The Workers' Compensation Insurance Rating Bureau of California yesterday released its study of insurers' experience in 2006, reflecting continuing declines in costs and an industry that may be over-reserved by about $6.5 billion. This figure is based on expected claims losses reported by insurance companies and what the Bureau estimates those claims will ultimately be. The wide difference portends further reserve releases this year.

Aggregate workers' comp premiums last year plunged 30 percent to $16.5 billion from $21.4 billion in 2005 thanks to the effects of reforms in 2003 and 2004. The average workers' comp rate per $100 of payroll was down to $3.25 in the second half of 2006, compared to $3.78 in the first half and a high of $6.47 in the second half of 2003.

While most cost and pricing indicators continued to fall, according to the Bureau's analysis, the biggest change was the cost of individual claims. After four years of straight declines, the ultimate average cost of a claim in 2006 at $40,999, up a whopping 23 percent from 2005. The change was driven by both rising indemnity and medical costs on a per-claim basis. The upshot of this is that although claims counts and aggregate claims costs have fallen, the more severe claims are the ones that are still in the system.

In another surprise, it estimated ultimate losses in the 2006 accident year at $6.4 billion, a significant rise from $5.8 billion in 2005. Also, the ultimate 2006 accident year loss ratio was expected to rise to 37.1 percent from 27.1 percent in 2005.

The Bureau ascribed the likely loss increase rise to the fact that premiums have dropped so quickly in relation to claims costs: "This loss ratio, while still very low compared to historical norms, represents a 10 percentage point increase from the estimated accident year 2005 loss ratio. This increase is primarily the result of declining premium rates."

Besides falling claims costs, frequency also continues to fall. It slipped yet another 10 percent in accident year 2006.

And that, as they say, is -30-