RATE SPIKE – Fresh Round of Workers’ Comp Hikes Set to Hit This Week
By HOWARD FINE
Another round of workers’ compensation premium rate increases is due to hit this week, marking the second year in a row that they are rising at midyear.
Officially, the rate increase on premiums renewing after July 1 has been pegged at 7.2% by state Insurance Commissioner John Garamendi, following a 10.5% rate hike in January.
Adding in the 10.2% midyear increase last year, official rates have gone up 30% in slightly more than 12 months.
Rate increases are, in reality, much higher because Garamendi’s suggested increases only cover the cost of claims, not insurers’ overhead or investigative fees or other premium surcharges that insurers typically tack on to premiums.
Taken together, these additional costs typically add another 5% to 20% to premiums, depending on industry type and claims histories.
“Annual premium increases of 50% to 100% are typical for my clients,” said insurance broker Fritz Mutter, president of Golden Pacific Insurance Services Inc. in Monrovia. “A 25% increase is really good, and I guarantee you that almost no one is seeing the combined 20% increase that Garamendi has recommended over the past 12 months.”
One business expecting to see a huge jump is Cerritos-based Insta Graphic Systems Inc., a print shop serving the apparel industry.
“Our rates are going up on July 1, and, although we haven’t seen the bill yet, our insurance carrier has told us our annual premium will likely double, from $180,000 to just over $360,000,” said Janet Wells, a co-owner of Insta Graphic.
Wells said her company has had some claims filed against it over the last year, including a $98,000 bill for repair of a torn thumb ligament.
“The medical costs are totally out of control, and the employer has no say on these costs,” Wells said. “We’re just told to pay up.”
Making matters worse, Wells said, is that her biggest customers are asking her to cut her prices as much as 20%.
“This is a very serious problem,” Wells said. “Since we’ve already laid off as many people as we can and still keep the press going, we’ve got three choices: sell the business, move out of state or close entirely.”
Wells said this latest increase would push her workers’ compensation costs to about $6 per $100 in payroll, double the level of last year. But that’s hardly out of line with what other companies are experiencing.
The statewide average premium for the first quarter was $5.80 per $100 of payroll, according to David Bellusci, senior vice president and chief actuary for the state Workers’ Compensation Insurance Rating Bureau.
Three years ago, the rates were half that amount. The run-up has been the fastest in state history, Bellusci said.
“I wouldn’t be shocked to see that figure reach $7 per $100 payroll by the first quarter of next year,” Bellusci said. That would bring the cost in California to nearly double the next-highest premium rate in the country.
Driving the increases have been runaway medical treatment costs, extensive litigation, a deregulated insurance market that came near collapse last year and three successive annual benefit increases that Gov. Gray Davis signed into law last year.
And a new factor has come into play with this round of increases.
The state’s largest insurer, State Compensation Insurance Fund, is coming under increasing state scrutiny as it has grown to include about half of the overall state workers’ compensation insurance marketplace. To stem that growth and forestall what some feared would be a collapse of the fund, Garamendi in April ordered State Fund not to accept new customers unless those customers can prove three private insurance carriers rejected them.
“This is giving tremendous market power to some private insurance carriers,” Mutter said.
Making matters worse, medical treatment and litigation costs are escalating so rapidly that Bellusci said the rate increase Garamendi has recommended wouldn’t even come close to covering them.
Originally, Bellusci said, the Workers’ Compensation Bureau recommended to Garamendi that premiums be boosted 10.6% for the second half of the year.
But actuaries in Garamendi’s office looked at the same data and came up with a more conservative estimate of the cost increases, said Garamendi spokesman Norman Williams.
After the Workers’ Compensation Bureau came out with its recommendation in April, more cost data came in, Bellusci said.
“We now estimate that for the second half of this year, costs will increase about 22%,” he said. “Since the Insurance Commissioner has recommended a midyear increase of only 7%, that leaves an increase of about 15% that will have to be accounted for at the end of the year, when the regularly scheduled premium recommendation comes.”
A package of reform bills backed by Gov. Davis is moving through the state Legislature and considered likely to pass. The centerpiece of the package is a bill to cap fees charged by outpatient clinics; proponents say this will go a long way toward reducing workers’ compensation costs.
But critics say the package doesn’t go nearly far enough, since the bills don’t attack the thorny issues of classifying injuries and determining workplace causation.
Fine is a staff reporter with the Los Angeles Business Journal.
