STATEMENT OF THE CASE

This matter is before the Administrative Law Court (“ALC” or “Court”) pursuant to a request for a contested case hearing filed by the Consumer Advocate for the State of South Carolina (“Consumer Advocate”) on October 12, 2005, challenging a corrective action order (“Corrective Action Order”) issued by the Director of the South Carolina Department of Insurance (“Department”) on October 10, 2005.  Pursuant to notice to the parties, a hearing in this matter was held before me on April 28, 2006 at the offices of the Court in Columbia, South Carolina. 

PROCEDURAL HISTORY

            This matter began on September 16, 2005 when, pursuant to S.C. Code Ann. § 38-73-540(C) (2002), the National Council on Compensation Insurance, Inc. (“NCCI”) provided formal notice to the Director of the Department that excessive losses were indicated in the South Carolina workers’ compensation assigned risk program that were jeopardizing the ability of the program to operate as a self-funded mechanism as required by South Carolina law. NCCI proposed a corrective action pursuant to S.C. Code Ann. Section 38-73-540(C) (2002). 

In response thereto, the Director issued the Corrective Action Order on October 10, 2005 pursuant to authority in S.C. Code Ann. § 38-73-540(C) (2002).  In the order, the Director adopted the recommendations of NCCI and ordered that the loss costs for the assigned risk program must be equal to the loss costs approved for the voluntary market by the Administrative Law Court in the Voluntary Cases, applied a loss cost multiplier of 2.176 to the South Carolina voluntary market loss costs with the existing differential of 40.4% to any approved revision to the current loss costs under consideration before this Court in the Voluntary Cases, and addressed the procedure by which future assigned risk rates would be set.[1]  The Corrective Action Order also stated that the issuance of a corrective action order pursuant to S.C. Code Ann. § 38-73-540(C) was a permissible alternative to the hearing procedure under S.C. Code Ann. § 38-73-910(A) based on this Court’s ruling in NCCI v. South Carolina Department of Insurance and Philip S. Porter, Docket No. 00-ALJ-09-0687-CC (2001).

            On October 12, 2005, the Consumer Advocate requested a contested case hearing as authorized by the South Carolina Administrative Procedures Act (“APA”), S.C. Code Ann. §§ 1-23-310, et seq. (2005), and S.C. Code Ann. § 38-73-910 (Supp. 2005).  The Court assigned Docket No. 05-ALJ-09-0406-CC to the case (“Assigned Risk Case”).  In the request, the Consumer Advocate challenged the Corrective Action Order, arguing that the order might result in assigned risk rates that might be excessive and that the order was issued by an inappropriate procedure. Subsequently, NCCI, Companion Property and Casualty Insurance Company (“Companion”), and the South Carolina Small Business Chamber of Commerce (“Small Business Chamber”) sought and were granted intervention in this matter.

            On November 2, 2005, the Consumer Advocate filed a petition requesting this Court consolidate this case with the Voluntary Cases for purposes of discovery and hearing.  This Court did, by order dated April 28, 2006, consolidate this matter with the Voluntary Cases for discovery and other pretrial matters; however, the Court ordered that this matter be heard separately from the Voluntary Cases.

            On April 17, 2006, the Department filed a Motion for Summary Judgment, accompanied with a Memorandum in Support thereof.  In its motion, the Department argued that the issues presented in the Assigned Risk Case were issues of law and there was no genuine issue of material fact because the Consumer Advocate had produced no admissible evidence during discovery to show that the Corrective Action Order was improperly issued or that the assigned risk differential and the loss cost multiplier were improperly calculated.  The Consumer Advocate timely filed a response to the motion, along with a Cross-Motion for Summary Judgment, asserting that the Corrective Action Order was, as a matter of law, issued by an inappropriate and unlawful procedure.

            This Court heard arguments on the Motions for Summary Judgment on April 27, 2006.  By Order dated May 9, 2006, this Court: (1) granted the portion of the Department’s Motion for Summary Judgment addressing the authority of the Director to issue Corrective Action Orders under § 38-73-540(C);[2] (2) denied the portion of the Department’s Motion for Summary Judgment addressing the materiality of factual issues;[3] and (3) denied the Consumer Advocate’s Cross-Motion for Summary Judgment.

