Workers' Compensation Advisory Council Aug.

4, 2004 Minutes
Voting members: Visitors: James Cavanaugh Stan Daniels Mike Hickey Glen Johnson David Olson Reed Pollack Julie Schnell Gary Thaden Ray Waldron Voting members excused: Paul Bailey Wayne Ellefson Voting members absent: Bradley Robinson Non-voting members: Senator Tom Bakk Representative Joe Mullery Non-voting members absent: Representative Dan Dorman Senator Geoff Michel Staff members: Scott Brener Debbie Caswell Jim Feckey Ralph Hapness Beth Hargarten Keith Keesling Phil Moosbrugger Terry Mueller Jana Williams Craig Anderson; MWCIA Liz Carpenter; MN Pharmacists' Assn Linda Carroll-Shern, J.D. Colleen Colburn; MN Chiropractic Assn Tom Hesse; MN Chamber of Commerce Brian Hicks; MAPS Bob Johnson; Ins. Fed. of MN Colleen Johnson; Local 49 IUOE Todd Johnson; WCRA Brad Kading; RAA Raymond Krause; OAH Mary Krintre; MN Hospital Assn David Kunz; MN Chiropractic Assn Matthew Lemke; Winthrope & Weinstine Louise Montague; MOTA/Ergo Results Andy Morrison; Koll, Morrison Tom Mottaz; MTLA Nancy Myers; Department of Commerce Robin Peterson; MNAPTA Mark Pixler; MAPS Curt Pronk; Mayo Foundation Dorothy Quick; Columbia Park Medical Group Steve Scharfenberg; State Fund Mutual Joanne Schwecke, Western National Erin Sexton; MN Medical Assn, MN Orthopedic Society Anne Symington; Metropolitan Hand Surgery Assn

The meeting was called to order at 9:40 a.m. by Beth Hargarten acting as chairperson. Roll was called. A quorum was present on both sides.

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Ray Waldron made a motion to approve the minutes from the Dec. 10, 2003 meeting, the Feb. 18, 2004 meeting, and the March 10, 2004 meeting. Gary Thaden seconded the motion. Hargarten called for discussion. Joe Mullery noted he was listed as being absent from the March 10, 2004 meeting. He asked that this be changed to excused and requested that legislators automatically be excused during session. Hargarten said she believed there might be a distinction in Chapter 15 of the statutes that govern the operations of boards and councils about excused versus unexcused absences for purposes of removing a member who has missed a certain number of meetings. That may have been why DLI made the distinction. She offered to change the minutes from March 10, and she will look into it to see if there are any rules on the operation of the council. All voted in favor of the motion to approve the three sets of minutes, with the corrections to the March 10 minutes. David Olson made a motion to approve the agenda as presented. Waldron seconded the motion. All voted in favor of the motion. IV. Commissioner's update Hargarten announced Commissioner Scott Brener was at an all-Cabinet retreat for the governor today, so he was unable to be at the Workers' Compensation Advisory Council (WCAC) meeting. He asked Hargarten to let the WCAC know both he and Hargarten met with the two statutory leaders of the WCAC, Waldron and Olson. They talked about what happened and did not happen during the past legislative session regarding the WCAC bill and where they would like to see the council go now. She said it is fair to say all three individuals value the council process very much, would like to see it stay in place and would like to continue to follow the WCAC process. However, Hargarten noted she thinks Waldron, Olson and Brener believe the two sides of the WCAC need to take a more active role at the Capitol in the discussion process, the lobbying process and in the committee process. She noted she hopes the next session is better for the WCAC and DLI than this past session was, and they intend to forge ahead. IV. B. Workload and staffing issues at OAH Hargarten noted Sen. Bakk sent a letter to the commissioner that asked about staffing issues at the Office of Administrative Hearings (OAH) and whether there have been any problems with timelines with getting cases, in particular workers' compensation cases, heard and resolved. Chief Judge Raymond Krause, from OAH, reported OAH is down six judges through retirements and layoffs after the last budget session. They now have 23 judges on the workers' compensation side. The caseload at the workers' compensation court is relatively steady from two years ago. It fluctuates on a month-by-month basis, but -- on an annualized basis -- it is about the same as it was prior to the loss of the six judges. He was very pleased to be able to report that the time from when the case is certified to the Hearing Division to the hearing date was, prior to losing six judges, five to six months,

