Flash Report: CA Combined Lower Than Bureau Says

By: Brad Cain

California’s workers’ comp industry is significantly more profitable than employers, legislators, regulators, and other policymakers are being lead to believe. The Workers’ Compensation Insurance Rating Bureau pegs the industry’s 2016 combined ratio at 96%, which is quite profitable. But a study commissioned by Workers’ Comp Executive extracted State Fund’s results and confirms private carriers have a combined ratio at 90.9%.

Five percent is a wide difference as to industry profitability when its based on $13 billion. It equals some 2/3 of a billion dollars.

The gap between State Fund’s combined experience of 130.4% and the stronger combined results of the private sector – is a difference of roughly 34 points.

The California Department of Insurance, since Commissioner Steve Poizner directed that SCIF’s experience be only partly considered after 2010 testimony at a rate hearing from Dale Debber (publisher of Workers’ Comp Executive and Father of Compline), has refused to consider State Fund’s ‘out of the range of reasonableness’ loss adjustment expenses (LAE) as part of the rate calculation. The Bureau now calculates pure premium rates using only the private sector’s LAE experience.

Understanding that, Workers’ Comp Executive asked the Bureau what the industry’s combined ratio looks like without State Fund’s experience.

Officials there said they do not have that information.

An independent actuary, however, was up to the task of calculating it.

“The CY 2016 combined ratio for the industry including SCIF is 96.0% as reported in the WCIRB Report on 12/31/16 Insurer Experience dated 4/14/17. The 2016 Combined Ratio for SCIF is 130.4% based on information included in the SCIF Board of Directors Meeting Agenda dated 2/17/17,” the actuary notes. “Using market share data published by SNL for 2015 and 2016, I estimated the percent of earned premium for SCIF of the total California insurance market for 2016. Then I derived the CY 2016 combined ratio for the industry excluding SCIF of 90.9%.” The actuary’s name is being kept confidential to prevent industry retribution.

The distinction between the combined as reported by the Bureau and the combined as calculated by the independent actuary is important. The higher reported ratio supported the rate decision that backed the insurance industry’s 7.8% rate cut recommendation.

The Department and Commissioner, apparently not having all of the facts, rejected the public members of the governing committee’s independent analysis. It suggested that a larger – 9.6% – rate cut was warranted. Employers will feel the difference in their workers’ comp premiums over the next year – an estimated $234,000,000.

The real question is, given the private market’s results, should the rate cut have been greater?

The Bureau is a private, non-governmental organization financially supported exclusively by insurance carriers in whose interests it operates.

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