FRAUD ALERT
Brokers Say More Reform Needed to Lure Insurance Carriers and Cut Workers’ Comp Rates
By SHERRI CRUZ
Recently passed workers’ compensation reform was “nice” but doesn’t go far enough, local insurance brokers say.
Further, the latest “pure premium” advisory rates recommended by state Insurance Commissioner John Garamendi aren’t likely to cut into workers’ comp premiums paid by California businesses. At best, it will keep premiums from going higher.
The real problem from the broker perspective is that there aren’t enough insurance carriers in the market in California.
Brokers are paid a commission to offer carriers’ insurance to employers. But they can’t shop around many rates because carriers haven’t found it profitable to do business in the state. It hasn’t been profitable in the state because the system is being abused, brokers said.
Fraud, coupled with declining income earned by insurance companies on their stock market investments in the past few years, has caused several carriers, such as Hartford Financial Services Group Inc. and Houston-based AIG American General, to exit the state’s workers’ comp market.
“We don’t see any rate relief around the corner,” said Gregory Pe & #324;a, branch manager with Dodge, Warren & Peters Insurance Services Inc. in Orange.
Workers’ comp reform recently signed by outgoing Gov. Gray Davis is a step in the right direction, he said. For example, limiting the number of chiropractic and physical therapy visits was a good move. But benefits still are too heavy on the employee side.
“There are forces afoot in California that don’t want to see meaningful benefit reforms, and they will fight to save their hide,” Pe & #324;a said, referring mainly to the trial lawyer lobby. The number of claims litigated today versus a few years ago is staggering, he said. Gov.-elect Arnold Schwarzenegger has promised to pursue wider reform of the workers’ comp system.
“Those of us in the know don’t think the reforms passed by Davis and crew are going to amount to huge savings,” said Bruce MacKenzie, an independent broker at MacKenzie and Associates in Orange. No matter what the advisory rates are lowered to, he expects rates paid by businesses to remain flat.
The number of claims is down in the state, MacKenzie said. So it’s not necessarily a problem in the workplace. What really needs to be addressed is fraud, he said.
“It’s too easy to get into the system,” MacKenzie said. Then once workers are in, it’s too easy to abuse the system, he said. After fraud is addressed, competition will return and rates will go down, he said.
Late last week, Insurance Commissioner Garamendi was set to fix an advisory premium rate decrease that is more than the 2.9% already expected to go in effect Jan. 1.
His guidelines are based on testimony from the Workers’ Compensation Insurance Rating Bureau and others. The recommendations were based on varying projected estimated savings from workers’ comp reform signed by Davis.
Architects of the legislation said the workers’ comp reform should save $5 billion to $6 billion annually, which, in turn, should be passed on in the form of lower premiums. The rating bureau said savings from the reform will be about $4 billion.
For the past few years, insurance companies have applied the advisory rates issued by the commissioner. But even if carriers use those rates, it doesn’t necessarily translate into savings by the time the policy reaches the employer.
“Playing around with the rates won’t solve the problem,” said Jayce McClellan, an independent agent who sells workers’ comp policies through Kelly & Kelly Insurance Services Inc. in Lake Forest.
Lower rates only will affect companies when carriers come back into the market, and they aren’t coming back until they see real reform, he said.
Little Competition
The number of carriers that McClellan can choose from has dwindled to a few. There are honorable carriers, but some take advantage of being one of the few, he said.
The carriers compete with the State Compensation Insurance Fund, which sells policies at cost. But the state fund is in danger of going bust and some brokers, such as McClellan, don’t even use it.
“I’m concerned about them,” he said. Other brokers are trying to move their business out of the state fund.
“We’ve had to use the fund because it’s cheaper,” Pe & #324;a said. But Garamendi said he wants to refashion the state fund to be solely a carrier of last resort, its original purpose.
The workers’ comp reform package was a step in the right direction, according to Jim Zelinski, spokesman for the state fund, which covers about 260,000 companies. “But there’s more work to get done,” Zelinski said.
Insurance premiums are affected by the number and type of workers’ comp claims employees have filed against their companies.
“One claim in this marketplace can cause problems,” McClellan said. Repeater claims, such as a back injury, which require frequent visits, are more costly than one-time claims.
The only real way for a company to reduce their premiums is to lower payroll, he said. Some companies try to skirt the law and go without workers’ comp insurance at all, he said.
If the state’s Division of Occupational Safety and Health walks in, they’re in big trouble, McClellan said. “It’s a sad situation,” he said.
Meanwhile, commissioner Garamendi has said he plans to be more aggressive in going after potential fraud cases. Last week, department investigators raided the offices of Orange-based temp agency CheckMate Staffing Inc.
The move came after a complaint from one of CheckMate’s insurers, alleging that the company had under-reported staff members, resulting in a lower premium for workers’ comp coverage. No charges have been filed in the case.
On the surface, higher workers’ comp premiums has meant higher income for brokers because they work on commission. In addition, business is up because the need is higher,companies are shopping for insurance to find cheaper rates and because they might not get renewed.
But insurance carriers have cut commissions to brokers, who say raising rates isn’t good for business.
“We don’t benefit if our clients are suffering,” McClellan said. He’s also lost some accounts because some of his clients have closed or left the state.
Brokers say they’ve taken some heat because or rising workers’ comp premiums. “I make all my clients promise not to shoot the messenger,” MacKenzie said.
“We aren’t the insurance company,” Pe & #324;a said. “We don’t set the rates.”
Brokers have tried to combat the bad messenger problem by working closely with companies to help them lower their premiums through safety consulting and educational programs.
Large companies have institutionalized their safety programs, Pe & #324;a said. But small companies tend not to do as much training.
Pe & #324;a’s company offers safety consulting services and “employer school,” which keeps employers updated on legislation and safety tools. “It’s always a packed house,” he said. The service is included with the policy.
MacKenzie also offers safety consultation. “I pay for that out of the commission I get,” he said.
There is room for optimism on the workers’ comp front among brokers. “Change has to happen,” Pe & #324;a said.
“I’m eternally hopeful,” McClellan said.