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and it still is. They do not have nearly the cushion they had and it is a tougher push to get there. The judges are putting in a lot more time on hearing cases and writing decisions, and less time in doing the research and developing the opinions. Krause said that is not a good thing, from a judges' perspective, to spend less time on a case than you feel you need to, but it is imperative to keep workers who are injured moving through the system to get their cases heard equitably and expeditiously. Krause thinks they are still maintaining quality in the opinions they write and the decisions they make. Krause said he knows there are some issues with respect to the Duluth office. Prior to the budget cuts, they had two hearing judges and a settlement judge headquartered in Duluth. They currently have, until Sept. 1, 2004, a full-time hearing judge and a full-time settlement judge still in Duluth. As of Sept. 1, 2004, the settlement judge will be one of the layoff casualties. They have made up the difference in Duluth on the hearing side by having Minneapolis judges travel to Duluth to hear cases, as they do to other outstate locations. The number of hearing judges and the number of hearing days in Duluth has not changed from the time prior to the layoffs. They have not only maintained their case hearing rate in Duluth, but have actually absorbed the backlog that was there three years ago, so they are now current and their times to hearing in Duluth are not appreciably different than the rest of outstate Minnesota. The OAH judges continue to travel outstate in other areas as well, so they are maintaining their ability to get out and hear cases in outstate Minnesota. Krause noted OAH's future plans are to have two hearing judges in Duluth. He thinks it makes sense, from a budget standpoint, to have two headquartered there rather than traveling back and forth. Krause reported OAH has made some structural changes to help streamline the scheduling and, from a structural point of view, to keep their focus on hearing cases and not on the mechanics of moving the cases through the system, such as the paperwork. Therefore, they went back to a system of two separate divisions with a settlement division and a hearing division within the workers' compensation court. They now will have five judges who are on long-term assignments, focusing on settlement, which will help concentrate the thinking and the expertise around settlement, because the larger the number of cases that settle, the fewer that have to get heard and the faster the whole system works. To keep the case-flow moving, they are increasing their emphasis on video conferencing and facilities in Duluth and Minneapolis. When they have a judge who has several cases that have settled and, therefore, has some time, that judge can fill in, either in Duluth or Minneapolis, and get cases heard more expeditiously by using video conferencing. The new systems they are using have received good reviews and seem to work very well. They have very particular criteria for which cases are appropriate for a videoconference and they only use it for rather simple two-party cases where a court reporter and an interpreter are not necessary until they get used to the video conferencing of hearings. So far, using those criteria, it has worked extremely well.

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Cavanaugh asked what resources OAH has for law clerks and paralegals to do research for the judges. Krause responded that on the workers' compensation side they have three staff attorneys for the 23 judges. There are no law clerks. These attorneys tend to not do research for judges on a regular basis, because there are not enough of them to do that. They tend to be doing things such as one who is largely working on the rules project and reviewing cases that need special attention; another one is doing all of the prep work for the asbestosis cases. The judges do their own research. The attorneys are doing work that enables otherwise extremely time-consuming sets of cases to get prepped, so a judge can do them more quickly. Cavanaugh asked whether Krause has ever considered increasing the percentage of judges' time to write decisions and hear cases. Krause said they would love to, but cannot at the moment, given the caseload and having fewer judges than they used to. On the administrative law side, which is the other half of his shop, they have a higher ratio of staff attorneys to judges. Because they bill their services to the agencies that use them, they are able to bill at a lower rate, because they use those staff attorneys more effectively. He thinks if they had the ability to have more staff attorneys on the workers' compensation side, it would reduce the "per hour cost" of hearing a case. Daniels asked what kind of judges would be left in Duluth and whether they are going to have some problems there with no settlement judge. Krause said that, given the resources they have, they are trying to do the things they can by phone or video, because that is the most cost-effective way to do them. If they put another settlement judge in Duluth, that would be one less judge in Minneapolis, where the bulk of the cases are. Daniels commented he got a few calls about video conferencing for the settlements. His people do not like it and think they are being treated like second-class citizens in northern Minnesota. They think the cost cutting is affecting northern Minnesota more than anyplace else and he questioned if it is really cost-effective to send a judge to Duluth and pay travel expenses, housing and other. Krause said that is why their long-term plan is to be able to wean themselves off of that travel and get two judges in Duluth, full-time and permanent. He noted they are focusing on hearing judges there and clarified it would not include settlement judges. Daniels said, in his opinion as a union representative who has worked with a lot of people on video or conference calls, he does not think it is fair to an injured worker to have to talk to a telephone. It is not as effective and that it is not fair for the people in rural Minnesota to be treated like that. He suggested if it is a cost-effective tool, it should be used throughout the state. Krause responded that they do. Waldron asked about the timeframe for getting a second hearing judge to Duluth. Krause said he would like to have that done in the next six months. He has some other issues to take care of first. They are going through some structural changes sorting out who is in the settlement division and who is in the hearing division, and checking to see if there are judges in Minneapolis who want to relocate in Duluth. In the meantime, they will continue to have one judge travel there from Minneapolis every week. Waldron asked why they fired a judge in Duluth. Krause explained they had to lay off a judge by seniority. The settlement judge in Duluth happened to be the lowest in seniority, so when they had to lay off a judge, that is the one who had to leave. Krause is sensitive to the

