It was only a matter of time. The insurance commissioner, having served up his sugarplum vision of how workers’ comp insurers should be able to reap a wonderful rate of return at a 120% combined ratio, was simply inviting the Legislature to take him up on his offer and introduce an excess-profits law. It is the law of unintended—or perhaps inexperienced—consequences.
Our friends from within the ranks of organized labor have done so with Assembly Bill 2692 (Hernandez). There is general cynicism among the cognoscenti that this is not a Department-sponsored bill, because the new insurance commissioner claims to know more about the appropriate loss ratios for workers’ comp insurers than does the industry.
AB 2692 allows rebating of excess profits back to policyholders or, if that doesn’t quite work out, to the California Insurance Guarantee Association, a roundabout path back to policyholders.
Presumably, labor would even apply this to that sacred cow known as State Compensation Insurance Fund, which on the one hand the commissioner acknowledges has loss adjustment expenses that are unreasonably high due to its inability to shed claims staff commensurate with its declining market share, yet on the other hand pays multiple tens of millions of dollars in fines because of delayed benefit payments due to excessive file load per claims examiner, and yet on some other hand whose unallocated loss adjustment expenses are cited when decrying the overall loss cost multipliers of the industry. Wait, that’s three hands, isn’t it? Well, no one ever argued that workers’ comp was anatomically correct.
At least State Fund’s costs were analyzed separately by the Department and removed from the industry averages, even though the Bureau had so generously left them in.
But more important is the increasing symbiosis between labor and the Republican commissioner. The commissioner’s underlying message in the recent pure premium orders, other than raising the specter that Rod Serling is still alive and living on Fremont Street in San Francisco, seems to fit nicely with labor’s desire to have an exclusive, omniscient State Fund making no profits and beneficently doling out benefits to the downtrodden of California. Isn’t this the same monopoly the industry says SCIF schemed for during the late 90s?
How can we say that? Simple: Only an insurer that has the ability to take advantage of decades of retained reserves can survive in the new world order of a 120% combined ratio. Carriers new to the market, or those that have to answer to shareholders, cannot put a positive spin on a 120% combined ratio. They certainly cannot contribute profits to surplus and increase capacity.
Insurers not domiciled in California, whose billions of dollars in surplus have helped deliver the billions in savings since 2004, also can’t justify red ink to their domiciliary regulators under that awkward little notion of risk-based capital.
By the way, exposing a dirty little secret, capacity is already leaving California’s increasingly competitive marketplace, and if AB 2692 is simply the shape of things to come, then the exodus of capital will only increase. The prime requirement for carriers to commit surplus is a stable and predictable marketplace. Anyone see that around here?
The commissioner and his labor allies have expressed moral outrage over the loss adjustment expense loading of carriers (ULAE). It would be helpful for policymakers if either would take even a nanosecond to try to comprehend how difficult it is to enforce the reforms of the governor’s SB 899 when providers, lawyers and judges actively and aggressively work daily to undermine its foundations. Whether apportionment, medical treatment, or permanent disability evaluations, novel theories that fuel workers’ comp administrative law judges’ fervent desire to ignore what the Legislature did in 2003-2004 add thousands of dollars to every claim.
Take a moment to look at the statistics of the Appeals Board, whose case openings are way down yet whose hearings are stable if not increasing since 2004. Why is that?
Oh, wait a minute. There’s that annoying little thing about fair rate of return in the United States Constitution, isn’t there?