By Howard Fine
For months now, headlines and studies have trumpeted huge double-digit drops in workers’ compensation premiums in California.
But when Ruben Guerra, the owner of R.G. Packaging & Designs, a two-person business in Commerce, opened his January renewal quote from the State Compensation Insurance Fund, he was stunned to see his premium was unchanged.
“I thought there was supposed to be a big decrease,” Guerra said. “We’ve been reading about this now for months. But where’s my decrease?”
Guerra is not alone in wondering where his savings are.
According to a recent Union Bank of California survey of 1,900 businesses statewide, a stunning 85% said they have not seen their workers’ compensation premiums go down in the past year.
Sixty percent of the companies said their workers’ compensation premiums were unchanged from January 2005 to January 2006, while roughly one in four companies said their workers’ compensation premiums actually rose.
This comes despite four rounds of rate cut announcements from insurers averaging 38% in the past two years. It also flies in the face of a recent state-mandated study from Bickmore Risk Services that projected insurance rates to have fallen 46% from July 2003 and January of this year.
“This shouldn’t be happening,” said Norman Williams, spokesman for state Insurance Commissioner John Garamendi.
Too Small
Neither the study’s authors nor state and insurance industry officials could offer firm explanations for the discrepancy. But they suggested that the companies surveyed,all with revenue of less than $5 million,are so small that they’ve simply been left behind as rates have plunged.
Businesses this size rarely have the staff or the time to shop around for the best workers’ compensation insurance rates. Guerra himself said he didn’t do any comparison shopping. “I’ll definitely do so next year,” he said.
But even if they do shop around, small companies tend to have little negotiating power. They are often considered too small to be attractive underwriting prospects for many insurers.
Last September, Robert Schuster, owner of Hollywood Studio Rentals, received a notice from his carrier that his policy was being canceled.
“The official reason they gave was that four years ago a claim was filed against my company,” Schuster said. “But if that was the case, why didn’t they drop me each of the last three years instead of renewing my policy? I think the real reason is that they didn’t make enough profit on us.”
Schuster searched around for another carrier but got quotes that were substantially higher than he was paying. That prompted him to implement a plan that had been in the works for a couple years: converting the company into a limited liability corporation, with each employee receiving just more than 5% of the company’s stock.
With everyone now a part owner, the company had no employees to cover and did not have to purchase workers’ compensation insurance, Schuster said.
“Paying them each 5% of the company’s profits has turned out to be cheaper than paying workers’ compensation,” he said.
State insurance officials questioned the legality of Schuster’s move.
Whatever the case, it illustrates the impatience felt by small-business owners. These companies took the brunt of the workers’ comp rate hikes in the early years of the decade as most of the private market disappeared and they were forced to sign up with State Fund at sharply higher rates.
Soon after the workers’ compensation reforms passed in April 2004, some midsize and larger companies were able to cut deals with private insurers that began coming back into the market. But most of the small companies remained with State Fund until recently.
Many Players
Now, though, insurance industry officials say so many players have come into the market that small businesses no longer have to remain with State Fund, which has seen its market share drop to about one-third from about 60%.
State Fund spokesman Jim Zelinski said the insurer is lowering its rates.
“We are passing along savings to all of our policyholders regardless of size,” he said. “In fact, in November we filed our fifth consecutive across-the-board rate decrease.”
State Fund also has just instituted an additional 10% discount for employers with premiums under $75,000 that have good safety records, Zelinski said.
At the same time, the private insurance market also is beginning to target smaller companies.
“There are carriers out there now that specialize in serving very small businesses. It’s just a matter of those businesses shopping around until they find them,” said Nicole Mahrt, spokeswoman for the American Insurance Association.
Mahrt said she could not explain why more respondents to the Union Bank survey saw their premiums rise.
“The only other factors I can think of is that companies either had recent claims against them or they added employees,” she said.
Indeed, small businesses tend to be among the fastest-growing companies. It’s possible that some of the responding firms added employees and failed to take that into account when looking at their workers’ compensation premiums.
Union Bank chief economist Kei Matsuda said there might also be a “perception gap.”
“Business owners see these headlines screaming 40% rate cuts, so they expect to see their own rates drop by that magnitude. If their premiums only go down 4% or 5%, they may think that’s flat and respond that their premiums didn’t change when in fact they did go down,” Matsuda said.
Fine is a staff writer with the Los Angeles Business Journal.