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need for hearing judges in Duluth and that is why they have to move one to Duluth to replace the one that was laid off. Waldron asked if there is a timeframe to bring the other six judges back. Krause said they have had a series of meetings among the workers' compensation judges to look at what their budget needs are to keep the quality where it is and keep the time to hearing dates where it is, because they think five to six months is where they want to be. If it is less time than that, the cases are not ready to be heard, because things such as IMEs are not available. They want it to be no longer than six months from the time they get the hearing certification to the date of the hearing and to keep the quality high. To do that, their recommendation is going to be to get two of those six judges back over time. Krause said whether that recommendation would be accepted by the Department of Finance, the governor and the Legislature is yet to be seen. They think they can maintain the caseload with no more than two additional judges and some technology. If they had the ability to upgrade their technology, it would enhance the speed by which they do some of the things they do. Those two things would be in their budget request going forth in the next biennium. Waldron asked if the WCAC should play a role in that and recommend they should support that issue; he asked whether it should be all six judges or just the two Krause spoke of. Krause responded he would welcome any support they can offer. He said it is fair to also say that where the caseload was two-and-a-half years ago and the number of judges they had to have years ago, they had more judges than they needed to do that caseload. Six is more than they need to do the caseload they have now. He thinks two more judges would give them what they need to cover vacations and people who are out ill, etc. That would help them, but he does not think -- given the caseload they have -six judges would appreciatively reduce the time to hearing or increase the quality substantially. Daniels asked if five or six months for a case to be heard was an average. Krause said it is not. OAH set a target for themselves that no case, once certified to the Hearing Division and barring exceptional circumstances beyond their control, will go longer than six months before it gets its first hearing date. If attorneys are not ready, the case is not ready or the injured worker has surgery scheduled, that may push the hearing date out, but OAH will offer a hearing date within six months of the case being certified to the Hearing Division. They cannot control whether others are ready for a hearing, but they can control how long it takes OAH to get their calendar under control and set a hearing date. That is done at six months and it is not an average; it is an outside limit OAH set for themselves. Daniels asked for a ballpark figure of the timeframe for cases in Minnesota from the time of the first hearings until settlements. Krause responded that has been running 14 months on average, but it varies widely. Some cases settle in no time and others, because of intervening events and other injuries, will go on, not because the court is not hearing the case, but because of things that happen within the case itself. Bakk noted Krause said the period of time to get a hearing in Duluth is the same as other rural areas of the state. He asked if there is a difference in the metro area of the

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period of time where one could potentially get an expedited hearing and whether that opportunity does not exist in Duluth and the other rural areas. Krause said it is the same timeframe for an expedited hearing, because they are statutorily obligated to hear those cases in the statutory timeframe and they do. Actually, they are way under that deadline. For a non-expedited case, because they are traveling to various hub locations, they try to minimize the expense for the taxpayers. They do not send a judge out for one case; they try to group them. That adds one month, on average, and up to two months, at the most, to rural Minnesota versus Minneapolis, because they have to group them. Five judges are out on the road every week, but they are not in every location every week. They try to group the cases so they are not sending 15 judges out on the road every week. That adds -- at the most -- two months to the five to six months for the initial hearing, or 12 to 14 months for the entire process. Generally, it does not, but that is the worst case scenario. Pollack complimented Krause for both maintaining the quality and reducing the backlog. Krause noted there has been a push and the judges have really "stepped up"; he is very proud of them. It has not been without some difficulty, but they have done it. IV. Commerce review of the MWCIA ratemaking report and the Commerce report about workers' compensation rates Nancy Myers, an actuary from the Department of Commerce, stated Minnesota Statutes require the Rate Oversight Commission (ROC) to review the ratemaking report published by the Minnesota Workers' Compensation Insurers' Association (MWCIA). The ROC may report to the commissioner of the Department of Commerce about the completeness and compliance of that report. The statute also requires the commissioner of the Department of Commerce to report to the ROC about the changes in the loss costs filed by the MWCIA and their relationship to the rates that the insurance companies file. Myers pointed out the handout in the member's packets about the Report on Workers' Compensation Rates from Rick Amundson at the Department of Commerce. Last year, the change in the loss costs was a slight negative, basically flat, at about -0.3 percent. This year, the change is also a slight negative of a little more than -0.1 percent. The rates filed by insurance companies have increased 5 percent from last year. The loss cost changes and the rate changes differ for a variety of reasons. First, the loss costs, by statute, cannot include future trends or changes in development patterns for older years. Consequently, the loss costs cannot fully reflect such recent phenomena as higher trends in medical costs. However, the rates can -- and do -- reflect such changes in the economy. The loss costs also cannot reflect changes in company expenses and in investment earnings. Again, the rates can -- and do -- make these adjustments. Also, an individual company has more recent data and will reflect that information in its rate change. Myers stated the Department of Commerce, basically, has no issues with the MWCIA ratemaking report or how the rates compared to the changes in the pure premiums. The ratemaking report published by the MWCIA has two functions. It looks at industry data and analyses that experience, and comments about how the costs of losses

