The mercurial California workers' compensation system is the subject of two new comprehensive studies in February that gave ample ammunition to critics and supporters of the recent reform, SB 899.

One, mandated by SB 899, is intended to review how the insurance mechanism has responded to recent reforms. While restating the obvious, that report arrived at the conclusion that the insurance industry has done a pretty good job of delivering savings to California's beleaguered employers. Depending on whose actuary you believe, the industry could do better, and it is anticipated that as (or if) the reforms are sustained, insurance companies will continue to do a better job of bringing value to both their policyholders and investors.

It is the latter constituency that seems to get lost in the hype from critics of reform. But as we have seen from the constant news releases emanating from the State Treasurer and the self-satisfied announcements from the Public Employees Retirement System (PERS), return on equity matters, even to those with a social conscience.

But for those interested in more than just conclusions, this report has troubling aspects. Not surprisingly, those troubling aspects center on the State Compensation Insurance Fund (State Fund). The marketplace picture painted by the study seems to be out of touch with reality. First, the study indicates that State Fund has seen its market share drop precipitously, 22 percent to be exact, between 2003 and 2005. No one can seem to figure out where this number comes from and if it is realistic.

If this is considered to be a trend, then State Fund's market share could drop even further in 2006. The study authors tend to be a bit too cursory in their analysis of this potential trend, pointing out that the drop in premium is the result of increased competition and that the private market is offering rate reductions significantly lower than State Fund, and have been doing so for several years—never mind claims handling or a myriad of other technical service considerations.

At this point, an issue of canine anatomy is involved. The commissioner has repeatedly indicated that State Fund is the big dog in the market. State Fund has responded in typical canine fashion, which likely explains why the commissioner wears dark suits all the time. The tail, it would appear, is starting to move the dog around a bit, in terms of how the rest of the market is responding to reforms.

But rather than worry about a longer-term adverse impact on underwriting cycles that could be triggered should State Fund attempt to regain market share, the study's authors should have pointed to the as-yet-unresolved issue of who oversees the largest workers' compensation insurance writer in America.

As insurance rates continue to drop, the debate over State Fund has largely disappeared.

Few remember that State Fund actually lost its lawsuit against the California Department over the application of risk-based capital (RBC) to its operations. Reading the study, it would appear that most also have forgotten AB 1985 (Calderon), a piece of legislation signed into law and effective January 1, 2003 that was supposed to give the commissioner broader tools to make certain that premiums, not just rates, were adequate.

That law also placed all domestic workers' compensation insurers, including State Fund, under RBC. In other words, consultants' recommendations on monitoring premium adequacy already have been made into law.

Missing, too, is an analysis of those statutes signed into law many generations ago that are uniquely applicable to State Fund. For example, the fund is authorized to be fairly competitive with other insurers, and, according to statute, "...it is the intent of the Legislature that the fund shall ultimately become neither more nor less than self-supporting." What does that mean? Well, don't expect to find clarification of this from the SB 899 study, because it isn't even mentioned.

The study concludes with the observation that it is beyond the scope of the study to determine whether there should be stronger tools to limit "profiteering" beyond the general sense, "...under the prohibition against excess rates."

Prohibition against excessive rates? Last time I checked, that was only part of Proposition 103, a rating system that, as we all know—well, almost all of us—doesn't apply to workers' compensation. Even if the consultants missed that fine point, one chart is very compelling, the one that shows that even with the drop in costs, the loss ratio for workers' compensation insurance is still higher than that for all other lines of property and casualty insurance. You know, the lines that Proposition 103 really does regulate. That message is also likely to be lost on a number of people.

In sum, the report doesn't break new ground. That is unfortunate because it could have served as an opportunity to bring clarity to what happened before the recent reforms, send a signal that dropping premiums is not an excuse to ignore underlying system costs and the need to have a healthy insurance marketplace, and to put into perspective the magnitude of recent premium reductions and the need to make certain that price and costs are in the same general vicinity.

On the other hand, it is more informative than the other study released this month, that on permanent disability from the Commission on Health and Safety and Workers' Compensation. Commentary on that study has to be saved for another day. There truly isn't enough ink to explain that one.