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 Mr. Rosen’s prefiled testimony, he stated that a revision to the current assigned risk program rate level in effect since February 15, 2005 was necessary and that any approved revision to the voluntary loss cost level would support a similar change to the assigned risk rate level.  He also opined that the current assigned risk differential was adequate and no revision to it was warranted.

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.

In his prefiled testimony, Mr. Merlino opined that setting the assigned risk rates based on approved voluntary loss costs was reasonable and appropriate and that multiplying the approved voluntary loss costs by the loss cost multiplier proposed in the Corrective Action Order would result in assigned risk rates that are adequate, not excessive, and not unfairly discriminatory.

By the Consumer Advocate

            The Consumer Advocate prefiled testimony and supplemental testimony of Martin M. Simons, ACAS, and a consulting actuary.  In his prefiled testimony, Mr. Simons opined that the underlying data necessary to calculate an assigned risk differential was not currently available and the process used by the Department in the Corrective Action Order to determine the assigned risk rates was not appropriate because it did not incorporate a target rate of return analysis.[4]

By Companion

            Companion prefiled testimony of Jerelyn S. Boysia, FCAS, and Director of Actuarial Services for Companion. In her prefiled testimony, Ms. Boysia opined that the actions taken resulting from the Corrective Action Order were necessary and that the Court’s upholding the Corrective Action Order would ensure that the assigned risk differential remained unchanged upon approval of the voluntary loss costs.

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 challenging rates charged for workers’ compensation insurance to be written in the assigned risk program in South Carolina. This case was also consolidated for purposes of discovery and pre-trial matters, but not for trial, with those certain cases pending before this Court bearing docket numbers 05-ALJ-09-277-CC, 05-ALJ-09-355-CC, and 05-ALJ-09-364-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.                  Insurers that participate in the voluntary program are required to participate in the assigned risk program and to pay their share of any assigned risk assessments. S.C. Code Ann. §38-73-540(A)(1).  Each carrier’s degree of participation in the assigned risk program and each carrier’s share of any assigned risk assessment is generally equal to the percentage of the total voluntary market premium written by that carrier.

7.                  The assigned risk program is required to be self-sustaining.  S.C. Code Ann. §38-73-540(C).

8.                  Policies issued in the assigned risk program are issued by servicing carriers or direct assignment carriers. The employer cannot choose whether it is serviced by a servicing carrier or a direct assignment carrier or the identity of its servicing carrier or its direct assignment carrier.

9.                  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.

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

11.              All employers obtaining assigned risk coverage that is not written by direct assignment carriers are insured under policies issued by servicing carriers.

12.              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.

13.              The Department of Insurance establishes the portion of the assigned risk policies to be issued and serviced by each servicing carrier. Within that quota, servicing carriers cannot limit the number of assigned risk policies they write nor can they limit the assigned risk dollar exposure that they insure.

14.              Servicing carriers must participate in the voluntary program. S.C. Code Ann. §38-73-540(B).

15.              Since May 1, 2003, servicing carriers have been able to cede, or assign, the premium and the losses of their assigned risk business to a pool comprised of carriers who write in the voluntary program in South Carolina. After ceding these risks, servicing carriers must still service the policies and retain a fee, referred to as the servicing carrier allowance, as their compensation for doing so.

16.              The rates to be charged in the assigned risk program will be established in this case.

17.              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).

18.              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.”

Loss Costs v. Full Rates v. Premiums

19.              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.

20.              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 and apply in both the voluntary program and the assigned risk program.

21.              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.

22.               Historically the experience in the assigned risk plan is worse than the experience in the voluntary program. To enable the assigned risk program to be self-sustaining as required by law, and to provide for assigned risk rates that are actuarially sound, an assigned risk differential is used to account for that difference in experience by operating as a surcharge.

23.              The assigned risk differential is currently forty and four-tenths percent (40.4%), which means that the loss costs for the assigned risk program are 40.4% greater than the loss costs for the voluntary program.