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have changed in Minnesota in the past year. It also establishes relationships between the employer classification codes. Myers noted the material the MWCIA publishes is reviewed before it goes out. The MWCIA has an actuarial consulting firm that analyzes the data and compares the recommendation. They also have an actuarial committee composed of actuaries from various insurance companies that look at the data and comment about the proposals. As an actuary at the Department of Commerce, Myers is on that committee and that is where any questions or issues about ratemaking get discussed. By the time the report is published, a lot of eyes have looked at it and it has been analyzed and questioned to the extent that is appropriate. Myers commented about what is going on in Minnesota workers' compensation. Hickey referred to one of the graphs and noted premiums have just about gone up to pre-1995 levels. Myers confirmed this was true. She noted the medical costs are about half of what the workers' compensation dollar goes for. There have been no law changes and the number of claims has actually continued to drop. Medical costs and the change in wages are still what drives the numbers up. Myers noted the Department of Commerce has been watching the growth in the Assigned Risk Plan (ARP). The ARP is now the largest insurer in Minnesota. In 1993, the ARP wrote about $93 million. The largest writer in the voluntary market was State Fund, with about $82 million. The ARP has continued to grow and now has more than $100 million as premiums. The ARP, as a percentage of the voluntary market, is about 11 percent right now, but it is still less than the historic high of 17 percent in 1994. As the profitability of insurance companies improves, Myers hopes they take business out of the plan. Myers stated things are fairly quiet on the rate side right now and are expected to stay that way. A council member asked if the Department of Commerce sets the profits for insurance companies. Myers clarified that the agency does not set profits. The insurance companies determine the profit they need or believe they can achieve, and that is a decision made by an individual company. Minnesota is a very competitive market and Myers thinks the competition works in workers' compensation like it does in other businesses. There is no indication of excessive profits in Minnesota. If fact, if anything, companies are probably losing money right now with what they are writing. In response to a question by Hargarten, Myers confirmed the medical costs are certainly going up in Minnesota, but said we do not have the insurance crisis here that is occurring in some states. Insurance companies are still continuing to write work comp business and rate increases have averaged 5 percent during the past year. Minnesota seems to do better with its medical costs. That is not to say we cannot improve, but it is not an insurance crisis. Hargarten asked if Myers was talking across the board, not just in

