The Florida Workers' Compensation Statute has had a long and storied history since it first appeared in 1935. Every decade or so, we can count on some major changes to the structure, process, or benefit components of this far-reaching and complicated statute. In 1979, changes abounded. One in particular — Florida Statute 627.215 — continues to frustrate many.

The statute, passed during the 1979 legislative session and effective July 1, 1979, addresses excessive profits for workers' compensation, employer's liability, commercial property and commercial casualty insurance, and says, in part, that each insurer group writing workers' compensation and employer's liability “shall file with the office prior to July 1st of each year…the following data:

Calendar-year earned premiums
Accident-year incurred losses and loss adjustment expenses
Administrative and selling expenses incurred in this state or allocated to this state for the calendar year
Policyholder dividends applicable to the calendar year.”

The statute was amended in 1988 to add commercial property and casualty insurance. In 1995, the Legislature added a section that stated that the statute no longer applied to commercial property and casualty as of Jan. 1, 1997. Also in 1997, the Legislature made it clear that property and casualty included commercial umbrella liability.

A review of the May 1, 1979, staff report regarding this statute does not provide any legislative intent. However, the report states that, “… an excessive profits provision similar to that of auto insurance is another regulatory tool designed to curb windfall profits.”

This is a very interesting statement when you recognize that Florida is a National Council on Compensation Insurance (NCCI) “gross rate” state. That is, Florida is a state where the gross rates charged for workers' compensation are submitted by NCCI to the Florida Office of Insurance Regulation (OIR) and, when the process is completed, the rates that are approved are the rates that must be charged. Therefore, in theory and practice, the manual rates as authorized are not inadequate or excessive.

However, according to the Florida statute, a company is generally considered to have an excessive profit if the underwriting gain is greater than the anticipated profit, plus five percent. The calculation is clearly defined: A carrier takes the earned premiums, subtracts dividends, expenses and losses and develops its underwriting profit. It then subtracts five percent of the earned premiums for the three years involved (I will explain this more fully later). The carrier is deemed to have an excessive profit if this number is greater than zero.

We are fortunate to have more than 300 companies writing workers' compensation in Florida with market shares of 15 percent or less. If one of these organizations — with luck and great attention to the core disciplines of marketing, underwriting, loss control, claim handling, payroll audits, and fraud detection — has a great outcome, the “excessive profits” go back to the policyholders, who are not necessarily the individuals and owners providing the capital and surplus that is at risk. So, the Excessive Profits statute presents a potential loss of all of a carrier's equity to a gain of five percent of its gross premiums written.

Florida Underwriter's October 2009 issue included a great cover story titled “Workers' Compensation Today-New Rates, New Reckoning” by Rick Hodges, then president of Summit Holdings. In the article, Hodges mentioned this excess profits law for workers' compensation. He wrote about how carriers share profits with policyholders by paying dividends, and that these dividends are not included in the rate calculation formula. The fact that these dividend payments are not included as an expense in the approved rates is, in my opinion, likely wrong. Excess profits distributions are also excluded, and this is clearly wrong. These distributions are statutorily mandated benefits and must be considered in the rate calculation as long as the excess profits statute is a part of the system.

How It Works

The annual excess profits filing involves a five-year cycle. As an example, the filing that will be due prior to July 1, 2010, involves the results for workers' compensation written in Florida for the three calendar years 2006, 2007 and 2008, with the primary valuation being as of Dec. 31, 2009.

There are four major components within the filing: premiums earned on a direct basis, dividends incurred, expenses incurred, and the losses incurred for the three calendar years involved.

If your company is only writing workers' compensation in Florida, then the expense allocation process is reasonably straightforward. However, if your company is writing multiple products in multiple states, the allocation process of items to the state is more complicated. Companies, as a general rule, utilize manual premiums or earned premiums. But you should not limit your thought process to just a premium allocation approach. Your company should determine for each item involved whether alternative allocations might be appropriate.

If you have excessive profit, you are required to make a refund to policyholders of record as of December 31 of the final compilation year. In the example above (a July 1, 2010, filing), the final compilation year is 2008. The amount of the refund that each eligible policyholder is to receive is determined by his individual earned premiums during that calendar year. (It should be noted that this amount for a given policyholder can involve more than one policy.)

Each policyholder receives his pro-rata portion, determined by dividing his earned premium during the year by the total earned premium for this specific set of policyholders, multiplied by the total excessive profit to be distributed. It is very important that this process is followed exactly as outlined in the Statue 627.215 to avoid penalties.

As to the completion of the form, the filing is for each insurer group writing workers' compensation insurance in Florida. The statute gives the company the choice of filing for each individual insurer in its family or filing as a group. Your individual circumstances will dictate which approach to utilize.

Premiums are direct and in most cases should agree with the annual statement. If your premiums on the form do not agree with the annual statement, you must explain the difference.

Policyholder dividends are calculated as policyholder dividends paid during the year, plus the reserve for policyholder dividends declared and unpaid at the end of the year, minus reserve for policyholder dividends declared and unpaid at the beginning of the year. If you have any policyholder dividend reserves shown at the end of the year, you will need to include within your filing an explanation of how this amount was developed.

Your expenses include acquisition costs, other actual costs such as field supervision and collection expense, general and other expenses, and taxes, licenses and fees. For each of these expense items, you must provide an explanation of the methodology used in deriving the expense.

In determining losses and loss adjustment expense, companies in the past needed to include the insurer's share of the Florida residual market. Since the Florida Workers' Compensation Joint Underwriting Association replaced the Florida residual market, there are no premiums, expenses, or losses being allocated to the voluntary market.

The instructions are quite incomplete, and it is not the fault of anyone or their team that valid deductions are overlooked. This is not the standard process where you generally reach a unique conclusion. With this form there is a family of outcomes, and several of these outcomes are acceptable.

Do not make the mistake or the assumption that all of your entries that are included in your filing must agree with your annual statement. Utilize the six-month period between year-end and the report due date to gather data, perform an evaluation, and then (and only then) complete and file your form.

Editor's Note: In late January, the OIR agreed to begin proceedings to adopt a new rule to implement the workers' compensation excess profits law. The action followed a challenge related to the current rule from FFVA Mutual Insurance Co.

Ray Neff, MAAA, is president of Neff Consulting, which provides insurance and management consulting services to the insurance industry. He may be reached at 941-388-0611 or [email protected].