By JAMES L. KNOOP, Lockton Insurance Brokers LLC
After consecutive rate reductions totaling 65 percent since 2004, California's Workers' Compensation Insurance Rating Bureau (WCIRB) implemented its first workers' compensation insurance rate increase of 5 percent last January 1, 2009.
California Insurance Commissioner Steve Poizner, on the other hand, rejected two WCIRB recommended rate increases of 23.7 percent last July 1 and a 22.8 percent increase for January 1, 2010. These rejections were based on the commissioner's assertions that carriers are too inefficient to warrant an increase and cost-control measures from California insurance reforms have not been fully implemented.
The commissioner's advisory opinion of no rate increase has received mixed responses from the insurance industry and praise from business and labor representatives. The debate remains, though, how employers and their workers' compensation insurers are left to deal with the practicalities of a market with justifiable pricing pressures.
The latest WCIRB rate increase recommendation is based on three key concerns: increases in loss development, increases in medical cost and legal decisions that may eliminate savings from California insurance reforms.
For the latter, the Almaraz/Guzman and Ogilvie decisions may drive up permanent disability settlement costs, undermining savings from California insurance reforms. The issue centers on the American Medical Association (AMA) guidelines being rebutted in the 2005 permanent disability rating schedule (PDRS). If the rebuttal is upheld, a new rating would be at the discretion of the judge adjudicating the case. The WCIRB estimated the cost impact to be 5.8 percent to the "advisory" rates.
Commissioner Poizner's argument for no increase focus on comparing large self-insured employers against insurers. The commissioner explained that self-insureds have more aggressively implemented cost controls, therefore reducing their claim costs.
However, since 2005, average medical costs have increased by about 50 percent according to the WCIRB. Add to this the impact of the recession resulting in 12 percent unemployment in California and, consequently, lower employer payroll. As losses and medical costs continue to increase, the present rates cannot sustain adequate premiums to cover these rising claims costs.
INSURERS FILED RATES
California is an "open rating" state, meaning that insurers can file their own rates using the WCIRB "advisory" rates as the baseline. Responding to the commissioner's recommended rate increases, several insurers agree that the actual increase needed is in the range of 5 percent to 8 percent--not the recommended 22.8 percent from the WCIRB.
Since October, insurers have filed rate increases from zero percent to 12 percent. Compared with the WCIRB's recommended rate increase of 23.7 percent from last July 1, insurers filed increases ranging from 4 percent to 30 percent.
Keeping all this in perspective, the final modified or net rate could ultimately be lower than what the "advisory" rates are. Insurance underwriters can apply significant "schedule" credits based on an employer's good loss record and loss-control practices. A lower experience modifier will further reduce the rate, so there are opportunities for employers to control costs despite rate increases.
The market for workers' compensation in California is still dominated by the State Compensation Insurance Fund, which accounted for 22.6 percent of the total 2008 workers' compensation premium. However, the competitive market is moving toward rate increases as a result of deteriorating loss ratios and reduced investment returns.
Every renewal is different--it depends on the loss experience, employee concentration, risk controls and type of operation. As the market transitions, expect to see more insured risk-sharing alternatives such as deductible and retrospective rating programs and greater underwriting emphasis on loss control, claims cost control and claims management.
INCREASING LOSS EXPERIENCE
The WCIRB estimated that California's ultimate accident-year combined ratio will be 111 percent for 2008, well above the 92 percent combined ratio for 2007 and 70 percent for 2006. Medical costs are rising as well, with the average medical cost per indemnity claim expected to rise to $37,000 for accident year 2008, an increase from $32,998 in 2007 and $29,221 in 2006.
That said, for 2010, there will be changes to the Experience Rating Plan (ERP), including:
--Eligibility threshold increase from $15,700 to $16,300 (effective January 1, 2010)
--3 percent average increase to the Expected Loss Rates (ELR) (effective January 1, 2010)
--New single "split-level" approach through which the first $7,000 of a claim's value is considered primary and any remainder up to the $175,000 individual claim limitation is considered excess (effective January 1, 2010)
--Elimination of the credibility values known as the "B" and "W" values (effective January 1, 2010)
--Medical cost-containment expenses must be reported as allocated loss adjustment expense instead of medical losses (effective July 1, 2010)
The purpose of these ERP changes is to improve accuracy and simplify the rating formula. An analysis of the WCIRB's 2010 experience modifications recently issued has shown that the majority of experience-rated policyholders are seeing lower experience modifications as a result of these formula changes.
Fewer than 40 percent are seeing an increase, of which 6 percent are seeing increases from 11 and 20 points and 2 percent are seeing increases of more than 20 points.
The small number of policyholders experiencing large increases are generally employers with worse than average loss experience.
OVERALL MARKET INFLUENCE
California has been an influential market that is closely watched by insurance, business and political leaders. An insurance commissioner's responsibility is to maintain checks and balances and not rubberstamp increases that may not be warranted. Some industry professionals, however, are concerned that a continued denial of rate increases could have negative repercussions, causing the market to constrict and even spark another cycle of insurer insolvencies.
A workers' compensation system that combines safety and claims management with medical cost controls to reduce claim costs and sustain competitive rates enables business to remain competitive, creates jobs and increases tax revenues to state coffers.
The economy affects workers' compensation more than other lines of insurance, as it is driven by employer payrolls. Most financial experts expect the economy to not recover until 2010, but at a growth rate well below the last five years. As such, the recession will continue to constrain top-line growth in workers' compensation business. This imposes more pressure on insurers trying to control expenses.
For California employers, that means they must continue aggressive safety and risk management controls. Also important is implementing claims cost controls and claims reviews, while helping injured workers through the process and returning them to work sooner.
Last but not least, they should fight for meaningful medical cost reforms with their California legislators. Medical cost inflation drives workers' compensation inflation.
January 18, 2010
Copyright 2010© LRP Publications