69. NCCI opined that its loss cost analysis considered voluntary and assigned risk exposures and losses to: (1) utilize the largest volume of data; (2) make benchmarks consistent year to year; and (3) to encourage competition as a matter of good public policy.[28] Since 2004, it has calculated voluntary loss costs by using a combination of voluntary and assigned risk business.

70. The difference between NCCI’s and Mr. Merlino’s proposed loss cost increase is attributable, in part, to NCCI’s use of the combined experience from both the voluntary and assigned risk programs to calculate the voluntary program loss costs. NCCI cited several justifications for using the combined data from both programs.

First, NCCI opined that the use of both the assigned risk and voluntary program data utilizes all of the credible data available in this state to calculate the overall loss cost level change. Second, it opined that the usage allows it to determine the individual loss costs for each of the approximately 550 separate job classifications in this state and to set those loss costs at levels equal to the average employer’s experience in each of those classifications. Third, it argued that this combination results in loss costs that will be consistently calculated for each filing and would not be dependent on the relative sizes of the voluntary and assigned risk programs that vary from year to year. Fourth, it argued that since the voluntary program had better loss experience actuarially than the assigned risk program, if it calculated loss costs by using only voluntary program data, the result would be a loss cost indication in the voluntary market that would be better than the average experience in this state. Fifth, NCCI argued that the use of this method fostered good public policy by encouraging depopulation of the assigned risk program, provided incentives for carriers to voluntarily write as much business as possible, and would result in an actively competitive voluntary program. Sixth and last, it opined that the use of both the voluntary and assigned risk program data is appropriate if, as in this instance, the objective is to establish a loss cost level that is the best available indication of the average cost for claims and claims handling to insure employers in this state. Both Mr. Conger and Mr. Merlino agreed that it is important to consider the purpose of the Filing when calculating loss cost levels.

71. The market share adjustment factor used by NCCI considers the distribution of voluntary versus assigned risk exposures for the experience period and also includes an assumed distribution of business for the prospective period. NCCI assumed the distribution of business for policy years 2002 and 2003 on the actual distribution underlying the data. The distribution of assigned risk assumed, after adjusting to a current level basis, was 15.8% for policy year 2002 and 20.3% for policy year 2003. For the prospective period, NCCI assumed that all risks would be written in the voluntary market and assumed that the distribution of business for the prospective period would be 0% for the assigned risk market and 100% for the voluntary market. According to Mr. Merlino, if one assumed that the prospective period had an assumed distribution of business between the voluntary and assigned risk equal to the 2003 policy year distribution, the voluntary rate distribution would be reduced from+ 32.9% to 23.7%. This was the basis of his original recommendation.

72. According to Mr. Merlino, NCCI has proposed loss costs for the voluntary market that, on average, are appropriate for the business included in NCCI’s combined voluntary and assigned risk data base. However, since the assigned risk market has a higher average loss cost than the voluntary market, he felt that NCCI’s approach would result in a level of loss costs that would be too high for the voluntary market. Further, Mr. Merlino stated that even though the Filing includes voluntary and assigned risk business, NCCI's assumptions are inconsistently applied to the exposures and losses. It was also his opinion that the voluntary data is more representative of risks that will be written in the voluntary market than the usage of the combined voluntary and assigned risk data. Mr. Merlino separated the two markets and used only the voluntary market data for his calculation of voluntary market loss costs.

73. Mr. Simons opined that although it is appropriate to look at loss costs for the voluntary and assigned risk markets together, it was not appropriate to look at it in the manner NCCI used in the Filing. He believed that an appropriate analysis should include the effect of changes taking place in the assigned risk as well as changes in the voluntary market. He stated that there are interrelationships between the voluntary and assigned risks, and noted that as employers are shifted between the voluntary and assigned risk markets, changes in assigned risk trends will often result in offsetting changes in voluntary trends. Therefore, in his opinion, it is essential that the voluntary and assigned risk markets are trended separately.