24.              The current 40.4% assigned risk differential has been unchanged since at least 1999.

25.              Rates charged in the assigned risk program are also intended to cover the costs of administering the assigned risk program. These costs include production expenses, a provision for Second Injury Fund assessments, general administrative expenses, and a servicing carrier allowance. These expenses are used to develop an assigned risk loss cost multiplier.

26.              As set by Corrective Action Order dated October 10, 2005, the assigned risk loss cost multiplier is currently 2.176.

            27.       Assigned risk rates are calculated by multiplying the voluntary loss costs by the assigned risk differential factor, and multiplying that product by the assigned risk loss costs multiplier.

28.       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.[5]

29.       The Assigned Risk Adjustment Program (“ARAP”) creates a surcharge which incentivizes assigned risk employers to improve workplace safety.  After assigned risk rates are calculated, ARAP surcharges particular risks who have worse than average loss experience.

30.       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.

31.       Voluntary program loss costs and assigned risk rates are based on the same premium and loss experience. Therefore, each program’s proposed values are inextricably linked to the others.

Parties

32.       Petitioner, the Consumer Advocate for the State of South Carolina (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.

33.       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.

34.       Companion Property & Casualty Insurance Company, Inc. (“Companion”) was admitted as an Intervenor in this case. Companion is a servicing carrier for the assigned risk program in South Carolina and will be affected by the assigned risk rates that are the subject of this case.

35.       National Council on Compensation Insurance, Inc. (“NCCI”) was admitted as an Intervenor in this case.  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 a 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.

36.       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.

37.       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 assigned risk rates that are the subject of this case.

Positions of the Parties

38.       The class code relativities 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.

39.       The current class code relativities need to be updated.

40.       The following persons, all of whom submitted prefiled testimony in this case or in the companion cases identified in paragraph 1 above, 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 the testimony and evidence presented at the hearing in this matter, having passed upon the credibility of the witnesses and carefully considered the burden of persuasion by the parties which is a preponderance of the evidence I make the following Findings of Fact, which are in addition to the foregoing Stipulations:

General

            41.       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 at the hearing to the public for comment; none was offered.

42.       The Consumer Advocate and the Small Business Chamber were the only parties to challenge the Corrective Action Order; further, the Consumer Advocate was the only party to submit testimony challenging the Corrective Action Order.

43.       The Consumer Advocate’s sole testimony supporting its challenge to the Corrective Action Order was by Mr. Simons, its consulting actuary.  He asserted that:  (1) the data used to calculate the voluntary loss costs upon which the assigned risk rates are to be determined was not valid; (2) the assigned risk loss cost multiplier (2.176) used and delineated in the Corrective Action Order might lead to rates that are excessive, inadequate, or unfairly discriminatory, and (3) during a 2 – 3 year period in 2000 to 2003 (when NCCI was not the Plan Administrator) no one collected assigned risk ratemaking data.

44.       Ms. Boysia, Companion’s expert witness, testified that upholding the Corrective Action Order is necessary to a healthy and properly functioning assigned risk program that is self-sustaining and ensures competition with the voluntary program.

Sufficiency of Data

            45.       Historically, assigned risk rates have been established in conjunction with the establishment of loss costs in the voluntary market. The indicated loss cost change would be calculated separately for the voluntary business and the assigned risk business, using the combined data.  Through the analysis of the loss cost data, an assigned risk differential was calculated to account for the difference in the underlying experience from the assigned risk business to the voluntary business.  Once the assigned risk differential was determined, the final assigned risk rate was calculated by applying a factor to the approved loss costs to account for both the differential (loss experience) and the expenses associated with the assigned risk market (loss cost multiplier).

            46.       NCCI made its last joint filing for a change to the voluntary loss costs and assigned risk rates in South Carolina on November 30, 2000. That filing was subject to a hearing before this Court; a Final Order and Decision was issued on October 23, 2001.  See Docket No. 00-ALJ-09-0687-CC.  In its order, the Court decreased the voluntary loss costs by -10.4% and ordered that the assigned risk rates would remain at their then current level.   Further, the Court ordered that the assigned risk differential would remain at 40.4%.[6] 

            47.       Since the issuance of the October 23, 2001 Order, NCCI has made two filings with the Department for voluntary loss cost changes with effective dates in 2003 and 2004; neither of those filings were accompanied with requests for changes to the assigned risk rates.

