Over the last several years Workers’ Comp Executive has not sided with the Workers’ Compensation Insurance Rating Bureau’s recommendations regarding California’s pure premium rates for workers’ compensation. Rather, WCE has agreed with the public actuary, Mark Priven. Priven has consistently recommended a larger decrease and currently recommends a decrease instead of an increase.
This year our tune is changing. The Bureau is correct but for the wrong reasons.
In April, we thought the Bureau lost “its ever lovin’ mind,” as our headline proclaimed. But with further analysis, we now conclude Bureau’s increase is warranted.
Most California carriers, with few exceptions, have experienced significant profitability in workers’ comp over the last few years. We see redundancy in reserves and nearly pure loss ratios in the eighties. For brokers, this translates into a competitive market with excess commissions and underwriting flexibility.
In trying to figure out what rates to suggest, the Bureau examines the history and makes actuarial assumptions about where things are heading. It’s those assumptions that have consistently been incorrect. And it is actuarial assumptions (noted as the basis for the opinion and then disclaimed) that allow those highly educated outside actuaries for carriers to file opinions with Departments and other analysts about the excellent health of their client carrier just before the carrier tanks.
We’ve all seen it multiple times with those errors and omissions protecting disclaimers. And why should I be different? My assumptions follow, and my disclaimer is simple: I’m a high school dropout; what the hell do I know?
California and the nation have reached a crossroads. It is clear the economy is in trouble and likely to get worse. High tech companies are leading the way in layoffs and leveraged and unleveraged firms of all kinds are trying to cut costs to prepare for increased costs and decreased sales. It is the ultimate squeeze, and carriers must cover their operating overhead just like any other organization. We learned (at least hopefully) from the many California workers’ comp carrier failures of the 90s that irrational price decreases to cover overhead only lead to insolvency.
We can also think – and my high school dropout logic indicates – medical cost inflation will increase significantly faster than the Bureau projects. Add to that workforce contraction which leads to increased frequency and moral hazards, leading to more temporary and permanent disability payments. The question is, will increased pay rates offset premium decreases from a reduced workforce. My assumption is they will not.
Moreover, customer liquidity – the credit risk to carriers could be significant. We recommend more frequent audits during the policy year and increased seriousness about collections.
Investment income due to long-term investments, a stock market likely to head south over the next year, and rapidly increasing interest rates will lag behind the need. Carrying stocks at purchase price is funny money, and we will understand certain carriers have significantly increased risk to the value of surplus.
And let’s not forget the unstable California political environment. Governor Gavin Newsom maintains California’s “state of emergency” and the emergency powers and can at any time completely change the environment in which we operate. Equally concerning is the California legislature. It is union financed and empowered by a carrier and business community lacking institutional knowledge, bereft of legislative mechanics, and frankly without power.
The bottom line: Workers’ Comp Executive supports the Bureau’s filing for a 7.6% increase.