This Court is cognizant of the order dated March 1, 1990 by the then Chief Commissioner of the Department, acting under the authority granted by S.C. Code Ann. § 38-73-1430 (2002), wherein the Commissioner directed that workers’ compensation rate filings must be treated differently for the voluntary and the assigned risk programs. Further, this Court has previously found that employers in the assigned risk market usually have greater losses than other employers, have greater risks, and the carriers refuse to insure them. National Council on Compensation Insurance Inc. v. S.C. Department of Insurance, Docket No.: 00-ALJ-09-0687-CC (2001). Therefore, I find, based on the preponderance of the evidence presented, that calculating voluntary loss costs by using a combination of voluntary and assigned risk business data is inappropriate and unreasonably overstates the voluntary loss costs. The Court further finds that it is appropriate to look at both loss costs for the voluntary and assigned risk markets at the same time, understanding that they have a close interrelationship, that employers often shift between them, and that changes in the assigned risk trends often result in offsetting changes in voluntary trends. However, both markets must be trended separately.

Trending methodology - experience period/number of years used.

74. Trends adjust the historical data to account for the impact of inflation on losses and premiums between time periods. These trends reflect the relative difference in the rate of changes in indemnity and medical costs to the rate of change in payroll.

The trend component of the loss cost 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 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 factors are calculated separately for indemnity and medical loss ratios.

75. The trends used by NCCI in the Filing were calculated using an 8-year exponential trend procedure.

76. The final annual trend factors were analyzed separately for indemnity and medical losses, including frequency and severity trend analyses and indicated countrywide trend factors. Once the indemnity and medical cost ratios were developed and brought to the current benefit level and trended, NCCI indicated that the current loss cost levels should be increased by 32.4%. Further, NCCI added the proposed change in the loss adjustment expense of 0.4% to arrive at its recommended increase of 32.9%.

77. Both Mr. Merlino and Mr. Simons used different periods of historical data to determine trends. Mr. Simons used data beginning in 2000 because it was substantially more favorable than the eight years of data NCCI used. He opined that the trends from 2000 were much lower and were even better in 2003 than in 2002. Also, he testified that the use of the latest indicators is more responsive to positive change and that the use of more recent data was actuarially sound given the conditions of the South Carolina marketplace. Finally, Mr. Simons opined that it is illogical that trends would be improving so rapidly if experience was deteriorating at such a pace that an increase of 32.9% would be needed from the loss cost approved only a year before the Filing. Subject to his reservations as to the reliability of the data used in the Filing, Mr. Simons presented an indication for a loss cost increase of 12.7%. His indicated change was calculated from an equal weight of the most recent policy year and accident year of South Carolina paid loss indications based upon 8-year exponential trends. Lastly, Mr. Simons recommended that loss costs applicable to “F” classes (governed by Federal laws) should be reduced by 5.0%.

78. Mr. Merlino (as did Mr. Simons) used a five year experience base instead of the eight year base used by NCCI. However, he did use NCCI's trend factors. He did not adjust his projections for the missing data or the data accuracy concerns (as expressed by Mr. Simons). The later increase in his indications (subsequent to the review of the 2005 SIF report by Mr. Simons) was due solely to his analysis of the 2003 law change regarding the Second Injury Fund, which has already been addressed.

79. Other factors that were considered in the trending was the previous underestimating of future loss cost claims in earlier filings by NCCI and the deteriorating state of the voluntary market in this state.

80. Also, the Small Business Chamber contended that NCCI did not consider data from the South Carolina Workers’ Compensation Commission (“Commission”). It noted that in the executive summary (contained in the Filing), NCCI listed the following factors as affecting loss costs in this state:

(1) workers’ compensation insurance provides benefits to covered employees in this state that include unlimited medical care, wage replacement benefits, vocational rehabilitation services, and death benefits;

(2) since the workers’ compensation program provides unlimited medical care, it does not contain many of the cost containment mechanisms associated with traditional health insurance;

(3)   the increase in the projected number of claims and the expected amount for which those claims will ultimately be settled has an impact on the loss costs;

(4)   indemnity (wage replacement) benefits are tied to wages (wage levels that are ever increasing by statute, i.e., average weekly wage) and this ultimately affects benefit costs;

(5)   attorney involvement affects loss costs;

(6)   there is a trend towards claims remaining open longer.