            48.       The next change to the assigned risk rates (since the order on October 23, 2001) was made in the corrective action order by the Director, effective February 15, 2005.  The order was issued after the Department received notification from NCCI in November 2004 that a change was needed.  The corrective action order increased the assigned risk rates by an additional 32.8% and changed the assigned risk loss cost multiplier to 2.176.

            49.       Effective in 2003, the Department implemented changes in classification relativities.  Pursuant to verbal direction by the Department, the voluntary loss cost change approved for 2004 did not change class relativities.  See SCCA-Ex. 8 in Docket No. 05-ALJ-09-0277-CC.

            50.       NCCI acted as the Assigned Risk Plan Administrator in South Carolina until April 30, 2000.  It resumed that function again on May 1, 2003, and has served in that capacity to the date of the hearing.  Between April 30, 2000 and May 1, 2003, the Department acted as the Assigned Risk Plan Administrator.  During this time, the Department did not ask NCCI to submit any revised assigned risk rates for regulatory review. Further, NCCI had no responsibility to collect assigned risk ratemaking data.  Although the statutory law in this state requires the Assigned Risk Plan Administrator to maintain necessary ratemaking data in order to permit the actuarial determination of rates and rating plans appropriate for the business insured through the plan, the Department did not assign these data collection duties to NCCI or to any other entity.

            51.       As to the sufficiency of data, Mr. Merlino testified that he had reviewed the assigned risk differential by using the assigned risk program loss experience data and the data used in the Voluntary Cases matter.  He also testified that he had all the data necessary to calculate the loss cost multiplier.  Further, he used the calculations and data used by NCCI.

            The arguments by the Consumer Advocate and the Small Chamber are documented in the transcript of the Voluntary Cases matter and in the Final Order and Decision of the Court in the Voluntary Cases; thus, the Court does not find it necessary to restate them in great detail here. The Court adopts by reference those provisions of the Final Order and Decision in the Voluntary Cases wherein the Court held that adequate data existed to make a determination of voluntary loss costs.  The Court also notes that the same parties and witnesses litigated that question fully before this Court on April 24-27, 2006 and, therefore, the parties may be collaterally estopped from challenging in this case the Court’s decision on that issue in the Voluntary Cases.

Loss Cost Multiplier

52.       Mr. Simons opined that the assigned risk loss cost multiplier promulgated by the Department in the Corrective Action Order might lead to assigned risk rates that are excessive, inadequate, or unfairly discriminatory.  As described in the Stipulations above, assigned risk loss costs are calculated by multiplying the loss costs that are approved for the voluntary program by the assigned risk differential.  Final assigned risk rates are then calculated by multiplying the assigned risk loss costs by an assigned risk expense provision.  Thus, the assigned risk differential and the expense provision are the two components of the assigned risk loss cost multiplier.

            Assigned Risk Differential

53.       The current assigned risk differential is 1.404, or 40.4%. 

54.       It is Mr. Rosen’s opinion that this assigned risk differential is adequate and that no change is necessary.

55.       Mr. Merlino, however, indicated that the assigned risk differential he calculated was slightly lower that the amount determined by NCCI.  He analyzed and tested the assigned risk differential proposed by the Corrective Action Order based on five (5) years of data and used two different methods. First, he calculated his own assigned risk rate indications that he compared with those indications he had calculated for the Voluntary Cases.  Then, he compared data for both the assigned risk and voluntary programs at the same relative points in time.  

56.       Mr. Simons testified that he did not calculate an assigned risk differential because there was no loss cost data for the South Carolina assigned risk business for the policy years and accident years (between 2001 and 2003 while the Department served as the Plan Administrator); he opined that such was necessary for him to properly determine loss costs that would not be excessive, inadequate or unfairly discriminatory.  He further opined that the material/data contained in Mr. Merlino’s prefiled testimony was insufficient to determine an appropriate assigned risk differential or to determine assigned risk rates that would comply with applicable statutory provisions.  Also, Mr. Simons listed thirteen items which, in his opinion, were necessary to determine the appropriate profit factor to produce final assigned risk rates that were not excessive, inadequate or unfairly discriminatory; he opined that none of these items appeared to have been considered in either NCCI's or the Department’s analysis.

