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LEAD STORY–Employers Pay Heavier Price for Workers’ Comp Insurance

ention workers’ compensation insurance to San Diego carpet purveyor George Coles, and he’ll unleash a torrent of criticism.

Coles and many other employers in the state are livid over escalating insurance premiums they’ve had to pay this year, as insurers apply price hikes recommended by the state’s Department of Insurance.

While some employers will see minimal or no hikes, the average premium increase for most businesses is 20 to 25 percent above what was paid last year. Some are seeing much higher increases, say industry sources.

This year, Coles Carpets, a three-store carpeting firm founded in 1947, will pay double the premium it paid in 1999. Last year, the company’s workers’ compensation premium rose by about 30 percent, said Coles, who declined to reveal dollar figures.

Although Coles was aware his workers’ comp costs would rise because of several injuries, the hikes are excessive and demonstrate a system that has run amok, he said.

“The situation (concerning workers’ comp costs) is critical now,” he said. “This thing is like an earthquake ready to burst.”

– State Shakes Up

Insurance Industry

On March 3, the earth shook beneath the state’s entire insurance industry as the state Department of Insurance seized control of Superior National Insurance Group Inc., the state’s largest private workers’ comp insurer, based in Calabasas in Ventura County.

The last major insurance firm seized by the state was Golden Eagle Insurance Co. of San Diego in 1997. It was sold to Liberty Mutual Group based in Boston but retained the name.

According to the Department of Insurance, Superior National, made up of five companies with total assets of about $730 million, “was in hazardous financial condition and was severely under-reserved.”

Like many other workers’ comp insurers, Superior National had been offering premiums to its customers that were so low that real and potential losses began catching up with them, said Scott Edelen, a Department of Insurance spokesman.

The state stepped in and put Superior under conservatorship because the company’s liabilities exceeded its assets and was facing a negative surplus, or a potential shortfall, of $400 million, Edelen said.

Superior National, with about 1,200 employees, has an office in San Diego with 30 employees.

Under the conservatorship, the state terminated the employment of the top four executives, assumed operations of the company and began shopping it to a well-reserved buyer. If a buyer cannot be found, the department will be forced to liquidate the firm, Edelen said.

– Insurers Potentially

Face Claims Losses

Superior National’s failure and seizure could be just the tip of the iceberg, as more insurers deal with mounting claims losses, say many in the industry.

“Between 1995 and 1998, the average cost of a claim has gone up 50 percent. Medical costs went up 50 percent, and cash benefits paid out have also increased by 50 percent,” said Ed Woodward, president of the California Workers’ Compensation Institute, a nonprofit research center for 54 workers’ compensation insurance groups in the state.

According to CWCI, the aggregate workers’ compensation claims losses rose to $6.2 billion in 1998, from the $4.5 billion incurred in 1994.

Looking at the average injured worker indemnity claim, or one that involves more than medical treatment, the amount climbed to nearly $27,000, compared to about $18,000 in 1994, according to the CWCI.

Woodward said as of last year, the state’s workers’ comp insurers are more than $3 billion shy of what is needed to cover all potential losses.

“Reserves are inadequate, policies are under-priced, and losses are developing dramatically,” he said. “All that means that prices will go up. It’s inevitable.”

– Costs Rise Under Push

For Reduced Premiums

Besides the rising costs associated with paying and administering indemnity claims, insurers are feeling a double whammy caused by their collective rush to offer reduced premiums, beginning in 1995.

In that year, California went to an “open rating” system of pricing premiums. Before, workers’ comp rates were set by the state, but as part of a reform package approved by state lawmakers, insurers began engaging in unbridled capitalism.

The problem was, insurers were offering premiums that defied logic and eventually put the entire industry in a bind, said Jeff Cavignac, president of Cavignac & Associates, a San Diego-based insurance brokerage.

“It was a very competitive and cutthroat environment,” Cavignac said. “People were fighting for the almighty premium dollar and sometimes disregarding sound underwriting practices. The perfume of the premium overcame the stench of the risk.”

Craig Cornell, principal at Barney & Barney LLC, a San Diego-based insurance broker, said once the open rating system took effect over a couple of years, premiums plummeted for most employers by an average of 40 to 50 percent.

– Aggregate Premiums

Drop Over Four Years

He said during the four years following the change to open rates, the aggregate premiums dropped from $11 billion to about $6 billion.

Also adding to the current crises was a trend by many insurers to get their clients to operate safety and loss prevention programs, Cornell said.

“Clients learned that they didn’t have to do very much in terms of safety and loss prevention in order to realize a reduction in their rates every year,” he said. “As a consequence, safety and loss controls slipped.”

In recent years, the combination of drastically reduced premiums and rising indemnity claims costs have converged, threatening many companies’ reserves, the money insurance firms set aside to pay for expected claim payouts.

According to the CWCI, the combined loss and expense ratio for the industry increased to 141 percent. That meant for every dollar in premium collected, insurance firms were paying out $1.41 in claims and expenses.

The insurance industry usually had ratios in excess of 100 percent because it would take premiums and invest them, reaping revenues off those investments. But the most recent ratios have reached critical levels, forcing the kind of drastic action taken by the Department of Insurance earlier this month.

– Commissioner Institutes

18.4 Percent Rate Increase

To force insurers to boost their reserves back to safer levels, Insurance Commissioner Chuck Quackenbush instituted an across-the-board premium rate increase of 18.4 percent that took effect Jan. 1.

Cornell said while most in the industry were expecting a rate hike, the nearly 20 percent mandate “took everyone by surprise.”

It certainly has taken many state employers by surprise, especially those who found their workers’ comp costs doubling.

Despite instituting safety programs at the higher-risk carpet laying business, Coles said he’s being punished by a system that unfairly penalizes companies that incur a bad year with several injuries.

“The whole system should be junked, and they should start it all over again,” Coles said.

He blames the bloated bureaucracy as well as certain attorneys and lobbyists as the main culprits unduly driving up costs.

Coles has a lot of agreement on this issue.

– State System

Called Complex

Practically everyone who was interviewed , insurance executives, brokers and employers , agree the state workers’ comp system is beyond human comprehension and able to withstand any attempt to control it.

“The vast majority of the people who touch the system , the doctors, the injured workers, or the claims administrators , find the system extremely difficult to deal with, inequitable, unpredictable and inconsistent,” said CWCI’s Woodward.

Tom Hagerman, president of a Santa Fe Springs cabinet manufacturing business, helped spearhead reforms to the workers’ comp laws in the early 1990s through a group he co-founded called the Independent Business Coalition Against Workers Compensation Fraud.

Hagerman says he now sees many of those reforms unraveling, and the system reverting back to where it was.

The system remains susceptible to fraudulent claims, but perhaps even more corrosive is the complexity and massive bureaucracy inherent in the system, he said.

“Very few people, even those working within it, ever understand it,” he said.

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