As to the assertion that injured workers are provided unlimited medical care in this state, this Court takes judicial notice of the law in this state that in the workers’ compensation program the carrier chooses the treating physician and has the right to decide which treatment will be provided. Further, the Court takes judicial notice that physician’s fees are regulated by a fee schedule set by the Commission. The Court also takes judicial notice that medical treatment is governed by S.C. Code Ann. § 42-16-60 (2002) and is not unlimited under the law of this state, except in cases of permanent and total disability and, even in those cases, the carrier continues to choose the doctor and continues to authorize any treatment as provided under the fee schedule, unless otherwise ordered by the Commission. Accordingly, the Court finds, based on the preponderance of the evidence presented and applicable law, that unlimited medical care is not a valid reason to increase the voluntary loss cost level by 32.9%.

Concerning the impact of claim frequency and claim amounts on future loss costs levels, Mr. Rosen stated that lost time claim frequency has decreased according to its data. Further, he admitted that the medical severity has gone up only 2.5% in South Carolina and had declined when compared to the rest of country in the 2002 – 2003 time frames. All the witnesses testified that medical costs continue to increase above the growth in wages. The Court finds, based on the preponderance of the evidence, that claim frequency and claim amounts do not support an increase of 32.9% in loss costs.

The executive summary also asserts that wage levels are tied to indemnity benefits and, therefore, affect workers’ compensation costs. The data reflects that wages in South Carolina increased by 3% in 2002 - 2003 and remains 10% below the national average. The parties stipulated that workers’ compensation premiums are based on rate times the units of exposure, i.e., payroll, and this Court notes that premiums automatically increase (by statute) when wages increase. According to NCCI’s data, the cost of indemnity payments over wage growth decreased in 2002 – 2003. The Court finds, based on the preponderance of the evidence, that the decrease in indemnity payments over wage growth does not support a 32.9% loss cost level increase.

The executive summary further asserts that the high level of attorney involvement in South Carolina workers’ compensation claims affects costs. NCCI did not review or consider any data available from the Commission concerning such prior to submission of the Filing. Data from the Commission reflects that attorney involvement in workers’ compensation cases decreased during the applicable period (2002 – 2003). Further, no evidence was adduced that showed any impact on loss cost where there was attorney involvement. The Court finds, based on the preponderance of the evidence presented, that attorney involvement does not support an increase of 32.9% in the loss costs.

Also, the executive summary states that there is a trend in South Carolina towards claims remaining open longer and that this increases the costs to carriers in this state. However, a chart contained in the executive summary shows that the percentage of lost-time claims closed within the 2002 – 2003 period improved. Further, data from the Commission shows that claims have been closing more quickly in 2003 than in 2001 and are closing even much more quickly under the leadership of its new chairman and executive director.

Finally, NCCI did not consider any effect on future loss costs resulting from improvements in the Commission’s funding, staffing, and technical support.[29] The Commission’s budget was cut $740,000 by the General Assembly in 2001 - 2002 and $1,200,000 in 2002 – 2003. By statute the Commission is composed of seven commissioners who serve as hearing officers. However, during part of the 2002 – 2003 time period, the composition of the Commission consisted of only five (5) commissioners, thirty percent of its staff, and little or no travel money or per diem to compensate Commissioners to travel to their assigned hearing locations throughout the state to conduct hearings. Further, the computer system at the Commission was old and during the 2002 – 2003 periods it did not function properly. With additional funding in the last several years, a new computer system has been installed and new software programs are being installed over a three year time period; further, the Commission has been increased to its full complement of seven members, additional staff has been hired, and travel money for the commissioners has been restored.[30] Hearings on claims are being heard more timely now.[31] Both Mr. Rosen and Mr. Conger testified that these improvements would be positive changes.

