TOO BIG TO FAIL?
Workers’ Comp Insurer’s Woes Could Hit Employers
By HOWARD FINE
California officials are scrambling to avert what could be the biggest crisis yet to hit the troubled workers’ compensation system: the closing off of new policies by San Francisco-based State Compensation Insurance Fund, the de facto insurer of last resort.
Under a compromise proposal that emerged last week, employers seeking coverage from State Fund would have to show proof they couldn’t get coverage elsewhere. State Fund itself would be required to boost rates.
Both moves could sharply raise workers’ compensation premiums for all employers as early as mid-year. Premiums already have doubled on average in the past four years.
State Fund has seen thousands of new customers in the past three years as the rest of the insurance market has suffered a near meltdown. Regulators long have been concerned that State Fund would not be able to handle a flood of injury claims from new customers.
Then, two weeks ago, State Fund President Dianne Oki told a legislative committee that the fund would have to stop writing new policies soon or face financial problems.
Her comments sent shock waves through state government and the business sector, raising the specter of companies being unable to obtain workers’ compensation insurance coverage at any cost. By law, employers must carry workers’ compensation insurance or face stiff penalties.
In response, state Insurance Commissioner John Garamendi said last week State Fund would remain the insurer of last resort but warned employers would have to prove they were unable to get insurance elsewhere.
He also said he would require State Fund to boost its rates “significantly” in an attempt to discourage employers from signing up.
As the proposal stood last week, an employer dropped by their current carrier or seeking to renew with State Fund must obtain three rejection letters from other carriers before seeking coverage with State Fund.
While this may ease the financial strain on State Fund, it could cause workers’ compensation premiums to spike further.
“This could raise rates for employers and could even open them up to predatory pricing from insurers,” said Charles Bacchi, a lobbyist for the Sacramento-based California Chamber of Commerce.
Bacchi pointed to another development: the Workers Compensation Insurance Rating Bureau recommended an 11% mid-year increase in the base premium rate, on top of two similar increases last year.
Meanwhile, questions arose last week about whether Garamendi had the authority to order State Fund to write new policies.
Garamendi’s agency is charged with ensuring the solvency of insurance carriers, including State Fund. But State Fund, a quasi-governmental body, is not an ordinary insurer. The governor appoints its board members but it is entirely funded by policyholder premiums.
The 1913 law that set up the State Compensation Insurance Fund states only that it should “provide an available workers’ compensation insurance market for California employers” and that the fund be “competitive” with other carriers in the market.
Oki’s testimony assumed that State Fund has the authority to turn away customers.
Garamendi and his staff looked at the same language and concluded it doesn’t.
State Fund spokesman Jim Zelinski said Fund officials are in discussions with Garamendi’s office over how to resolve the situation.
Industry speculation has State Fund curtailing new policies around mid-year, concurrent with a rate increase. Whether curtailment would mean a complete cutoff or Garamendi’s compromise is unclear.
As private carriers have pulled back from the market or sharply raised premiums, employers have flocked to State Fund. Until recently, State Fund’s premiums were lower than comparable premium offers from private carriers.
Four years ago, State Fund held 20% of all the workers’ compensation premiums in the state. It now holds around half.
In an attempt to slow growth, State Fund enacted a sharp increase in premiums last summer, averaging about 20%.
But with hikes elsewhere averaging up to 40%, it remained a comparative bargain and employers kept coming.
In all, 39,000 new employers have come to State Fund in the past two years, bringing the total to 266,000, 17% more than in 2000.
A key gauge of State Fund’s size is in the premium dollars it takes in each year. That figure tripled in two years, to $5.36 billion at the end of 2002 from $1.73 billion at the end of 2000.
State regulators point to this premium growth and say it’s been too rapid and that State Fund holds too much of the market to withstand a surge in claims.
But others say that because the premium growth has far outstripped the increase in policyholders, State Fund is not in serious financial danger.
“The numbers bear out that their premiums are up, but they don’t appear to have seriously increased their exposure,” said Michael Mattoch, staff consultant to the Assembly Insurance Committee. “That’s why Oki’s comments caused such a shock.”
Fine is a staff writer for the Los Angeles Business Journal.