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workers' compensation; Myers said this was true in workers’ compensation and in medical malpractice. IV. D. Proposal to move regulation of the WCRA to the Department of Commerce Hargarten introduced Brad Kading, from the Reinsurance Association of America, to make a PowerPoint presentation regarding reinsurance. Copies of the slides were in the members' packets. She noted Carl Cummins, from WCRA, was available if anyone had any questions for him following Kading's presentation. The Reinsurance Association of America is a group of 18 reinsurance companies. It sells reinsurance in the rest of the country and around the world. Kading made comments about the legislation introduced by Rep. Greg Davids in 2004, with regard to WCRA oversight. Davids asked that the WCAC review and advise him about whether he should take action on that legislation in the future. Kading reviewed the slides. The premise of Rep. David's legislation was that there should be regulatory principles applied to the WCRA that are consistent with the regulations applied to other insurance companies and reinsurance companies operating in Minnesota. The WCRA is not subject to regulation by the Department of Commerce and it is not subject to solvency regulation and the oversight that is applied to other insurance companies in the state. Because that insurance regulation is there for the principle purpose of protecting consumers, Kading raised the question about why the same regulatory principles are not applied to WCRA, which ultimately is the final payer of many workers' compensation claims. The regulatory issue with regard to WCRA is whether the regulatory authority should be with the Department of Labor and Industry (DLI) or the Department of Commerce. The statute currently provides the regulatory structure and regulatory oversight is with DLI; the Department of Commerce is to provide some supporting advice and consent, as Kading understands it. Kading read a quote from David Gruenes, commissioner of the Department of Commerce, from a legislative hearing in November 1997. Gruenes said, "If the WCRA operated in a competitive market and had to use the same prudent management as other reinsurers, the WCRA would have to nearly double its reserves and more than double its surplus. That adds up to a minimum of $1 billion of additional assets that would stand behind the claims of policyholders ... its absence represents the loss of protection to Minnesota employers." Kading suggested those same issues are relevant in the current market and are relevant in the current oversight of WCRA. Kading referred to his graph "WCRA reserves and surplus, seven-year history” and gave an explanation. He noted there is something called a safety margin, or surplus, that is used by insurance companies and those are the insurance regulatory principles that are applied by the Department of Commerce to every other licensed insurance company and reinsurance company in the state. Because of the volatility with regard to loss reserves and development, it is understood that to truly protect consumers you must have a safety margin or a surplus account. The WCRA operates with only a small surplus

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account. The chart shows that in 2002 and 2003, the surplus fund disappeared because of the adverse investment experience and because of changes in the loss development patterns. For the first two years in the history of WCRA, there is a negative surplus account. If this were an insurance company, the insurance regulator would have acted to close the company. Kading believed this is the time to look at WCRA regulatory oversight issues. It does not mean there will not be sufficient funds to pay the claims; it just means that because experience has deteriorated and deficits have now been incurred, this is the appropriate time to assess the situation and decide if changes are needed in current operations that will then provide for long-term financial security. This is the essence of the insurance regulatory oversight legislation. Kading referred to the graph "Net leverage (with national indemnity)" and said the red line tracks surplus that is the safety margin. The WCRA had a large safety margin at one point. The statute compels the distribution of a surplus from time to time. The WCRA management makes the decision about how much it wants in the safety margin. The part that is changed in the graph reflects the decisions made by the board to disgorge what was deemed as excess funds. What happened in 2002 and 2003 is that those estimates about the excess funds were in error, because of the changes in loss development patterns and because of the climate in the investment market. That resulted in WCRA going to a negative surplus position. Hickey asked what a private reinsurer would do if this situation happened to them. Kading responded the private licensed reinsurer would be forced into regulatory supervision, either liquidated or put into runoff; it would then be closed down. A private reinsurer would not have been able to go below the required minimum surplus, as set in law. A WCAC member asked if a private reinsurer saw a surplus through its investment strategies, whether that surplus is returned to the participants of the mutual company or if that is profit for the reinsurer. Kading said if the reinsurer was formed as a mutual company, there are some small reinsurers that are mutuals, and those excess funds could be distributed to policyholders. On the stock insurance side, which is where most reinsurers are, those excess funds are distributed to shareholders, but only after the regulator has approved its distribution. Federal regulatory law is very restrictive with regard to any distribution of surplus funds to a shareholder in an insurance company. Thaden noted Kading said the drop in the surplus was partly responsible, due to decisions made by the WCRA board and asked what the other reasons were. Kading replied the chief issues were the loss reserve development and different trends in loss reserve development as are covered in the WCRA reports, similar to what Nancy Myers commented about medical costs inflation and future reserving needs. In the example prior to the large surplus distributions in 2000 and 2001, the amount of funds that were distributed in excess funds were still meant to leave WCRA with a surplus of zero. The change in investment climate and adverse loss development caused, in hindsight, what was viewed as an excessive refund of surplus funds. Thaden asked for the reasons for the drop in the surplus outside of the WCRA board and their decisions. Kading said when the