The Court finds that NCCI should have considered available Commission data showing a trend towards claims closing faster because of recent improvements in Commission funding, staffing, and technical support. This trend, which contradicts NCCI’s assertion that claims are remaining open longer, does not support an increase in the loss costs of 32.9%.

Accordingly, I find, based on the preponderance of the evidence presented, that including the evidence of improvements in Commission funding, staffing, technical support, and claims processing, the usage of five years of historical data (versus eight years) for trending was responsive to positive changes in the marketplace.

CONCLUSIONS OF LAW

The Court must make two determinations. The first is whether the data used by the various actuaries is sufficient to support an actuarially sound adjustment to the existing loss cost levels. If the answer to the first question is yes, then the Court must determine the amount of the increase. In this case, all the actuarial testimony reflected that an increase was justified; therefore, the primary issue before the Court is the amount of the increase.

Based upon the foregoing Stipulations and Findings of Fact, as well as the discussion, I conclude, as a matter of law, the following:

1. The South Carolina Administrative Law Court is empowered to hear this case pursuant to S.C. Code Ann. § 38-73-910(A) (Supp. 2005) and Chapter 23, Title 1 of the South Carolina Code of Laws (2005), as amended.

2. Generally, a request for insurance loss cost revisions is governed by S.C. Code Ann. §§ 38-73-10, et seq. (2002).

3. Before an increase in premium rates may be granted, notice of the filing must be published in all newspapers of general, statewide circulation at least thirty days in advance of the insurer’s proposed effective date of the increase. S.C. Code Ann. § 38-73-910(A) (Supp. 2005). Further, a copy of the notice must be sent to the Consumer Advocate. Id. An affected party may then request a public hearing on the proposed filing with the Administrative Law Court within fifteen (15) days of the date of the notice. Notice was timely published and the Consumer Advocate acknowledged receipt of this notice. I find and conclude that all requirements of these statutory provisions have been met.

4. The Administrative Procedures Act requires that notice of the hearing must be provided to all parties at least thirty days prior to the hearing. S.C. Code Ann. § 1-23-320(a)(2005). Notice of the place, time, date and subject matter of the hearing was timely given to all parties.

5. S.C. Code Ann. § 38-73-960 (2002) requires that a proposed loss cost increase must be on file with the Department at least sixty days before it becomes effective. I find and conclude that this statutory requirement has been met.

6. S.C. Code Ann. §§ 38-73-10(a)(1) (2002) and 38-73-430(4) (2002) require that insurance rates must not be excessive, inadequate, or unfairly discriminatory. S.C. Code Ann. § 38-73-430 addresses certain provisions that must be complied with in the making of rates.

7. S.C. Code Ann. § 1-23-350 (2005) 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) (2005). 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 (2005).

8. NCCI has the burden of proof to show, by a preponderance of the evidence, that the proposed loss costs will not be excessive, inadequate or unfairly discriminatory. S.C. Code Ann. § 38-73-10(a)(1) (2002). 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 than the evidence which is offered in opposition to it.” Black’s Law Dictionary 1220 (8^th ed. 2004).

9. 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 (2002), directed that workers’ compensation rate filings be treated differently for the voluntary and the assigned risk programs. Assigned risk market program filings should propose complete rates, and voluntary program filings should propose only the projected losses and the projected loss adjustment expenses (i.e., the loss costs per S.C. Code Ann. § 38-73-10 et seq. (2002)). I conclude that the Filing complies with that Order.

10. NCCI is the nonpartisan rating bureau required by statute for workers’ compensation insurance. S.C. Code Ann. § 38-73-510 (2002). NCCI collects workers’ compensation experience and data from carriers with respect to their experience in this State as well as throughout the United States. NCCI made the Filing 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 (2002). The Filing was made on July 1, 2005 and it sought an effective date of November 1, 2005 as well as an overall average increase of 32.9% to the current voluntary loss cost level. An increase in workers’ compensation insurance rates may not be effective until at least twelve months has lapsed since the last increase in such rates. S.C. Code Ann. § 38-73-920 (Supp. 2005).