Notwithstanding the assertions of the Consumer Advocate, the Court finds there was sufficient data necessary to calculate an assigned risk differential and that the assigned risk differential component of the loss cost multiplier, as used by the Department in the Corrective Action Order, was appropriate. 

Expense Provision

57.       NCCI calculated an estimated loss cost multiplier at the Department’s request.  Further, its calculations indicated an increase in the expense provision of 0.9% and produced a loss cost multiplier of 2.176. 

58.       Mr. Simons opined that the Department should conduct a rate of return analysis to determine if the loss cost multiplier was appropriate.  He testified that he has historically used a -2.5% profit factor in calculating a rate of return.  However, he testified he has used the -2.5% profit factor since the late 1980s and early 1990s when interest rates were substantially higher than they are now, that prevailing interest rates are very relevant to a target rate of return, and that he had not revisited his -2.5% profit factor (despite his acknowledgement that interest rates have declined significantly in the intervening years through the present).

Further, Mr. Simons testified that Mr. Merlino did not perform a target rate of return on equity analysis when he calculated the expense provision of the loss cost multiplier and that Mr. Merlino incorporated an assumed profit factor of zero into his calculations that might result in excessive rates. 

59.       Also, in his prefiled testimony Mr. Simons stated he did not calculate an expense provision because he did not have the underlying assigned risk data.   Notwithstanding, at the Court’s request he calculated a loss cost multiplier using an assigned risk differential of 1.091 after accounting for ARAP, along with a voluntary loss cost level increase of 12.7% (as he proposed in the Voluntary Cases and after making some assumptions based on the available data).  His calculation produced a loss cost multiplier of 1.718.[7]

Mr. Simons also calculated a loss cost multiplier using a voluntary loss cost level increase of 32.9% (as proposed by NCCI in the Voluntary Cases matter), rather than the 12.7% increase he proposed in the Voluntary Cases.  Using NCCI’s increase, Mr. Simons stated that his calculation would produce a loss cost multiplier of 1.457.  However, he also admitted that using such a loss cost level increase and loss cost multiplier resulted in an assigned risk differential of less than one, or 0.925. 

60.       Mr. Merlino opined that a formal target rate of return analysis was not necessary under these circumstances because such analyses are necessarily complex and require a great number of assumptions regarding the data.  Also, he believed he could properly evaluate the Corrective Action Order and the implicit profit based on a reasonable range of alternative assumptions derived from his professional experience and judgment.

Mr. Merlino analyzed the calculations for the 2.176 loss cost differential and concluded it yielded a profit factor of -3.7%, which is at the low end of a reasonable range for a profit provision. 

61.       Ms. Boysia and Mr. Simons agreed that the use of an assigned risk differential of less than 1.00 would be inappropriate.  According to Ms. Boysia, an assigned risk differential of less than 1.00 would result in assigned risk loss costs, and presumably assigned risk rates, that would be lower than the voluntary program rates, and that an assigned risk differential set too low would discourage competition in the voluntary program (because it does not allow carriers to apply underwriting discretion in pricing their business).  Further, she testified that if one used the loss cost multiplier of 1.718 and the assigned risk differential of 1.091 (as proposed by Mr. Simons), together with an increase to the voluntary loss cost level of 12.7%, the result would be an overall decrease in the assigned risk rate level of approximately 11%.  Mr. Simons agreed.  Ms. Boysia also stated that such a decrease in the assigned risk rate levels would not be consistent with Companion’s experience in South Carolina. 

62.       Mr. Merlino analyzed the loss cost multiplier calculated by NCCI, which was less than the multiplier he had calculated, and concluded that it was reasonable.  It was his opinion that as long as the voluntary loss cost level increase approved in the Voluntary Cases was not excessive, inadequate, or unfairly discriminatory, regardless of the magnitude of such increase, the loss cost multiplier proposed in the Corrective Action Order was reasonable and would not lead to rates that are excessive, inadequate, or unfairly discriminatory. 