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board made decisions about what discounting rate should be used for its losses, it was looking at a projection of macroeconomic issues. Those macroeconomic projections dramatically changed after Sept. 11, 2001, and we have all witnessed changes in stock and bond market issues since 2001. The 1990s were a period of unique investment gains in the stock and bond market. As insurance companies forecast investment gains in the future, they are not forecasting investment gains comparable to what we had in the 1990s. That gets back to the General Re, a large U.S. reinsurance company owned by Berkshire Hathaway. They are forecasting a very flat state of investment returns for most of the rest of the decade. Thaden asked if the WCRA board made these decisions to decrease the surplus, whether the answer is to change the board. Kading said that could be, but Minnesota has a statute that dictates parameters within which WCRA operates and he thinks the statute requires the disbursement of excess funds based on certain findings, so it could be a little of a management decision or a change in the direction of the board or you may need a statutory change to get that change in required surplus distribution. Pollack noted all of the assumptions Kading put together indicate they review it to determine a rate. He knows what he paid for reinsurance for the past five years. Looking at this year's rate and all of the information provided, he asked Kading what percentage increase he would have seen this year to meet the expectations. Kading said in the insurance market it would be an individual decision and it would vary. Reinsurance rates in the private market have gone up dramatically in the past few years. The way the insurance company deals with that is it changes its decisions with regard to how much reinsurance to purchase. The insurance company is always looking at how much it needs, how much it will cost and what the cost benefit trade-off is. It will be making adjustments within its risk management decisions based on what it is getting in return for the premium paid. Pollack stated he wanted to know what the cost would be to purchase reinsurance. Kading referred Pollack back to the 1999 Tillinghast study done by the Department of Commerce with regard to private market reinsurance pricing compared to WCRA reinsurance pricing. In that study, some people in the current market would pay more in the private reinsurance system and some would pay less. On the whole, the Tillinghast study found it to be roughly comparable, but there are a lot of variables in there as to who you are and what amounts of reinsurance you might like to buy. Kading noted in the private market you have a choice not to buy reinsurance. Kading continued his presentation with the key regulator tools. Kading said he viewed Rep. David’s legislation as one framework for possible outcomes and said it would be easy for the WCAC to seek input from the Department of Commerce regulators to figure out what the regulatory tools are that would be most appropriate for WCRA. Kading said what is ultimately needed is additional transparency and you get to additional transparency by the financial reporting that is required for insurance companies in a regulated market. That transparency then allows you to do benchmarking and an apples-to-apples comparison of the workers' compensation reserving practices in WCRA versus workers' compensation reserves in other reinsurance companies. Insurance regulation is ultimately all about solvency regulation. That is why we have all of these other requirements for disclosure, for capital adequacy, for

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measurement of loss ratios, for loss reserve development patterns, for corporate governance regulations and for a variety of other things. That basic solvency regulation is not being applied to the current framework for WCRA. That current framework is here for every other insurance company to protect its consumers. Why shouldn't those regulatory principles that are applied to other insurance companies also be applied to WCRA? Mullery tried to recall the hearing. He thought Davids’ bill was to abolish WCRA. He asked Kading if he was at that hearing and presented this side. Kading said he did, along with Todd Hess. He noted they were the two proponents of Davids’ bill. The basic bill was not to abolish WCRA. It was to change the regulatory structure to say the Department of Commerce would be the regulator of WCRA and the solvency regulation rules that apply to insurance companies in Minnesota would also apply to WCRA. Mullery asked if WCRA was not sufficient, who would pay the injured employee’s claim? Kading said the ultimate liability for the workers' compensation claim rests with the employer or the insurer. If the insurer or the self-insured employer is solvent, WCRA reimburses insurers and self-insured employers for losses. Mullery asked if that means the employee is always covered, no matter what. Kading said if everything goes wrong and somebody goes bankrupt, the employee is ultimately covered by the guaranty fund. Hargarten noted there is a fund called the Self-Insured Security Fund (SISF), which is a safety net for self-insured employers. Should something happen to the selfinsured employers and they can no longer pay -- they go bankrupt and go out of business -- then SISF steps in to pay the injured workers' benefits. Mullery asked what happens if it is not a self-insured employer. Hargarten responded if it is not a self-insured employer and it is an insured entity, and their insurer goes bankrupt, there is the Minnesota Insurance Guaranty Association (MIGA). However, they do have restrictions about who they will cover. If an employer has more than $25 million in assets, then the MIGA will not pay those benefits. Hargarten noted this is a whole separate issue that DLI has been discussing the past couple of months; she hopes to bring this issue to the council, because it creates a hole in the law about who should pay, who is responsible and where the burden then falls. Mullery asked if there is no limit on the original workers' compensation insurance company in terms of how much reinsurance it gets from WCRA. Hargarten responded that when they purchase insurance, they have certain retention levels. She suggested Carl Cummins could talk about that. They purchase certain levels from their insurance company and then, if a claim goes over and above the level they are insured for, that is usually when WCRA pays those claims. Mullery asked what would happen if WCRA disappeared suddenly. Hickey asked what would happen to the rates for fully insured employers and self-insured employers if we applied the standards of Davids' bill or what Kading considered to be accepted standards in all other states to WCRA. Kading said it would increase those rates. If you did an automatic allocation of all these standards, it would put the WCRA in the position of having to generate a lot of capital, fast. Its only source of