11. The Director of the Department or her designee is required by statute to approve the rate for each classification under which workers’ compensation insurance is written in South Carolina. S.C. Code Ann. § 38-73-490 (2002). The Director or her designee is authorized to disapprove any workers’ compensation rate that is not fair, reasonable, adequate, and nondiscriminatory. S.C. Code Ann. § 38-73-990. In reviewing rate filings, the Director or her designee may take into account recently passed legislation that will have an effect on insurance rates. S.C. Code Ann. § 38-73-915(A) (2002).

12. A workers’ compensation rate filing is subject to a waiting period of sixty (60) days before it becomes effective. S.C. Code Ann. § 38-73-960. The Director or her designee may extend the period for an additional period not to exceed sixty days if the Director gives appropriate notice within the waiting period. Id.

13. The Consumer Advocate for the State of South Carolina was admitted as an Intervenor in this case as an “affected party” pursuant to S.C. Code Ann. §§ 37-6-607 and 38-73-910(A) (Supp. 2005). The Consumer Advocate has a discretionary and statutory duty to represent consumers in matters of rates. S.C. Code Ann. §§ 37-6-604(A)(1) and 37-6-609 (Supp. 2005).

14. The purpose of this hearing was to determine whether NCCI’s request for a 32.9% increase in the current voluntary loss cost level is “fair, reasonable, adequate, and nondiscriminatory” as required by S.C. Code Ann. §§ 38-73-10, 38-73-490, and 38-73-910 (2002 and Supp. 2005). All employers with more than a minimal number of employees are required to provide workers’ compensation benefits for their employees. This coverage can be obtained from three sources: (i) self-insurance programs, whether individually or through self-insurance groups, (ii) the voluntary program, or (iii) the assigned risk program, also known as the involuntary program. Self-insurance programs are not before this Court in this case.

15. In the workers’ compensation field, the term “losses” means medical benefits paid to or for the benefit of persons injured in workplace accidents, and lost wages and other compensation paid with respect to those accidents. These lost wages and other compensation are sometimes referred to as indemnity benefits. In South Carolina, workers’ compensation insurance “loss costs” are the sum of the medical and indemnity benefits plus the cost of providing these benefits. This cost is referred to as “loss adjustment expense” or “LAE.” Loss costs represent the costs that all insurance carriers have in common.

Each carrier determines its own final rates in the voluntary program by combining its own expenses with the loss costs. These costs include production expenses, a provision for Second Injury Fund assessments, general administrative expenses, and a profit and contingency factor. These carrier-specific expenses are used to develop a loss cost multiplier, or “LCM,” which is applied to the loss costs to determine the carrier’s final rate.

16. Workers’ compensation insurance risks may be grouped by classifications with separate rates, where those classifications can be demonstrated to have variations in hazards, or expense provisions, or both, which have a probable effect on losses or expenses. S.C. Code Ann. § 38-73-430(3) (2002). Pursuant to this statute, the South Carolina workers’ compensation insurance market is divided into approximately 550 classifications.

The class code sensitivities currently in effect were established pursuant to this Court’s February 26, 2003 Consent Order and Order of Dismissal entered in the matter styled National Council on Compensation Insurance, Inc. v. South Carolina Department of Insurance, et al., bearing docket no. 02-ALJ-09-0537-CC. The current class code relativities need to be updated to reflect current class relativities. Since none of the parties contested the revised workers’ compensation classification code relativities proposed by NCCI in the Filing, the Court finds that the relativities as proposed are appropriate.

