Legislature Mulls Options As Dramatic Price Hikes Hit Home for Businesses
Workers’ compensation is the latest market in California to be thrown into turmoil by deregulation, as several insurance companies have gone insolvent following years of overzealous bidding wars.
The insurance underwriters that survived now must raise prices in order to recoup five years of losses, putting an end to the low prices enjoyed by businesses in San Diego and across the state following the industry’s gradual deregulation that began in 1993.
“Deregulation basically ended up in companies charging wholly inadequate rates,” said Norris Clark, the state’s deputy insurance commissioner for financial surveillance.
For now, prices are still expected to be lower than in the days of government controls.
In the midst of workers’ compensation reform in the mid-1990s, lawmakers removed the state-imposed minimum rate that insurance companies could charge businesses for workers’ compensation coverage.
The move, which took effect Jan. 1, 1995, resulted in a rapid rate decrease; premiums across the state dropped 40 percent.
“It was a fight to the bottom,” said 76th District Assemblywoman Christine Kehoe, the freshman Democrat from San Diego and a member of the Assembly’s Insurance Committee dealing with the industry’s woes.
The issue has grabbed lawmakers’ attention in Sacramento: one measure attempting to cure some of the system’s problems was approved by the Assembly Insurance Committee on April 25, and a Senate committee is set to hear a different measure May 9.
While businesses bathed in the low prices in the early days of deregulation, the rabid competition sent many insurance companies , which were selling their product below cost , into debt.
Out Of Business
Since the minimum rate was removed, seven of the top 20 workers’ compensation providers have either been liquidated, are under the supervision of the state or are no longer doing new business. They include Fremont Compensation Insurance Co. and California Compensation Insurance Co., which respectively were the fifth- and sixth-largest workers’ compensation writers in the state in 1994.
These failures, coupled with a number of mergers, have left little competition in the industry.
“The current state (of workers’ compensation) is unprofitable, in turmoil, with several defunct or financially troubled companies, very little capital interested in coming in and diminishing competition,” Clark said.
However, the future of workers’ compensation is not in jeopardy, and workers’ claims will be paid, he added.
“I think there will always be coverage available,” Clark said. “What the employers and businesses need to be concerned about is that the days of low, low rates are gone.”
In 1993, employers around the state paid insurance companies more than $9 billion in premiums, according to the Department of Insurance.
That dropped to a decade-low of less than $5 billion by 1996. Now, with an ever-growing work force and state-recommended price hikes of 18 and 10 percent in the past two years, premiums are still only expected to rise to about $7.7 billion, Clark said.
Lack Of Competition
While businesses might be paying lower premiums than in 1994, that hasn’t stopped Clark’s office from receiving a slew of complaints.
“The employer doesn’t look at what he paid in 1994, he looks at what he paid last year,” he said.
Betty Jo Toccoli, president of the California Small Business Association, said deregulation has worked well for most small businesses.
But some businesses , like moving companies , are now paying higher rates than before deregulation, she said, because insurance rates differ from industry to industry.
Also, she said there is growing concern over the folding and merging of insurance companies.
“It doesn’t look good, because if you don’t have competition, then you don’t have different writers to carry you,” she said. “And then you don’t have as good a chance of getting low rates.”
Clark said initial warning signs of the insurance companies’ insolvencies were masked in the first few years after deregulation.
At first, the insurance providers had reserve capital that covered up any losses on operating statements, he said.
“What we expected is that, if the companies compete too aggressively, those results will show up on their operating expenses fairly early,” Clark said.
State Takes Up Issue
Instead, the looming crisis went undetected until 1999, when, he said, “all the ways to hide the losses from deregulation were gone.”
Two bills pending in Sacramento would add more safety nets to guard against such a cycle happening again.
One would increase the amount of money going into the California Insurance Guarantee Association, which covers workers’ claims if an insurance company is unable to pay. The bill, AB-1183, was unanimously approved by the Insurance Committee and has been referred to the Appropriations Committee.
Clark said the fund will dry up in January if an increase is not made. Currently, 1 percent of all premiums must be contributed to the fund. The bill would make it 2 percent.
The second bill would give the Insurance Commissioner’s office authority to regulate prices that are believed to be below the insurance company’s cost. A hearing on the measure, SB-71, has been set in the Senate Labor and Industrial Relations committee for May 9.
