It appears that California is headed for another upsurge in workers’ comp premiums for insured employers. This likely has to do with a number of things, including chaos created by the Workers’ Compensation Appeals Board, ongoing frustration with liens, increased costs and delays brought on by Medicare, fluctuations in interest income because of the volatile economy, drops in payroll (especially in construction classifications) and the ebb and flow of capital into the market seeking to make a quick profit and exiting once the numbers don’t quite add up. Add to this the pressure on employers to cut costs, which limits the ability of small- and medium-size employers to return injured workers to work and makes alternative markets such as captives and self-insurance groups more attractive, with their promises of lower costs and better service.
Can anything postpone the inevitable? Well, first of all, workers’ comp premiums continue not to be a big-ticket item for insured employers — yet. The buffer of competition effectively will delay the pain caused by loss development that has occurred since 2004 — development already starting to alarm the self-insured community. Second, California’s unusual ratemaking mechanism and focus on solvency rather than rate adequacy, combined with a lack of will to address chronic underreserving, doesn’t really lend itself to an environment where, without legislative intervention, price and cost of workers’ comp insurance will be adequately aligned.
Add to this some truly conflicting public policy issues — the type that Sacramento is loath to address. The fundamental issue is whether workers’ comp premiums should be adequate without taking into consideration the multistate or multiline experience of the policyholder. Prior to 1993, the answer was yes. Since 1995, the answer has been no. To further add to the flexibility of insurers to price large and middle-market accounts, the Legislature also allowed deductible policies to be written. This provided premium relief to employers and, in what can only be considered an unintended consequence, also reduced the amount of the deposit insurers must post to cover losses and loss adjustment expenses in case of insolvency. It also reduced the assessment base of the California Insurance Guarantee Association (CIGA). This should be an ideal situation for insurers and business, right?
Well, not exactly. Following the carnage in the insurance marketplace earlier this decade, CIGA has been straining to keep up with its obligation to pay claims of insolvent insurers. The drop in premiums also means a drop in the assessment base of CIGA. Also, all these efforts to infuse competition into the insurance marketplace has been a boon for the large- and middle-market employers but has left the brunt of the actual costs of this overly litigious, overly complicated system squarely on the shoulders of small employers, who can’t even dream of doing business outside California. There is a reason why the technical innovations in processing policies have focused on the small employer — it’s because insurers are trying to reduce costs at the same time they are adding volume to their bottom line. Doesn’t leave much time for loss control or return-to-work programs, does it?
Over the past 20 years, the Legislature has tried to come to grips with the workers’ comp insurance industry and has singularly failed to do so. The minimum-rate law was repealed in part because of employer frustration (how did that work out for you, by the way?) and in part because of the political jousting between two great Californians – Governor Pete Wilson and Assembly Speaker Willie Brown. Prior to the repeal, a commission of economists recommended changes, but few of those recommendations were followed. The rest, as we say, is history. After the rash of insolvencies, the Commission on Health and Safety and Workers’ Compensation issued another report and a series of recommendations. This includes greater transparency in solvency monitoring (which would allow a modicum of self-policing if it were published just how much some carriers were underpricing) and an end to various practices that lead to predatory pricing. That hasn’t exactly caused legislators to rush to introduce bills, either.
The bottom line is that solvency regulation is now equated with high premiums. The Legislature, labor, the governor, the insurance commissioner and the business community really don’t care that much if insurers gnaw off their appendages in an effort to keep market share in California and — pay attention here — in other states. California workers’ comp premiums subsidize business across the country, and place an unfair burden on small businesses here in this state. But there is an interest in equity, solvency, and stability, and we need to realize that the current pricing structure doesn’t work.