California Insurance Commissioner John Garamendi is set to recommend in the next week 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, and that carriers need to lower employer insurance bills further.
Garamendi also said that hearings might be needed to probe pricing practices.
“What I’d like is to have premiums decline commensurate with the cost of claims,” he said.
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.
Garamendi has no legal authority to dictate rates.
Last year turned out to be a good year 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 of 55%,” Garamendi said.
In 1999, at the height of the state’s workers’ compensation crisis, insurers were paying $1.41 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.
Last week, the Workers’ Compensation Insurance Rating Bureau, an industry-funded group that serves as actuary to the insurance commissioner, said it plans to recommend a 13.8% decrease in the advisory rate set by the state.
Garamendi is frustrated that insurers have ignored his calls for steep cuts in rates and premiums. In the wake of Gov. Arnold Schwarzenegger’s reforms, Garamendi has recommended reductions totaling 24%, but the industry has cut rates much slower an average clip of 14% to 17% since January 2004.
During the interview, Garamendi also disclosed that his agency is conducting an analysis on the profit margins, overhead expenses and other financial data, of those providing workers’ compensation insurance in California.
His biggest concern is that these companies are not reducing premiums quickly enough to fall in line with the declining cost to manage claims.
“The analysis will be concluded in the next two weeks. It appears there should be some downward pressure on premiums,” he said.
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 controlled by Schwarzenegger 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.”
