Requires workers' compensation insurance premiums to be rolled back by 20%. After July 1, 2008, prohibits workers' compensation insurance premium rates above the maximum earned premium and below the minimum earned premium. Establishes a formula for the determination of the maximum earned premium and minimum earned premium. Authorizes consumers to initiate or intervene in any workers' compensation insurance rate making proceeding.

A BILL FOR AN ACT

SECTION 1. The legislature finds that the workers' compensation insurance market is necessary for the economic welfare of the state, and that without adequate and affordable workers' compensation insurance, the orderly growth and economic development of the state would be impeded. Adequate and affordable insurance for workers' compensation is also necessary to enable employers to satisfy their legal obligations under chapter 386, Hawaii Revised Statutes.

For these reasons, the legislature enacted Act 261, Session Laws of Hawaii 1996, to replace the existing workers' compensation assigned risk pool with a statutorily established nonprofit corporation known as the Hawaii employers' mutual insurance company (HEMIC). The purpose of HEMIC is to provide workers' compensation coverage for Hawaii employers, including employers who have in good faith, but without success, sought workers' compensation insurance in the voluntary market.

Act 261 also required insurers in the voluntary market and rating organizations to identify the overall cost savings resulting from this law and to incorporate the savings into the rates for new and renewal policies issued between July 1, 1996, and January 31, 2000. The legislature intended these provisions to provide desperately-needed premium relief to employers while the legislation establishing HEMIC was implemented.

Act 261 had a dramatic impact on the workers' compensation insurance industry. Total premiums paid and losses experienced were reduced from a high in 1993 of $339,000,000 and $223,000,000, respectively, to lows in 1999 of $157,000,000 and $110,000,000.

However, once the period during which cost savings were to be incorporated into rates ended, total premiums paid rose drastically. Between 1999 and 2003, total premiums collected increased from $157,000,000 to $308,000,000, an increase of ninety-six per cent. During that same time, loss costs experienced only a modest adjustment, increasing from $116,000,000 in 2001 to $128,000,000 in 2003, or roughly ten per cent.

The legislature finds that the insurance commissioner is empowered to initiate proceedings for appropriate relief, including but not limited to proceedings to roll back rates whenever it appears to the commissioner that an insurer or other interested person regulated under article 14 of chapter 431, Hawaii Revised Statutes, affecting workers' compensation insurance rates has set or applied any rate, classification, charge, or rule affecting workers' compensation insurance that is unreasonable. Despite having this authority, the insurance commissioner allowed workers' compensation insurance premium rates to increase by ninety-six per cent regardless of the fact that loss costs rose only ten per cent during that same time period.

Act 261 and other reform legislation approved during the mid 1990s effectively stabilized workers' compensation insurance loss costs, however, once the period during which loss cost savings were to be incorporated in rate filings ended premiums have increased dramatically.

Accordingly, the purpose of this Act is to establish statutory mechanisms that would ensure that workers' compensation insurance premiums adequately reflect insurer loss cost experience. While these mechanisms are implemented, this Act would require a twenty per cent roll back in workers' compensation rates.

The legislature finds that these mechanisms, based on Proposition 103, which was enacted in the state of California in 1988, will ensure that the rates will not be confiscatory and will not prohibit an insurer from making a reasonable rate of return on its investment.

SECTION 2. Chapter 431, Hawaii Revised Statutes, is amended by adding two new sections to article 14 to be appropriately designated and to read as follows:

"§431:14- Workers' compensation rate filing and rate making. (a) No rate for workers' compensation insurance shall be approved or remain in effect that is above the maximum permitted earned premium or is below the minimum permitted earned premium. Where the commissioner finds that a rate or a proposed rate is excessive or inadequate, the rate or proposed rate shall not be used nor remain in effect. If the rate or proposed rate is excessive, the commissioner shall indicate the highest rate that would not be excessive, which the insurer may adopt by amendment to its application, or the commissioner shall reject the rate in its entirety. If the rate or proposed rate is inadequate, the commissioner shall indicate the lowest rate that would not be inadequate, which the insurer may adopt by amendment to its application, or the commissioner shall reject the rate in its entirety.