The Court determines that the loss cost multiplier of 2.176, as proposed by the Department in the Corrective Action Order, is actuarially sound and appropriate.

Composition of policies in the assigned risk program

63.       Mr. Simons opined that the assigned risk premiums in South Carolina have grown by several hundred percent since 2003, and that much of this increase resulted from an increase in the percentage of smaller policies in the assigned risk pool.  He stated that 73% of the policies in the assigned risk program are small policies with less than $2,500 in annual premium.  Also, he opined that those smaller policies are placed by carriers in the assigned risk program because they are small and not profitable to carriers, not because they have bad risk experience.  

Also, Mr. Simons opined that an appropriate analysis should include the effect of changes taking place in the assigned risk as well as in the voluntary market because there are interrelationships between voluntary and assigned risks. He noted that as employers are shifted between voluntary and assigned risk markets, changes in assigned risk trends will often result in offsetting changes in voluntary trends. 

Mr. Merlino testified, however, that the fact that 73% of the policies in the assigned risk program are small policies is not unusual when one views the distribution of business by policy size because, in the workers compensation market, most of the total premium for the program is concentrated in  larger policies.  Further, he testified that he had seen no evidence to support Mr. Simons’s conclusion that the assigned risk program is disproportionately comprised of smaller policies and that the volume of small policies in the assigned risk program, as measured by premium, had decreased over the past three years.  Mr. Simons agreed he did not perform an analysis of the percentage of premium in the assigned risk program attributable to small policies.

64.       Although size could be a reason for a carrier to place a small policy in the assigned risk program, Companion’s experience has shown that loss experience for small policies is worse than the average loss experience and that such poor experience is another reason why a carrier might not write a policy in the voluntary program. 

This Court finds that Mr. Simons’ concerns regarding the composition of policies in the assigned risk program are unfounded, and, as such, are not relevant to this Court’s determination whether the assigned risk differential and loss cost multiplier proposed by the Corrective Action Order are actuarially sound and appropriate.

Classification changes

            65.       The classifications in the February 2005 assigned risk rates were established when the process was ongoing in determining the 2003 voluntary loss costs.  In 2004, the Department disallowed changes in classification relativities from those established in conjunction with the 2003 voluntary loss cost calculation. 

Mr. Simons opined that the current disparities brought about by the mandate to disallow risk classification relativity changes dramatically affects both voluntary and assigned risk rates and causes the current rates to be out of sync with the rates that would be charged if the classification relativities were adjusted in accordance with the experience (as required by Actuarial Standard of Practice #12).

            66.       Insurance company actuaries analyze the loss cost experience by classification so they can alert their underwriting and marketing departments that some employment classifications are under-priced and some are over-priced. With that knowledge, insurance companies tend not to write those risks they consider to be under-priced.   In such cases the employer may wind up in the assigned risk pool because of an inequitable classification system, not because they have had some workers’ compensation insurance claims.

            On the other side of this scenario are those employers whose rates are deemed by the insurance industry to be excessive, or where the approved rate is greater than it would have been if the underlying classification system was equitable. These employers are happily written in the voluntary market because the insurance company is permitted to charge a rate that is higher than it would have been if the classification system were equitable.

            67.       All parties agreed that changes to the job classification code relativities were necessary, regardless of the magnitude of increase in the voluntary and assigned risk loss costs, loss cost multiplier, and the assigned risk differential.  See Stipulation 39.  No party objected to the job classification code relativities proposed by NCCI in the Voluntary Cases. Accordingly, this Court adopts by reference those provisions of the Final Order and Decision in the Voluntary Cases matter that holds that the job classification code relativities proposed by the NCCI in the Filing are appropriate.  This Court also notes that the same parties and witnesses had the opportunity to litigate that question fully before this Court in the Voluntary Cases and that no party objected to those changes.  Further, this Court notes that the parties may be collaterally estopped from challenging in this case the Court’s decision on that issue in the Voluntary Cases.

