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New Law Reverses Minimum Reserve Requirements for Workers’ Comp

BY DAVE THOMAS

A Senate bill that had the attention of companies selling workers’ compensation insurance in California became law Jan. 1. SB 316 eliminates the requirement for workers’ comp insurers to place 65 percent of written premiums in reserve.

The author of the bill was state Sen. Leland Yee, D-San Francisco/San Mateo, who felt change was needed in the marketplace.

Yee sponsored the bill, noting that an insurer in his home district was entirely solvent and capable, yet unable to issue more policies due to duplicative and unnecessary reserve requirements.

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Yee said he learned this was a problem for other insurers, prompting him to author legislation to change the scenario at the time. He saw the biggest concerns as fewer policies being issued and less protection for workers in the state.

Adam Keigwin, a spokesman for the senator, said their office has not heard any feedback regarding SB 316 yet.

“It has only been law for three weeks,” Keigwin said. “We will likely receive more info in the next few weeks.”

Mark Priven, an actuary and principal with Sacramento-based Bickmore Risk Services, said the impact of the new law will have a positive but limited effect on the 2008 workers’ comp market in California.

“To the extent that insurers will be allowed to set aside lower reserves on new policies, their reported financial position will improve,” Priven said. “This particularly helps insurers seeking to expand, thus enhancing competition.

“As a practical matter, however, insurers will continue to be required to set aside reserves for expected future losses. Since loss and related expenses typically exceed 65 percent of premium, we believe that most insurers will set aside reserves exceeding 65 percent of premium even with the passage of SB 316. These insurers will not be directly affected by SB 316.”


Positive Change

So despite what Priven sees as limited impact on insurers, he said the overall news on SB 316 is good.

“We believe that SB 316 represents a positive change,” Priven went on to say. “The key issue that it addresses is the method used by the state to protect against insurer insolvencies. The state-of-the-art structure for evaluating insurer solvency is risk-based capital, and that was implemented in the mid-1990s. The 65 percent reserve requirement is from a much older time period, is not nearly as sophisticated as risk-based capital, and is no longer needed.”

That being said, there were 26 California workers’ comp insurance insolvencies between 1999 and 2003, a period when both risk-based capital and the 65 percent reserve requirement were in place.

“Therefore, we think it makes sense that SB 316 authorizes an independent study of the causes of these insolvencies at the same time that it reduces reserve requirements,” Priven added.

SB 316 requires a study to be conducted by the Commission on Health and Safety and Workers’ Compensation to examine the reasons for the large number of workers’ comp insurer insolvencies that took place within the past decade. The study is to be concluded by July 1, 2009.

The Association of California Insurance Cos., or ACIC, an affiliate of the Property Casualty Insurers Association of America that also represents more than 300 property and casualty insurance companies in the state, was the prime backer of the bill.

ACIC President Sam Sorich said the legislation will encourage expansion of the workers’ comp market in California, along with allowing for greater insurance options for businesses. Sorich agrees with Priven that eliminating the 65 percent requirement is a good thing.

“The requirement, which was created nearly 40 years ago, has been superseded by modern laws that more effectively regulate insurer solvency,” Sorich commented. “Eliminating the requirement will release capital so insurers can write more business in California.”

Sorich emphasized that the bill would not jeopardize benefits for injured workers. The insurance commissioner will continue to have the authority to make certain that insurance company reserves are adequate to pay claims.

“This bill helps California’s workers’ compensation system,” Sorich added. “It allows insurers to shed an unnecessary reserve requirement and, therefore, have greater flexibility for competing in the marketplace.”

Unlike other bills that sometimes get hung up due to partisan bickering or other reasons, SB 316 did not have any recorded opposition, getting approval from both the Senate and the Assembly overwhelmingly.

SB 316 won final legislative approval on a unanimous Senate vote Sept. 7.


Dave Thomas is a San Diego-based freelance writer.

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