(b) The commissioner from time to time, shall determine the maximum and minimum permitted after-tax rate of return for workers' compensation insurance ratemaking in accordance with rules adopted in accordance with chapter 91 and this chapter. The maximum and minimum profit factors shall represent the range of yields on investments in other enterprises presenting risks to investors comparable to property and casualty insurance, given due consideration to the competing interests of investors and consumers, and taking into account the fact that insurance is imbued with the public interest and that its purchase is sometimes legally required.

(c) The insurer shall have the burden of proving, by a preponderance of the evidence, every fact necessary to show that its rate is not excessive, inadequate, unfairly discriminatory, or otherwise in violation of this article.

(d) The commissioner shall review filings as soon as reasonably possible after they have been made to determine whether they meet the requirements of this article. Except as otherwise provided by this article, each filing shall be on file for a waiting period of ninety days before the filing becomes effective. The period may be extended by the commissioner for an additional period not to exceed fifteen days if the commissioner gives written notice within the waiting period to the insurer, rating organization, or advisory organization that made the filing that the commissioner needs the additional time for the consideration of the filing. Upon the written application by the insurer, rating organization, or advisory organization, the commissioner may authorize a filing, which the commissioner has reviewed to become effective before the expiration of the waiting period or any extension thereof. A filing shall be deemed to meet the requirements of this article unless disapproved by the commissioner within the waiting period or any extension thereof.

(e) In addition to the powers authorized under this article, the commissioner may institute proceedings for appropriate relief, including but not limited to proceedings to roll back current rates whenever it appears to the commissioner that an insurer or other interested persons regulated by this article affecting workers' compensation insurance rates has:

§431:14- Approval of rates for workers' compensation insurance. (a) Every insurer, which desires to change any rate, shall file a complete rate application with the commissioner. A complete rate application shall include all data required under this chapter and any other information as the commissioner may require. The applicant shall have the burden of proving that the requested rate change is justified and meets the requirements of this article.

(b) The commissioner shall notify the public of any application by an insurer for a rate change. The application shall be deemed approved sixty days after public notice unless either:

(c) A rate change application shall be deemed approved one hundred eighty days after the rate application is received by the commissioner unless either:

(d) Any person may initiate or intervene in any permitted or established pursuant to this chapter, challenge any action of the commissioner under this article, and enforce any provision of this article as they relate to workers' compensation insurance.

(e) The commissioner or a court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that:

Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant."

SECTION 3. Section 431:14-101.5, Hawaii Revised Statutes, is amended by adding eighteen new definitions to be appropriately inserted and to read as follows:

""Catastrophe adjustment" means the substitution of multi-year, long-term average of catastrophe claims for the catastrophic losses of any one accident year in the recorded period, based on a number of years as determined by the commissioner pursuant to rule.

"Federal income tax factor" means 1.0 minus the insurer's effective federal income tax rate reported in the most recent year for which historical data are available, given full account of all tax credits and offsets used or available to the insurer; provided that:

(2) Where the insurer had:

and

"Investment income factor" means the projected yield multiplied by the sum of the reserves ratio plus the surplus ratio.

"Leverage factor" means the ratio of net written premiums to surplus.

"Loss development" means the process by which reported losses are adjusted for anticipated payout patterns based on the average of the ratio of losses for the three most recent accident-years available for a reporting interval for as many reporting intervals as the commissioner may prescribe for a given line; provided that:

"Loss trend" means the process by which forces not reflected in historic loss data are expected to affect losses in the rating period.

"Maximum permitted earned premiums" means the sum of projected losses plus projected allocated loss adjustment expenses plus projected fixed expenses minus projected ancillary income divided by the sum of 1.0 minus the variable expense factor minus the maximum profit factor plus the investment income factor.

"Maximum profit factor" means the maximum after-tax rate of return, as determined by the commissioner, divided by the product of the leverage factor multiplied by the federal income tax factor.

"Minimum permitted earned premium" means the sum of projected losses plus projected allocated loss adjustment expenses plus projected fixed expenses minus projected ancillary income divided by the sum of 1.0 minus the variable expense factor minus the minimum profit factor plus the investment income factor.

"Minimum profit factor" means the minimum permitted after-tax rate of return, as determined by the commissioner, divided by the product of the leverage factor multiplied by the federal income tax factor.

