The Workers' Compensation Insurance Rating Bureau’s actuarial committee met yesterday. It appears likely that the Governing committee will recommend a whopping 27% mid-term pure premium rate increase when it meets on Wednesday. Bureau's staff is continuing to crunch some of the numbers, but that's the recommendation from the actuarial committee to the Governing Committee.
This range of recommendation will send shockwaves through employers and shudders through politicians, among them California Insurance Commissioner (and potential gubernatorial candidate) Steve Poizner who last fall whittled down a 16% recommended increase to just 5%. This also ends Governor Arnold Schwarzenegger’s season of workers’ comp reform and sets up an ignoble end to one of the hallmarks of his administration.
It's clearly unclear what the Department of insurance will do with this recommendation as it will likely include some data that has been excluded in the past, as well as costs that have not yet been incurred by carriers. This latter issue relates to the projected impact of recent en banc decisions by the Workers' Compensation Appeals Board involving permanent disability awards, notably Almaraz/Guzman and Ogilvie. Carriers are increasing reserves and bracing for closed cases petitioning to reopen and recalculate disabilities as a result of the WCAB decision.
Noting that these decisions are "eerily reminiscent" of the Minniear decision of the late 1990's, Bureau president Bob Mike told the committee, and rightfully so, that it has to be more aggressive in reacting to developments such as these. He noted that after Minniear, which established the treating doctor's presumption of correctness, the Bureau was caught behind the medical inflation trend because it waited on the data to come in. "We filed double digit increases twice a year and we still couldn't catch up," he recalled.
The Bureau has come under harsh criticism from the Commissioner who is investigating its practices. But the discrepancy this time certainly falls on the side of the Commissioner. The Bureau projected more accurately in medical cost inflation and other costs, and had the rate increase it proposed last been adopted the recommendation this time would not have been so dramatic. Nevertheless the rates as recommended by the Bureau and as amended by the Commissioner are purely advisory. Carriers in California are free to use their own judgment.
WCAB Decisions Worth 7%
After much discussion about which claims would be affected and the likely costs, the committee concluded that the recent en banc decisions by the Workers’ Compensation Appeals Board would account for 7 points of the recommended 27 point increase. Most of the cost drivers are expected to come from the Almaraz/Guzman decision, which attacks the heart of how ratings are calculated and which creates an even more adverse relationship between employer and injured worker.
The case is expected to increase costs in several ways, by generating a higher rating than would have been generated under the current guidelines, by creating a rating for some of the so-called "zeros," by increasing the frequency of claims and by increasing the "frictional costs." Frictional costs are the added costs associated with litigated claims, such as added expenses for reports by economists, vocational rehabilitation specialists and others of the ilk, as well as the associated loss adjustment expenses with these claims. WCAB provided a veritable field day for lawyers.
But even without the expected costs from the en banc decisions, a mid-year increase would still be in the offing. The committee got a glimpse of the year-end data and the picture was anything but pretty. While indemnity trends are holding steady, California's workers' comp system is seeing a steady deterioration on the medical loss front with increases in severity sharply outpacing the savings from any modest frequency deviations.
While cautioning that the data from 2008 is still very green and that corrections may still be filed by carriers, Bureau actuary Dave Bellusci called the development in medical severity since 2005 "staggering." The Bureau's projections on medical severity trends show a 14.8% increase in 2006, a 15.7% increase in 2007, and a 20.1% increase last year.
Based on the data, the Bureau was projecting a total loss to pure premium ratio for policies with July 1, 2009 effective dates of 0.937, based on indemnity of 0.288 and medical of 0.649. But after hearing the latest on the uptick in medical severity, the committee approved a medical inflation rate of 7% from the 5% that had been used in its last filing. With that change, the projected total loss to pure premium ratio jumped to 0.965.
The Bureau's staff will be updating its calculations before making a presentation to the Governing Committee on Wednesday for its final approval. If given, a rate filing would be made before the end of the month.