A strange thing happened a week or so ago in the California Assembly. No, it was not that the Insurance Committee resoundingly rejected what could easily be considered the most complicated rate regulatory scheme ever devised since the McCarran-Ferguson Act became law in 1945. It was a remarkable dialog between two legislators, Betty Karnette, a moderate Democrat from Long Beach, and Dennis Mountjoy, a very conservative Republican from San Gabriel Valley. The two see eye to eye on virtually nothing. But true to the insurance industry's reputation of uniting even the most divergent groups, they did agree on one thing-it was not time for insurance rate regulation yet. California workers' comp was saved from rate regulation perhaps for the last time.

A quick look through the windows of the stately halls of the legislature at that moment would have shown that pigs not only had wings but were airborne.

The unease of both parties in looking at this important issue is quite understandable. For Republicans, reforms embodied in SB 899 are the crown jewel of the revolution that brought Californians Governor Schwarzenegger. From the looks of the November ballot, the revolution is anything but over. Although several large employers attracted much attention during the period leading up to passage of SB 899, the heart and soul of the revolution was and still is the Small Business Action Committee (SBAC). SBAC is led by Joel Fox, former president of the Howard Jarvis Taxpayers Association. Mr. Fox is also on the leadership team of Citizens to Save California (CSC), the umbrella organization sponsoring ballot measures on the budget process and teacher merit pay and tenure. CSC also supports a measure to change the way legislative districts are drawn.

As was the case with SB 899, moving public policy debate in California is a very expensive and time-consuming proposition. If the business community is to continue to raise tens of millions of dollars and devote thousands of volunteer hours to these causes, one would expect that changes made will be quantifiable not just for the largest employers but for all employers. When numbers such as 41 percent loss ratio hit the papers, Republican legislators aren't the only ones who get angry calls from small businesses-so do the leaders of the revolution.

The view from the other side of the aisle has been consistent if not conflicting. For Democrats, the issue is that if such draconian measures had to be passed, all the savings from reforms needed to go back to business. Although most Democratic legislators continue to make a direct connection between the unconscionable reforms and the absence of rate regulation-suggesting that the legislature could do whatever it wanted to injured workers so long as insurance rates were regulated-even they have noted rate reductions for large employers and growing competition in the marketplace. Consequently, they too have taken up the cause of the "small employer." This is an unusual but fairly safe cause for them to champion because it doesn't affect the rest of their desire to regulate or tax most businesses large and small as much as possible, because when it comes to the insurance "business," most "real" businesses would vote it off the island.

The main Democratic constituencies-labor and applicants' attorneys-have been able to articulate only a message that basically says "well, everyone else's ox got gored in SB 899, why not insurance companies?" The insurance industry couldn't even figure out how to argue credit for time served, given the billions of dollars lost during the past ten years-billions that clearly went to applicants' attorneys, labor and business communities' bottom line.

The industry is covering its collective and badly under-reserved butt- realistically $8 billion to $14 billion in California workers' comp alone. And I don't know how to tell the truth-that it needs profits for a while to stave off the solvency crisis that Garamendi's department once again allowed to formulate. We're not even going to talk surplus here.

No, it no longer serves the Democrats to point out the windfall that businesses enjoyed as so many insurers stupidly priced themselves into insolvency, although they were quite clear to make that point when increasing benefits during the term of former Governor Gray Davis.

And that brings us full circle. Republicans and Democrats will argue with equal passion that SB 899 has drastically reduced workers' compensation costs. There is a great deal of truth in that belief, although the marked decrease in claims frequency is not getting the credit it deserves for contributing to the record low loss ratios the industry enjoys and the improved financials of self-insureds. It is also true that record lows are already a thing of the past. The 41 percent accident year 2004 loss ratio is a remarkable number, made more remarkable by the unique effect of reductions in pure premium every six months. When the 2005 accident year loss ratio climbs-a reflection of the competition that continues to heat up in this market-it is doubtful that our esteemed legislators will take notice.

By the way, there is another benefit increase in January 2006. And most people likely won't want to own up to that either.

2005 is the year Republicans and Democrats agreed to let the market "work." But the market "works" only if small businesses and their advocates stop roaring. When January 2006 rolls around and rate regulation legislation is again before the Assembly Insurance Committee, it indeed will be interesting to listen to the sounds of Republicans and Democrats, and whether these champions of small business still are on the same page. If they are, it could prove to be a very difficult year indeed for insurers.