The workers’ compensation insurance market in California is in big trouble. In 1998, estimates are that for every dollar the industry took in, it spent $1.47. That amount increased to $1.53 in 1999, and 2000 could be even worse.
Where will we be at the end of 2001, and what does this mean to California’s employers?
Prior to 1995, California operated under a system of “open rating.” California was subject to a “minimum rate” law; the minimum rates that could be charged by an insurance company were specified by the Workers Compensation Rating Bureau.
Since 1995, California has been operating under an “open rating” system, and companies have been free to submit their own rates to the rating bureau for approval. This has resulted in significant price decreases. It is estimated that since January of 1993, when rates peaked under the old minimum rate law, average rates have declined nearly 50 percent.
Unfortunately, during that same time frame, the cost of claims increased significantly. Indemnity claims , claims on which time was lost , have increased an estimated 73 percent since 1994. Collectively, the combination of decreased pricing and increased costs have resulted in poor operating results for a number of California’s workers’ compensation insurance carriers.
– Association Pays Insurance Claims
In March 2000, Superior National Insurance Companies, the largest private writer of workers’ compensation in California, was seized by the Department of Insurance. Superior National was not able to pay all of its claims, so the California Insurance Guarantee Association will have to step forward and pay the claims for the insurance company.
The maximum that can be charged by law under the California Insurance Guarantee Association is 1 percent of estimated premiums, and the Superior National liquidation will maximize that insurance association’s charge.
This is compounded by the fact that other companies are on the verge of collapse. Fremont General Corp., another of California’s largest underwriters of workers’ compensation, and its related entities are under increased regulatory oversight by the California Department of Insurance.
Fremont has since closed the majority of its production and claim servicing offices, and currently is seeking a liaison with an A-rated carrier to salvage what it has left. If Fremont were to be liquidated, there is some question as to where the money would come from to pay the anticipated claims.
In addition to Superior National and Fremont, a number of other companies have either withdrawn from the California workers’ compensation marketplace, substantially reduced the number of accounts they are willing to write, or have dramatically increased pricing.
– Benefits Fall Behind Inflation
Another concern is that workers’ compensation benefits have not kept up with inflation. According to a recent study conducted by the Workers Compensation Rating Bureau, the permanent disability benefit after adjustment for inflation has declined to about 80 percent of its value in 1984. Consideration is being given to raising benefits in California, but this would only exacerbate the existing problem.
In addition to poor operating results, estimates are that the industry may be under-reserved by more than $5 billion. An insurance company is required by law to estimate what it thinks it will ultimately pay on a claim. Although most consumers think that insurance companies tend to over-reserve, the opposite is actually true.
If, in fact, the industry is under-reserved by $5 billion, the problem in California could be far worse than it presently appears to be. Recognize that the entire industry only equates to $10 billion in premiums annually.
Although each insurance company is free to file its own rates, the Workers Compensation Rating Bureau does post advisory loss costs that most insurance companies use in setting their own rates. Prices began to rise in January 2000. At that time, the rating bureau recommended that insurance companies increase their rates by approximately 18.2 percent.
On Jan. 1, California Insurance Commissioner Harry Low proposed an additional 10.1 percent average increase in pure premium rate. However, industry experts agree that these increases are not nearly enough, and most insurance companies are raising prices 20 to 50 percent, and sometimes even higher, on their 2001 renewals.
Unfortunately, even these increases will probably not be enough, and will come too late for many insurance companies.
– Impact On Employers
1.) Rates are increasing, and will probably continue to increase for the next several years. Businesses should budget for it.
2.) Businesses need a proactive insurance broker who can access the majority of workers’ compensation markets interested in risks like yours.
3.) Perhaps the only way for employers to effectively manage their workers’ compensation costs is to better manage and control their claims up front. Work with an insurance broker and insurance company to develop a proactive risk management program to identify exposures and arrange to control them.
What will happen to the state’s workers’ compensation industry at this point is anyone’s guess, but individual employers need to take responsibility as well as proactively manage their workers’ compensation exposures.
Cavignac is the president and principal of San Diego-based Cavignac & Associates.
