To:           Missouri Workers' Compensation Insurers

From:      Susan Schulte, Chief, Property and Casualty Section

Re:          Workers' Compensation Schedule Rating Credits

Date:       January 31, 2002

Insurers are asked to recall that in May of 1997, the Missouri Department of Insurance issued Bulletin 97-03 regarding schedule rating plans. At the time, Missouri's workers' compensation market was experiencing a period of intense competition, during which some carriers were granting schedule credits of fifty percent and more in order to attract new business. The Department concluded that such undisciplined competition was unhealthy for the market in the long run, and as a result, set forth guidelines detailing the standards to be followed in the future by those insurers employing schedule rating plans in the state of Missouri.

While Missouri's workers' compensation market is still competitive, the Department has received reports of behaviors characteristic of the industry during a perceived "market hardening." Among these reports are instances of certain carriers who have removed previously authorized schedule credits from policies; allegedly, these credits were removed even though there had been no change in the nature of the insured-employers' operations that would justify the elimination of these credits. There was some speculation that the credits had been removed to increase the carrier's overall premium income without the need to file new rates with the Department.

It is unclear whether - or to what extent - these reports are accurate. However, the Department has seen this type of behavior in the past during previous market adjustments, both in the workers' compensation market and other markets. In fact, such behavior was one of the reasons why the Department suspended the use of schedule rating programs for a period between 1987 and 1994.

Rather than repeat this chain of events, the Department has decided that "now" is an appropriate time to stress to the industry that schedule credits should be removed only to the extent their removal is permitted under the schedule rating plans filed by the carrier with the Department. Generally, the removal of a schedule credit will be inappropriate unless that removal reflects a corresponding change in the risk factor underlying the credit. Schedule credits should not be used as the convenient pricing (or marketing) tool of first resort. If carriers have followed the guidelines in Bulletin 97-03, any credits applied to a policy will be rationally related to the employer's potential (or lack thereof) for suffering insured losses, and these credits will have been defined by detailed written standards. The removal of any such credit should occur only if the removal is authorized under the schedule rating plan filed with the Department, and only when the insured's circumstances match the plan's removal criteria. Ideally, this will occur only: 1) where the insured-employer's operations no longer meet the plan's objective standards; 2) where this failure to meet standards has been documented in the underwriting files; and, 3) where this failure has been explained to the insured.

The same concerns set forth in Bulletin 97-03 regarding questionable rating practices have motivated this reminder. Inappropriate use of schedule rating factors weakens the Department's ability to monitor the competitiveness of the market, increases the magnitude of market fluctuations, raises the potential for unfair discrimination and undermines the ability of a schedule rating program to foster rational and effective long-term loss control programs. Such misuse also has the effect of reducing the confidence of the employer community in the wisdom of the state's recent competitive market reforms. Hopefully, this notice will be sufficient to reinforce the need for rational schedule rating behavior. Should an insurer identify the need for an overall increase in premium, its response should be to file amended rates with the Department, not to remove previously authorized credits without apparent justification.

If you have any questions, please feel free to contact the Property & Casualty Section of the Department at (573) 751-3365.