CONCLUSIONS OF LAW

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.                  The Administrative Procedures Act requires that notice of a hearing be given to all parties at least thirty days in advance.  S.C. Code Ann. § 1-23-320(a) (2005).  Notice of the contested case hearing to determine whether the Department’s Corrective Action Order to change workers’ compensation insurance rates was lawful was given more than thirty days prior to this hearing.  No member of the public appeared at the contested case hearing to present a protest or other position with respect to the Filing. 

3.                  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).

4.                  The Consumer Advocate for the State of South Carolina has a discretionary and statutory duty to represent consumers in matters of rates.  S.C. Code Ann. §§ 37-6-604(A)(1) (Supp. 2005) and 37-6-609 (Supp. 2005).

5.                  NCCI is the assigned risk program administrator pursuant to the provisions of S.C. Code Ann. § 38-73-540(C) (2002). 

6.                  S.C. Code Ann. §§ 38-73-10(a)(1) (2002) and 38-73-430(4) (2002) require that insurance rates 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.                  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 (2002).

8.                  S.C. Code Ann. § 38-73-540 (2002) specifically addresses assigned risk rates, mandates that assigned risk rates be self-sustaining, and provides a mechanism for corrective action by the Director upon notification by the plan administrator that excessive losses are indicated in the assigned risk program.

9.                  Assigned risk rates are calculated by multiplying the voluntary loss costs by the assigned risk differential factor, and multiplying that product by the assigned risk loss costs multiplier.  The assigned risk differential and the expense provision are the two components of the loss cost multiplier.  The assigned risk loss cost multiplier is currently 2.176 as set by the Director in the Corrective Action Order dated October 10, 2005.

This Court must decide whether the loss cost multiplier identified in the Corrective Action Order is appropriate, and whether such loss cost multiplier, when applied to those loss costs approved for the voluntary program in the Voluntary Cases, results in assigned risk rates that are self-sustaining and are not excessive, inadequate, or unfairly discriminatory.

10.              The Assigned Risk Adjustment Program creates a surcharge which incentivizes assigned risk employers to improve workplace safety.  After assigned risk rates are calculated, ARAP surcharges particular risks that have worse than average loss experience.

11.              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.

12.              Voluntary program loss costs and assigned risk rates are based on the same premium and loss experience. Therefore, each program’s proposed values are inextricably linked to the others.

13.              The class code relativities 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.

14.              In this case, the Consumer Advocate, as the Petitioner, has the burden of proof to show, by a preponderance of the evidence, that the proposed rates are excessive, inadequate or unfairly discriminatory pursuant to S.C. Code Ann. § 38-73-10(a)(1) (2002).  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).

15.              Based upon the preponderance of the evidence in this matter and the findings heretofore made, I conclude that the Director of the Department properly issued the Corrective Action Order, and that the proposed assigned risk rates are not excessive, inadequate, or unfairly discriminatory.

                                 ORDER

Based upon the foregoing Stipulations, Findings of Fact and Discussion, as well as the Conclusions of Law,

IT IS HEREBY ORDERED that the Corrective Action Order was properly issued by the Director pursuant to statutory authority, is approved by this Court, and is given full force and effect; and

           IT IS FURTHER ORDERED that the Corrective Action Order is appropriate in all respects; and

          IT IS FURTHER ORDERED that the loss costs for the assigned risk program shall be the same as those approved in the Voluntary Cases and that, after revision of the job classification code relativities as required above, such loss costs will lead to assigned risk rates that are self-sustaining and which are not excessive, inadequate, or unfairly discriminatory; and

         IT IS FURTHER ORDERED that the loss cost multiplier of 2.176, as discussed in the Findings of Fact, is actuarially sound and appropriate and, when such is applied to the loss costs approved in the Voluntary Cases matter (Docket Nos. 05-ALJ-09-0277-CC; 05-ALJ-09-0355-CC; and 05-ALJ-09-0364-CC), with the existing assigned risk differential of 40.4%, such will result in assigned risk rates that are self-sustaining and which are not excessive, inadequate, or unfairly discriminatory; and

          IT IS FURTHER ORDERED that the changes to the workers’ compensation job classification code relativities proposed and established by NCCI in the Filing must be implemented by the Department immediately and that such changes will help ensure that the assigned risk rates will not be unfairly discriminatory; 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