Workers’ Comp Deregulation Goes Awry
By HOWARD FINE
When state legislators moved to deregulate the workers’ compensation insurance market almost a decade ago, they envisioned more competition that would drive down employer premiums. And for five years, that’s what happened.
But now, just as with last year’s electricity market meltdown, the state workers’ compensation insurance system is in full-blown crisis. And, once again, California employers are footing the bill through sharply higher premiums.
These increases, which for some businesses have been up to 300%, are expected to continue. And perhaps just as threatening is that the state insurer of last resort, the State Compensation Insurance Fund, could run into financial difficulties as employers flock to it as workers’ comp insurance carriers fall.
In the past two years, at least eight carriers,most of them based in the state,have been declared insolvent and taken over by regulators, while others have exited the business.
A guarantee fund set up to ensure payments to policyholders if an insurance carrier becomes insolvent is itself in financial difficulty as it faces payouts of almost $1 billion a year.
In the hopes of preventing future insolvencies, state Insurance Commissioner Harry Low is pushing legislation that would partially re-regulate the workers’ comp insurance market. Added to this is a $2.5 billion benefit increase pushed through the Legislature two months ago.
“The bad news for the business owner is that prices are up and they will continue to go up for the foreseeable future,” said Fritz Mutter, president and chief executive of Golden Pacific Insurance Services Inc., a Monrovia-based commercial insurance brokerage. “I don’t see prices coming down again any time soon.”
The premium increases have ranged from 15% to 35% for employers with good claims records and from 50% to 300% for employers with more spotty records.
“If I can secure a 25% premium increase for a client, they may be flabbergasted, but I’m ecstatic,” Mutter said.
So how did the market reach a point where insolvencies have become almost commonplace and a 25% increase can be considered a blessing for an employer? As with energy, much of the blame is laid to a headlong rush into deregulation.
From 1995 through 1999, insurers priced their workers’ comp premiums below cost in a bid to grab market share. Employers saved billions of dollars in those years as the total dollar amount of written premiums shrank by one-third, from $9 billion a year to $6 billion a year.
But in the process, insurers racked up huge deficits as medical and other costs associated with claims continued to soar. By 1999, the state’s workers’ comp carriers were paying out a whopping $1.74 for claims and related expenses for every dollar they took in, according to the state Workers’ Compensation Insurance Rating Bureau.
The historical norm for payouts is about $1.10 for every premium dollar, with the difference being made up by investment income.
“This was a combined loss ratio that was almost unprecedented, anywhere at any time,” said Dave Bellusci, senior vice president and chief actuary for the Workers’ Compensation Insurance Rating Bureau. “There was no way that could continue for any length of time. The piper had to be paid.”
And in 2000, the party ended. The first shock came when Superior National Insurance Group Inc., the state’s second-largest carrier in terms of workers’ comp premium volume, became insolvent. A number of other insolvencies followed, including Reliance Insurance Co., Sable Co. and HIH America Compensation & Liability Insurance Co.
This month, two Pennsylvania insurers, Legion Insurance Co. and Villanova Insurance Co., were seized by regulators in that state. As of last year, Legion was the third largest underwriter of workers’ comp premiums in California, according to the state Department of Insurance.
Besides pushing up premium prices, these insolvencies have had two potentially catastrophic effects: they severely strained the California Insurance Guarantee Association, the fund set up to cover claims of insolvent insurers, and they forced huge numbers of employers to the State Compensation Insurance Fund. The California Insurance Guarantee Association typically paid out about $50 million a year to cover the claims of insolvent insurers.
But during the last year, the fund has been paying out $80 million every month primarily to cover the claims of Superior National and Reliance Insurance.
Faced with the threat of insolvency, state legislators last year rushed through an increase in the insurer assessment for the workers’ comp portion of the California Insurance Guarantee Association fund,from one percent to two percent of total premiums. Under state law, those assessments are passed directly through to policyholders.
But, in a compromise move to blunt opposition from employers, the Legislature made the increase temporary, only for one year. That wasn’t enough to close the gap and now the California Insurance Guarantee Association and state officials are pushing for an extension of that increase for three more years.
Meanwhile, the State Compensation Insurance Fund has seen a flood of new clients as the rest of the market suffers a meltdown. While other insurers either left the market or raised rates an average of 30% or more, State Fund, which was in more solid financial condition, boosted rates by 22% on Jan. 1.
Six years ago, State Fund held 22% of the market for total premium dollars, near its historical norm. But today, its market share has doubled, to about 45%, with the vast majority of the new policyholders coming on board in the last 18 months.
“We’re probably the only company in the country saying, ‘Stop! No more clients!'” said State Fund spokesman Ron Christensen.
This sudden growth has prompted concern about State Fund’s ability to handle all the new claims that will be coming in. If the fund were to become insolvent, the effect on California employers and the economy could rival or even exceed last year’s energy crisis.
“We are closely monitoring them,” said state Insurance Commissioner Harry Low. “So far, we see no immediate threat of insolvency.”
Christensen said the fund is financially sound. The concern, he said, is that its ability to handle sudden catastrophic claims,such as from a terrorist attack,might be strained.
Meanwhile, Low is pushing for more authority to force insurers to maintain adequate rates. He has sponsored AB 1985, which is being carried by Assembly Insurance Committee Chairman (and former Democratic Insurance Commissioner candidate) Tom Calderon, D-Montebello.
“The idea is to prevent these insolvencies by stepping in early,” Low said.
The bill, which will be heard in the Assembly Insurance Committee this Wednesday, faces opposition from employer groups wary of a return to the minimum rate system they so despised in the past.
Fine is a staff writer with the Los Angeles Business Journal