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doing that is in investment gains or to increase its rates, so it is not practical to do an overnight application of regulation to WCRA. Kading thinks what is more practical is to figure out which of these things are relevant and apply those or do a phase-in on required capital funds, so that over time, you make up for the inadequate capital base. And, again, he noted, you have a specific statute for surplus distribution. He thinks this presentation shows that the statute regarding surplus distribution is wrong. It is undercutting the soundness of the system. The volatility and the loss reserving in this line of business justified a capital cushion, but the statute causes a distribution of all of those excess funds. He thinks that is a problem and Rep. Davids would say his bill was a placeholder to start this conversation. Hickey asked Kading to assume we went to total conformity with what other states do on Sept. 1 and applied that to WCRA; he asked Kading to guess what the magnitude of the increase would be. Kading said he could not guess. Hickey assumed it was huge. Kading said the testimony would show there is about $1 billion that would have to be there that is not there and asked how you to raise $1 billion on a $30 million dollar premium base. It is not practical to do that. The other irony about the $1 billion is that if the excess funds had not been distributed, the $1 billion would be there today. He does not think anybody who would design the system would say WCRA needs a $1 billion in surplus. He does not think that should be the result of these analyses. The analysis is going to be that there needs to be a designated amount of surplus and that designated amount of surplus needs to logically be tracking the loss reserve growth. Cavanaugh asked Kading to explain the discrepancy between the $1 billion he just referenced and, going back to the graph and the amount in 2003, a negative surplus that was $35 million. Kading said the $1 billion would be David Gruenes' number in 1997, and that is Todd Hess's number from this year. That is the regulatory requirements that would be applied to insurance companies to have an ample cushion when it is appropriate for $4.7 billion in ultimate losses that are being reserved. Cavanaugh noted that would only be if they were subject to the same requirements that they would have to have a $1 billion. Following the graph, it would not be anywhere close to that, according to what they calculate they need in a surplus. Kading said they are using a measure of surplus completely outside of this schedule. Cavanaugh noted that is his point. Kading continued: they have their own standards they are applying to what they think their surplus cushion has to be and that surplus cushion is affected by the statute, by the federal law granting a tax exempt status and by other things you have to look at in regard to what an acceptable surplus amount would be. Clearly, no one intended for there to be three years of negative surplus. Hargarten asked Carl (Buzz) Cummins to address some of the questions that were asked. She noted the meeting was scheduled to adjourn soon and offered to continue the discussion at another meeting if that was preferred. Hargarten noted Mullery had questions about the retentions and what happens when an employer purchases insurance and they have a certain retention limit, what would happen if WCRA was not there. Cavanaugh asked Cummins for an explanation of the difference between 2000 and 2003, and how, in the year 2000, they had a $262 million surplus according to what WCRA views as a surplus and how they got to a negative $35 million in 2003. He also asked how they arrived at that surplus, particularly as it relates to what Kading was saying about all