All parties, except the Consumer Advocate, agreed to a decrease of five and nine-tenths (5.9%) percent in the loss cost level for the “F” classifications; the Consumer Advocate recommended a decrease of five (5.0%) percent but did not provide sufficient evidence that the decrease recommended by the other parties was not appropriate. Accordingly, I find that a decrease of five and nine-tenths (5.9%) percent in the loss cost level for the “F” classifications is appropriate and must be approved.

17. NCCI used data it received from carriers in making the calculations in the Filing. Generally, this data is reported to NCCI in two forms. The first type is financial call data supplied by carriers at NCCI’s request. The second type is statistical unit data supplied periodically by carriers. These types are commonly used in all NCCI filings. The Consumer Advocate and Small Business Chamber argued that the data used by NCCI in the Filing was flawed and, by extension, the use of the allegedly flawed data casts doubt on the results it yielded.

The Court is concerned with the evaluation process and the quantity of data used by NCCI before it makes a recommendation for a loss cost increase, especially based upon testimony by Mr. Rosen that in the two immediate loss cost filings it underestimated the projected ultimate cost of claims used in the filing and testimony that NCCI failed in its evaluation to have a process that ensured that the data it used in the Filing was accurate. However, I find and conclude that NCCI’s exclusion of the AIG data and data from several other small insurance companies was appropriate, was sufficient in quantity to base an actuarial judgment, and their exclusion does not raise questions about the quality of NCCI’s data. Thus, I find and conclude that the missing or excluded data does not materially affect the accuracy or reliability of the data used in the Filing.

18. NCCI uses a voluntary test audit program in four states, including South Carolina. As part of this program, it reviews selective policies and thereafter prepares quarterly reports that it sends to the carriers it uses in the program. The test audits in this matter covered policy years 2002 and 2003 and addressed a sampling of policies that had annual premiums between $4,000.00 and $250,000.00. Of the policies audited by NCCI, 54.24% had errors; further, the error ratio in South Carolina was trending upward and was more than 100% higher than the error rates in other states. NCCI reported that about 51% of the errors involved incorrect classifications and the remaining errors involved premium or payroll differences.

NCCI performed no follow-up with the audited carriers after it audited the information and sent its reports to them. Thus, it had no data to show that any errors it found in the audits and subsequently reported to the carriers were corrected. Prior to the beginning of this trial, NCCI recognized that this process needed a follow-up with the carriers that were audited and has amended its process to ensure that errors reported to carriers are corrected.

While errors of the type and magnitude described in the test audits are cause for concern, the Court is unable to find, based upon the preponderance of the evidence, a quantifiable impact such errors had on the accuracy or reliability of the data used in the Filing. I find the data used in the Filing is sufficient in quality, notwithstanding the Court’s concerns, to make actuarial determinations.

19. The Second Injury Fund was created by the General Assembly for the purpose of making payments in accordance with the provisions of S.C. Code Ann. §§ 42-9-400, 42-9-410, and 42-7-310 (Supp. 2005). In general, the fund reimburses employers and/or their insurer for at least a portion of claims for injured employees whose injuries were made worse by a prior injury. A major concern was whether the financial call data correctly reported the reduction of gross loss costs by the carriers in this state.

Given the fact that the dollar amount associated with reimbursements from the Second Injury Fund and from subrogation claims was in excess of $100 million per year for the period under review in this case (which represents a significant portion of the total workers compensation market under consideration in this case), I conclude that the verification of reimbursements issue is relevant to the Court’s decision in this case.

The Court is unable, based on a preponderance of the evidence, to determine with specificity when or how fund reimbursements or subrogation recoveries, received or anticipated by carriers, reduced the losses utilized by NCCI in the Filing. There was no examination or auditing of the data either by the Department or by NCCI. Because of its concerns over the sufficiency of the quantity and reliability of the data available and when and how reimbursements were deducted from the losses submitted in the Filing, this data should not have been considered in the Filing (if it was) and is not considered in this decision.

