Nevada workers' comp market opens up

As the workers' compensation insurance market opens to competition today, 164 companies plan to actively market insurance products in Nevada.

But when going after the largest and most profitable accounts, they'll find that Employers Insurance Co. of Nevada has already taken a sizable head start.

For the past seven months, EICON -- the former state agency that held a monopoly on the workers' injury compensation market until today -- has been locking some of its largest customers into agreements that can't be broken until July 2001. Over that period, it has been the only company able to sell policies in the state of Nevada.

That has some new competitors crying foul.

"Originally, we anticipated capturing significant market share in Nevada shortly after the state opens to private carriers on July 1, 1999," Anthony Marlon, chairman and chief executive officer of Sierra Health Services Inc., said in March. But state policy "makes it unattractive for many employers to switch carriers in the middle of the policy period."

"Also, the state fund, which will soon begin competing against private carriers, locked in two-year agreements with many employers as an early defense tactic."

Las Vegas-based Sierra said those tactics were hurting its bottom line. It said its earnings per share could be as much as 15 cents lower than expected in 1999 in large part because of roadblocks in the workers' comp market.

"They have strategically locked people in," said Frances Sponer, president and chief executive of AscentrA Insurance Agency in Las Vegas. "It's been difficult, because for 84 years, they've had a monopoly here. They took advantage of their head start."

Sponer estimates about 300 of EICON's 47,000 customers have been locked into two-year agreements. Though that's a relatively tiny chunk of EICON's total customer base, the companies locked in represent some of the state's largest and most profitable consumers of workers' compensation insurance.

EICON Chief Executive Doug Dirks could not be reached for comment.

Of Nevada's 52,881 employers, 1,000 employ 100 employees or more. By contrast, 31,300 employ four or less.

The agreements used to lock in those large companies are called "retrospective rating" policies, or "retros." Under such policies, a company pays a regular premium based on its size. At the end of the retro's life, the premium is adjusted based on the number of claims. If claims are below the expected amount, the premium holder receives a refund. Smaller companies can also get retros by being grouped into an industry, with refunds based on claims from all policyholders in the group.

Companies are able to break these agreements early, but the cost is high; if a retro is broken before its expiration, the company will not be eligible for the refund. Retros aren't exclusive to EICON, as most competitors are planning to offer similar incentive programs.

Still, competitors acknowledge EICON's retro agreements are a temporary head start, rather than a permanent handicap. "The state fund's advantage will dissipate over the next 18 months," Marlon said in March.

Another reason EICON has been pressing the agreements before today is that the company will no longer be eligible to offer such programs to its clientele, said Kathy Marlon, president of Sierra Insurance Group. Retro programs must now be approved by the Insurance Commission before being offered, and Marlon claims that Sierra has the only such program already approved for the competitive market.

The state's largest employers probably won't be available for either EICON or its competitors. Nevada companies are permitted to operate self-insurance programs, and more than half of the state's employees are covered by such plans.

But Sierra is convinced it can crack the self-insured market, because it can take a lot of the risk out of the process.

Many companies now self-insure by joining an association of other companies in their industry. But if one of the companies in the association becomes unable to fund its liabilities, Marlon said, all other members become liable for those payments. If an entire association fails, all other workers' comp associations become liable for its debts.

That hasn't happened in Nevada, Marlon said, but it is a definite risk. Sierra's pitch is this -- by joining an administered workers' comp plan, employers don't have to worry about potentially absorbing the liabilities of other members.

"This is a risk that employers no longer have to take," she said.

While EICON has been locking in its largest customers, it is dumping small businesses -- a class that it does not consider profitable. EICON has already announced it will terminate 18,000 policies. Such policies are those with premiums of less than $750 annually, those designated as "excess loss accounts," or companies with "poor loss experience." EICON has said it could lose more than $10 million a year if it kept those accounts.

These companies are still required to maintain workers' comp insurance by state law. Should a company be rejected by multiple carriers, it will be able to get insurance through the Hartford Group or Travelers, both designated as "residual" carriers. These carriers cannot turn anyone down, but as carriers of last resort, they will charge a 25 percent premium over other carriers' rates.

"There is an opportunity in the small business marketplace, because (EICON) made a business decision not to renew," said Mark McKinley, a Las Vegas insurance broker and president of the Nevada Independent Insurance Agents.

Those going after that market insist money can be made from small business accounts. McKinley says companies will be able to save on expenses on such accounts by automating the sign-up process.

"It's volumes and efficiencies that particular carrier can offer," McKinley said. "If it specializes in small business accounts, which many do, and they have an automation system that can process these policies at low cost, they can make money on them."

That's the strategy of AscentrA, which is selling workers' compensation products underwritten by Pennsylvania-based Meadowbrook Insurance Group. AscentrA is using an Internet-based system to process new policies.

The company is aiming for clients that pay between $3,000 and $30,000 per year in premiums. But Sponer said AscentrA doesn't plan to turn small businesses down, even those companies with much smaller premium bills that don't offer much of a profit opportunity.

"We're not going to say we won't take certain classes, because we believe it will come back to us," Sponer said. "We believe many will grow into larger companies. They become big, they become successful, and they remember who helped them."

Sierra's Marlon said premiums can also be cut by offering lower cost managed care programs to employees on workers' compensation, as well as loss prevention and safety programs. The result is lower payments by the insurer, which leads to lower rates.

But competition will mean bigger bills for small businesses, regardless of the underwriter. The minimum rate for annual workers' comp premiums per employer rose from $120 to $210 on July 1, a rate mandated by the National Council on Compensation Insurance. More than 8,500 employers were affected by that hike.

Shopping around won't change that rate, since workers' comp premiums are locked until July 2000. Companies will then be free to deviate by 15 percent from NCCI's set premiums. In July 2001, companies will be free to set their own prices.

Since pricing won't be a strategic advantage at first, new competitors will have to rely on other advantages, such as bundling workers' comp with other policies, or offering superior customer service.

"You have to realize that when you go to a competitive free market environment, service is everything," McKinley said. "Under a monopolistic system, there is little incentive to provide those services.

"The competitive environment really started to have its effects long before July 1, 1999. The state fund has worked real hard to try to become competitive."

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