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By DAN REYNOLDS, senior editor of Risk & Insurance®

A recent study by the Rand Corp. trumpets the initial impact workers' compensation reform in California has had on permanent disability awards, but it also uncovers a trend that could do even more to discourage insurers from participating in a market that is increasingly looking like a very unprofitable place.

Over the same period, the number of permanent disability cases rated dropped from 107,299 to 4,048 and moved back up to 33,161 by 2008.

SB 899, the bill that provided sweeping workers' comp reform in California, provided return-to-work incentives and guidelines for determining permanent disability ratings. It also allowed employers to create medical provider networks that could give them some sense of control over the healthcare portion of workers' comp spending.

But it wasn't just the medical expense that was modified, according to the researchers.

"Our findings indicate that the impact on income replacement was striking. Indemnity benefits fell dramatically, and most of the decline was experienced by workers with permanent disabilities," the Rand authors wrote.

The bill also created incentives for return to work, offering companies with fewer than 50 employees $1,250 for a temporarily disabled worker and $2,500 for a permanently disabled worker to cover expenses incurred while accommodating injured workers.

Among large companies in California that Rand surveyed, more than 93 percent reported that reducing workers' comp costs was a factor in return-to-work decisions. Among smaller companies, lowering workers' comp costs was a factor in the return-to-work decisions of 70 percent of companies.

There was also a sharp divide in the Rand survey results among large and small companies when it came to their assessment of the impact of reform. Slightly more than 42 percent of large companies believed workers' comp reforms were important, and just 23.5 percent of small companies thought they were.

Insurers make up one group of companies that has seen about enough of workers' comp in California. In 2004, according to the California Workers' Compensation Insurance Ratings Bureau, written premium for workers' comp in California was around $23.5 billion. By 2009, that figure had fallen to $8.9 billion, according to the bureau.

A June 2010 report from the California Workers' Compensation Insurance Ratings Bureau estimated that the combined ratio for workers' comp insurers in that state was 116 in 2009, a 15-point jump over 2008.

A.M. Best, the Oldwick, N.J.-based ratings agency, told Risk & Insurance® earlier this month that it estimated the combined ratio for the approximately 40 or so carriers in its workers' compensation index--for national exposures, not just California--could reach 116 for 2010. A.M. Best researchers believe it will go even higher in 2011 and possibly 2012 as well.

The Rand researchers wrote that it was difficult for them to pin California's initial gains to one aspect of reform or another. Maybe the small business owners in California are right. Maybe reform doesn't have that much impact compared to the soft market prices and the lowered exposures due to high unemployment that are currently hammering workers' comp.

January 21, 2011

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