Notwithstanding the immaturity and unreliability of the data since the passage of the amendment to the fund in 2003, I find and conclude that the effect of the statutory change will most probably result in a reduction of SIF reimbursements to carriers in the future and thus will increase the losses of carriers. Further, I find that the amendment contributes to the troubled state of workers’ compensation in this state. This Court cannot discount the effect the demise of this source of reimbursement will have on the loss cost level. However, since the data is so immature and green since its passage, the Court cannot ascribe any percentage factor to such for usage in determining the amount of the loss cost increase that is needed at this time in this state.

20. The Consumer Advocate, the Department, and NCCI disagreed on the appropriate methodologies for calculating a proposed loss cost level increase. Actuaries most commonly use two methods, paid loss and paid loss plus case reserves. In the paid loss method, an actuary estimates future loss cost using benefits previously paid by insurers on reported claims during a selective experience period. In the paid loss plus case reserves method, an actuary estimates future loss costs by including in the data base previous losses paid on reported claims during a selective experience period plus amounts set aside (reserves) to cover future payments on claims during the same selective experience period. NCCI used both methods in this Filing and normally uses both methods when preparing an analysis.

The Court finds and concludes that there has been a significant strengthening in case reserves, particularly in medical case reserves, and, therefore, the use of the paid plus case reserves method overstates the amount of loss costs. The paid loss method, as suggested and utilized by both Mr. Simons and Mr. Merlino, is the appropriate method to use in this review based upon the strengthening of reserves by the carriers that write the voluntary workers’ compensation insurance in this state. Further, the Court finds that the usage of more than two years of experience, as used by both Mr. Simons and Mr. Merlino, was needed because of the strengthening of reserves over the last few years.

21. NCCI's loss cost analysis considered voluntary and assigned risk exposures and losses in making its calculations. Both the Department and the Consumer Advocate used only voluntary data. The Court agrees with the methodology used by both the Department and the Consumer Advocate, finding and concluding that calculating voluntary loss costs by using a combination of voluntary and assigned risk business data is inappropriate and unreasonably overstates the voluntary loss costs. The Court further concludes that, although it is appropriate to look at both loss costs for the voluntary and assigned risk markets together, understanding that they have a close interrelationship, that employers often shift between the two markets, and that changes in the assigned risk trends will often result in offsetting changes in voluntary trends, it is essential that both markets are trended and evaluated for loss costs changes separately.

22. The Court does not find any evidence supporting NCCI’s assertion that there is a trend toward cases remaining open longer at the Commission that would support an increase in loss costs of 32.9%. Further, the Court concludes that NCCI should have considered available Commission data as factors in its trending, especially since the data shows that claims are closing much quicker because of recent improvements in Commission funding, staffing, and technical support.

Also, the Court concludes that the usage of more recent data for trending, such as improvements in Commission funding, staffing, technical support, and claims processing, is more responsive to positive changes in the marketplace and should be used versus the eight years of data that NCCI used.

23. I find and conclude that NCCI has met its burden of proof in showing that an increase in the voluntary loss costs must be approved. I further find and conclude that an increase in the current voluntary loss cost level of 18.4 % (22.4% as initially determined by the Department without any consideration given for the effect of the 2003 statutory change to the SIF, less a 4% discount for recent improvements at the Commission and data quality concerns) would neither be excessive, inadequate, nor unfairly discriminatory.

ORDER

Accordingly, based upon the above Findings of Fact and Conclusions of Law, it is therefore:

ORDERED that the current overall workers’ compensation insurance voluntary program loss cost level be increased, on average (other than for “F” classifications), by 18.4%; and it is further

ORDERED that the proposed change in the workers’ compensation insurance voluntary program loss costs for “F” classifications is decreased, on average, by 5.9%; and it is further

ORDERED that the workers’ compensation classification codes be updated in accordance with the relativities established by NCCI in the Filing that is the subject of this case; and it is further

ORDERED that all changes ordered above shall be effective for new and renewal policies issued on or after December 1, 2006.

AND IT IS SO ORDERED.

Marvin F. Kittrell

Chief Administrative Law Judge

October 2, 2006

Columbia, South Carolina