The workers’ comp insurance industry thrives on research: data and more data, as though the industry had hired Oliver Twist to ask his cruel master for more gruel after the first indigestible bowl did not produce the desired results. Organizations throughout the nation slice and dice even the most minute numbers to opine with an air of authority on how and why the insurance industry is breaking faith with its policyholders, investors, injured workers, doctors, lawyers, physical therapists, politicians and any other group not already mentioned. We have an elected governor whose campaign largesse contains millions of industry dollars, and an insurance commissioner who simply says that regardless of the costs of the system, insured employers cannot afford an increase in the price of insurance, thus routinely quashing hints of a need to increase the pure premium rate for the industry. Ah, those plucky free-market Republicans.
The latest gruel served up comes from the Department of Industrial Relations, whose chief, John Duncan, is as honorable a public servant as exists in state government. But within the department rests the Commission on Health and Safety and Workers’ Compensation, a semiautonomous state (kind of like Ukraine when it was part of the Soviet Union) that exists to provide a series of services to the true “stakeholders” of the system: labor and self-insured employers. These “stakeholders” (all of whom could get repetitive-motion injuries from rubberstamping the research reports passed by them) use commission staff to draft legislation, produce self-serving reports for interest groups overseen by the department (and there is more than one for self-insurance groups) and provide research that makes sure a broader labor agenda has the cover of respectability.
In this particular instance, the commission and its research annuitant (the RAND Institute for Civil Justice) recently coughed up a hair ball in the form of a legislatively mandated report on insurance solvency that was part of Senate Bill 316 (Yee), 2008 legislation sponsored by the Association of California Insurance Companies. SB 316 repealed the archaic minimum-reserve requirements for workers’ comp insurance carriers, and ordered a study of the chaotic late-1990s and early-2000s, to be paid for by those pesky insurance companies.
The result was 29 mostly irrational ivory-tower recommendations to promote more stability in the marketplace that can be distilled into two basic thoughts: we need more transparency in what insurers actually sell their product for in the marketplace (a good idea); and somehow if we just get enough gruel into the bowl—or data in the hands of actuaries—we can figure out how to assess cost savings shortly after the ink dries on reform legislation (by and large a really, really silly idea).
The problems with this report are legion, not the least of which is the idea that insolvency is really a major concern for the simple reason that there is not enough of a domestic market to worry about anymore. We shan’t delve into RAND’s idea that brokers be held responsible and even fined if a carrier they place business with goes broke. Even A.M. Best, the famed insurance rating agency, gives many carriers A ratings just before they are seized by regulators.
To make matters worse, the report continues to perpetuate the notion (as if elected officials needed encouragement) that if we can just figure out how to put a better price tag on reforms earlier, we can smooth out fluctuations in premium and keep rates really low forever. After all, if there is bipartisan agreement on anything, it is that no one cares about workers’ comp costs if we can keep the price of workers’ comp insurance down. By the way, could someone explain to me how a minimum-premium small business is disadvantaged by paying a $4,000 or $5,000 premium even if it has a claim that costs in the hundreds of thousands of dollars? Oh, sorry, let’s not go there.
The bottom line is fairly simple—you either believe in the market or you don’t. Knowledge is power, and if the commissioner will embrace the concepts of transparency in this report and show the market who the bad actors are, then, believe it or not, the market will police itself. When the bottom line is shrouded in fog is when problems arise. We saw it then and we see it now. No amount of number crunching will change this fundamental rule, for the rest of the report is based on the flawed premise—easily embraced by a commission that has either disdain or ambivalence for insurance—that everyone sells the same product and service for the same price.
The report is also testament to rejection of a tried-and-true premise for legislators and regulators: There is no substitute for experience.
No more gruel, please.