California Insurance Commissioner John Garamendi is set to recommend by June 10 cuts of up to 22% in premiums that employers pay for workers’ compensation insurance.
Garamendi told the Business Journal that he thinks insurance industry profits have become overly rich, under recent workers’ compensation reforms.
Hearings might be needed to probe pricing practices, he said.
“What I’d like is to have premiums decline commensurate with the cost of claims,” he said.
Garamendi has no legal authority to dictate rates. Insurance carriers use Garamendi’s nonbinding recommendation as a benchmark when setting rates for policy renewals after July 1.
He also makes a second recommendation for renewals set after Jan. 1.
“I’ll make a judgment call in the next week, but it seems to me the range of additional savings will go beyond 20%,” he said.
Under consideration is a range of 14% to 22% in rate cuts, he said.
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Last year turned out to be a good one for the industry.
The cost of medical treatment and benefits was at a low,45 cents for every $1 in premiums.
“This is an incredible profit margin,” Garamendi said.
Just a few years ago, at the height of the state’s workers’ compensation crisis, insurers were paying more than triple today’s cost for every premium dollar.
Last year the number of claims dropped 18.6%, continuing a downward trend following passage during the past few years of two state laws to dramatically overhaul the system.
The Workers’ Compensation Insurance Rating Bureau, an industry-funded group that serves as actuary to the insurance commissioner, recently said it plans to recommend a 13.8% decrease in the advisory rate set by the state.
Irvine-based CorVel Corp. has felt the impact of the drop in claims. CorVel, which sells software that helps companies manage their workers’ comp and other insurance claims, has struggled in recent quarters amid the drop in claims.
“We are having a tough time,” said V. Gordon Clemons, chief executive of CorVel.
He said that claims have fallen substantially while insurance companies have continued to charge high premiums.
“Profits are at an all-time high,” said Clemons for insurance companies in the workers’ compensation market, Clemons said.
But while the trend may be hurting CorVel’s core business of processing claims, Clemons said that employers across the state eventually will benefit.
“I think we will see a substantial drop in premiums over the next year or two,” he said.
Garamendi ‘Frustrated’
For now, Garamendi said he is frustrated that insurers have ignored his calls for steep cuts in rates and premiums.
In the wake of Gov. Arnold Schwarzenegger-led reforms, Garamendi has recommended reductions totaling 24%. But the industry has cut rates much slower at an average clip of 14% to 17% since January 2004.
Garamendi also said his agency is conducting an analysis on the profit margins, overhead expenses and other financial data, of those providing workers’ compensation insurance in California.
“The analysis will be concluded in the next two weeks,” he said. “It appears there should be some downward pressure on premiums.”
What will Garamendi do with the report?
“I’ll scream and yell and jump up and down on these companies,” he said. “I have no power to force a premium reduction, but with one exception: the State Compensation Insurance Fund.”
He claims that insurance companies are manipulating the quasi-public fund as a way to keep their own premiums high.
The fund controls 55% of the workers’ compensation market in California, with about 90% of all small businesses using it for insurance, according to Garamendi.
“The state fund is the market leader and the industry is pricing around it. The industry is cherry picking,” he said.
“My plea is to have the governor (step in) to reduce premiums. The board of directors (of the state fund) is aware of what’s going on here, and they are appointed by the governor.”
OC Probe
Garamendi also said that the Orange County District Attorney’s Office was reviewing a “a very big” workers’ compensation fraud case.
“The construction industry is the most common area of uninsured contractors,” he said. “There is a very significant case that is near completion in Orange County.”
He declined to elaborate.
Elizabeth Henderson, assistant district attorney in charge of the economic crimes unit in OC, also declined to identify any cases under review.
“We have some very large dollar investigations under way, but I can’t comment on them,” she said. “There are a significant number of businesses who don’t pay their fair share of workers’ compensation (premiums). Rates would go down if they did pay, because more would be swimming in the pool.”
In a sign of how important prosecution of workers’ compensation cases have become locally, the district attorney’s office has requested a huge boost in funding for the unit.
The office requested $2.5 million for its workers’ compensation fraud prosecution program for the 12-month period beginning July 1, up 42% from the current year and 117% higher than in 2001, according to statistics provided by Henderson.
The funding comes from a portion of insurance premiums.
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Garamendi Probing Gallagher Settlement
Yet another nationwide scandal may find its way to California,and possibly Orange County,according to state Insurance Commissioner John Garamendi.
Garamendi said in an interview with the Business Journal that his agency is looking at a recent nationwide settlement with Arthur J. Gallagher & Co., the world’s fourth largest insurance broker, in Illinois.
It’s all part of Garamendi’s ongoing investigation into broker practices.
The investigation focuses on the payment of contingent commissions to both commercial and personal lines brokers. These are sometimes referred to as kickbacks, with many insurance companies having ended the questionable practice following recent publicized probes into Marsh & McLennan Cos.
In Illinois’ settlement with Gallagher on May 18, the Chicago-based insurance brokerage agreed to refund $27 million from insurance companies,some in California,in exchange for steering clients toward those favored companies.
Garamendi said some of the restitution payments will go to “major California companies,” but he declined to identify them. Insurance brokers act as middlemen between corporations and insurers, helping companies get the lowest rates.
Garamendi indicated that his department wouldn’t sign off on the nationwide agreement until his investigators had turned over more stones.
His department will focus its investigation on the “steering” aspects of the Illinois agreement to see if specific insurance companies in California paid millions of dollars in exchange for Gallagher steering clients toward them.
There are several major insurance companies that operate in OC, but Garamendi declined to identify any that are the focus of his investigation.
“Gallagher admitted to steering and agreed to restitution,” Garamendi said. “Does that mean possible indictments in California? Possibly.”
The Gallagher clients who might get refunds don’t have to be named for another three months, said Chaka Patterson, Illinois’ assistant attorney general who led the Gallagher investigation.
The settlement requires Gallagher to calculate which clients get how much by Aug. 31. Notices are set to go out to the clients by Oct. 1. Clients will have until Dec. 31 to decide whether to participate in the fund. Payments are expected by March 31, 2006.
Patterson said that there could be some insurance companies in California that paid “contingency commissions,” or kickbacks, to Gallagher.
“We tried to negotiate a deal with any state with an interest in the steering and kickback scheme. But the insurance commissioner (Garamendi) may have an interest in investigating other insurance companies there,” said Patterson, speculating as to why Garamendi hasn’t signed off on the nationwide settlement.
Marsha Akin, a spokeswoman with Gallagher, declined to comment on ongoing legal issues related to the settlement.
In a company statement at the time of the settlement, Gallagher said it had admitted no wrongdoing or liability, and wasn’t required to issue a letter of apology.
The Gallagher settlement is the latest in a string of insurance scandals to hit the industry.
Broker Willis Group Holdings recently agreed to pay $51 million to settle investigations by the attorneys general of New York and Minnesota related to fraud and anti-competitive practices in the insurance industry.
Last October, New York Attorney General Eliot Spitzer initiated an industrywide bid-rigging probe with an investigation into Marsh & McLennan, one of the world’s largest insurance brokers.
New York-based Marsh & McLennan and Chicago-based Aon Corp. earlier this year agreed to pay $850 million and $190 million, respectively, to settle allegations of fraud uncovered in the probe.
Last fall, Garamendi filed a lawsuit accusing four insurance companies for allegedly steering kickbacks to San Diego-based broker Universal Life Resources Inc., which has agreed to cooperate with state investigators.
,Pat Maio