"Projected allocated loss adjustment expenses" means the insurer's historic costs per exposure associated with the adjustment of specific claims; provided that where an insurer elected to disaggregate a line of insurance into commodity and specialty categories, the insurer may, in addition to the computation of projected allocated loss adjustment expenses specified in this section, tender an alternative computation of projected allocated loss adjustment expenses for the specialty category, which the commissioner shall approve if the commissioner finds the projection to have been made in a sound actuarial manner.

"Projected ancillary income" means projected net income to the insurer or an affiliate of the insurer not derived from insurance premiums subject to this section but derived from operations directly related to insurance subject to this article; provided that:

"Projected fixed expenses" means allowable historic fixed expenses per exposure, adjusted for expense trend, and shall consist of other acquisition, field supervision, and collection expenses incurred plus state and local taxes, licenses, and fees incurred minus premium taxes plus unallocated loss adjustment expenses; provided that commission and brokerage expenses shall not be included in fixed expenses.

"Projected losses" means the insurer's historic losses per exposure, adjusted by catastrophe adjustment, loss development, and loss trend, and shall be calculated by applying the loss trend factor separately to data from each accident-year in the recorded period.

"Projected yield" means the insurer's imbedded yield in the most recent year for which investment results have been reported, plus an average of the insurer's realized capital gains over the most recent five years; provided that imbedded yield shall be calculated as the insurer's net investment income, excluded capital gains, divided by the average of the insurer's start-of-year and year-end surplus and reserves for the most recent year for which investment results have been reported.

"Reserves ratio" means the average of the last two years' loss revenues plus loss adjustment expenses revenues plus unearned premium reserves divided by the earned premium for the most recent year for which data are available.

"Surplus ratio" means the reciprocal of the leverage factor.

"Variable expense factor" means the sum of the commission rate and the state premium tax rate."

SECTION 4. Section 431:14-120, Hawaii Revised Statutes, is repealed.

["§431:14-120 Additional powers for workers' compensation rate filing and ratemaking. (a) The commissioner shall review filings as soon as reasonably possible after they have been made to determine whether they meet the requirements of this article.

(b) Except as provided herein, each filing shall be on file for a waiting period of ninety days before the filing becomes effective. The period may be extended by the commissioner for an additional period not to exceed fifteen days if the commissioner gives written notice within the waiting period to the insurer, rating organization, or advisory organization that made the filing that the commissioner needs the additional time for the consideration of the filing. Upon the written application by the insurer, rating organization, or advisory organization, the commissioner may authorize a filing which the commissioner has reviewed to become effective before the expiration of the waiting period or any extension thereof. A filing shall be deemed to meet the requirements of this article unless disapproved by the commissioner within the waiting period or any extension thereof.

(c) The commissioner may institute proceedings for appropriate relief including but not limited to proceedings to roll back current rates whenever it appears to the commissioner that an insurer or other interested persons regulated by this article affecting workers' compensation insurance rates has:

(6) Failed to recognize good safety performance records of employers in setting premium rates and levels."]

SECTION 5. (a) For any coverage for a policy for workers' compensation insurance issued or renewed on or after February 1, 2007, every insurer shall reduce its premiums to levels which are at least twenty per cent less than the premiums for the same coverage which were in effect on January 31, 2007.

(b) Between February 1, 2007, and January 31, 2008, premiums reduced pursuant to subsection (a) may only be increased if the commissioner determines that the reduced premium would be inadequate. The insurer shall have the burden of proving, by a preponderance of the evidence, every fact necessary to show that the reduced premium is inadequate.

(c) For an insurer who applies for a workers' compensation insurance policy rate for the first time on or after February 1, 2007, the rate shall be twenty per cent less than the rate which was in effect on January 31, 2007, for similarly situated risks.

(d) Any separate affiliate of an insurer, established on or after February 1, 2007, shall be subject to the provisions of this section and shall reduce its charges to levels which are at least twenty per cent less than the insurer's charges in effect on that date.

SECTION 6. If any provision of this A11, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 7. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun, before its effective date.

SECTION 8. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 9. This Act shall take effect upon its approval, provided that sections 2, 3, and 4 shall take effect on July 1, 2008.