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of the regulations they are subject to and that there would be a $1 billion shortfall. Cummins responded that they made a surplus distribution to companies and that the stock market, almost immediately thereafter, went down for three years in a row. That is how they went from a significant positive to a relatively small negative. In 2003, they recovered most of that negative and feel WCRA is safe financially now. Cummins said the RAA is trying to cast some doubt and disparity on WCRA’s integrity and he asked to give a response in some detail to what has been said by the RAA. He offered to come to the next meeting. Waldron invited Cummins to come back to the October WCAC meeting. He is on the board of WCRA and was offended by Kading's presentation. Cummins made a few points at the meeting; it was agreed Cummins would come to the October meeting to make a presentation. Cummins referred to the effect of a terrorism attack in Minnesota. He noted the Department of the Treasury, which operates the federal terrorism insurance program, concluded last month that WCRA will be treated under that program as an insurer. It is the only reinsurance program in the country that is included under this terrorism risk insurance. That means if there is a terrorist act in Minnesota, its members will pay a relatively small amount for the workers' compensation loss. That loss will funnel into WCRA and they will be able to immediately access the federal risk insurance program. No other state has that opportunity. Because WCRA has a relatively small premium base compared to the few insurance companies like State Fund Mutual, St. Paul Travelers and others, they will be able to access benefits for that program at a very low level. The second major benefit is the federal terrorism program does not cover self-insurers, but because WCRA is considered to be an insurer under the program, if terrorists commit an act where their self-insured members sustain a loss, they would have protection through WCRA. Under the federal program, WCRA has a level of protection that no other state has. Cummins was in Washington, D.C., two weeks ago to meet with the Jeffrey Bragg, the executive director of the Federal Terrorism Risk Insurance Program. He commended Minnesota for creating the WCRA, which is continuing to provide excess reinsurance protection for workers' compensation that is pretty much unavailable in the private sector. Regarding the premium issue, Cummins stated the RAA is not coming in and suggesting WCRA's regulation be changed simply because they have a concern about the Minnesota workers' compensation market. Their long-term objective is to be able to -- at least -- write reinsurance in Minnesota, which they generally cannot do now, or to put WCRA out of business entirely so they can enter this market the way they write their reinsurance in any other state. He noted the question had been asked about how much the rates would have to go up. Cummins said their rates would have to go up 40 to 50 percent a year just to cover each annual year's increased costs, plus they would have to add huge rate surcharges to start to build up that additional reserve they would be required to have. Right now WCRA's reserves are about $1 billion. Their actuaries tell them that is exactly what they need to cover their losses for a long time. If they suddenly have to reserve and account exactly the way insurance companies do, WCRA would have to raise those reserves up to about $1.7 billion, so they would have to raise $600 to $700 million from

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their member companies. Therefore, there would be a 40 to 50 percent increase, plus huge surcharges. Hickey noted reinsurance is complicated and Cummins is talking about raising WCRA's insurance rate 40 to 50 percent. He asked what that would mean to a traditionally insured employer and to a self-insured employer. Cummins responded that their rates now are, basically, between 1.5 and 7.5 or 8 percent of total premium. Therefore, for a small, self-insured entity or any other company that chooses WCRA's lowest retention limit, their rate would go from 7 to 8 percent a year to about 12 to 16 percent a year. Hargarten asked if we are seeing regular insurance premiums go up for workers' compensation, in general, and if WCRA is basing their rates on the premium, whether their rates would then be higher. Cummins clarified they do not base their rates strictly off of the premiums. It is close, but if premiums go up, their premiums will also go up. But, that is not exactly true, because from 1993 to 2003, WCRA's rates were virtually flat. Last year, they had an overall 20 to 25 percent rate increase because of rapidly increasing medical costs, private insurance premium costs and terrorism insurance costs. Their rates have been pretty stable for the past 10 years, until last year. Thaden asked Cummins about his statement about rapidly increasing medical costs. Going back to the previous item on the agenda from the Department of Commerce, where, from an actuary's point of view we do not have a crisis in medical costs. He represents employers and they have double-digit health care cost increases, higher deductibles and more out-of-pocket costs, and the National Institute of Medicine has tens of thousands of people who die needlessly in hospitals. To him, that sounds like a crisis and he is surprised the Department of Commerce could say that and nobody here said anything. He thinks we have a crisis in medical care in this country and he thinks it is very strange for our state government to say we do not. Cummins said, from their perspective, dealing with catastrophic injuries, they are continuing to see medical costs go up very dramatically. The increased use of medication and more sophisticated medical technology and techniques are cost drivers. Their claims frequency is going down, but the claims severity is going up, so medical costs are a big concern for them. Hargarten announced she would put Cummins on the Wed., Oct. 13 agenda for a presentation and further discussion. IV. E. Future agenda items Thaden asked that Gillette injuries and modification rates be on the October agenda. IV. F. Paper reports Hargarten pointed out the letter from an injured employee, Annette Poganski, about some concerns she had about the law. This could be addressed when the WCAC discusses legislative changes. She also pointed out a "Request for comments." She announced DLI would pursue a couple of the issues that were in last year's legislation,

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via rulemaking. Primarily, pharmacy reimbursement rates and the ability to negotiate rates in certified managed care. They will also be dealing with a variety of other miscellaneous managed care issues that have popped up throughout the years. Those are the two major issues from last year's legislation that DLI has decided to pursue via rulemaking and is in the "comments" phase now. Hargarten invited members to submit any comments. Cavanaugh made a motion to adjourn at 11:25 a.m. Thaden seconded the motion. All voted in favor of the motion. Respectfully submitted, Debbie Caswell Executive Secretary dc/s