Despite Gov. Gray Davis’ veto late last month of a proposed $1.5-billion increase in workers’ comp benefits, LA-area businesses are being slammed by sharply rising premiums. The workers’ comp premium crisis, which first hit employers at the beginning of the year, is quickly growing more acute.
“The market has actually gotten harder, with the premium increases becoming larger over the last few months,” said Mario Guerra, president of Calabasas-based Scanlon-Guerra-Jacobsen Insurance Brokers. “We’re seeing increases among our clients averaging 20% over last year, with many premiums going up 50% to 70%.”
The situation has been exacerbated by the state takeover and liquidation of Calabasas-based Superior National Insurance Group, which forced thousands of companies to search for new insurance. The state declared Superior National insolvent and moved in on March 7; the order to liquidate all accounts came on Sept. 26, giving 30,000 former Superior National customers 30 days to find new insurance.
In addition, ratings downgrades of major insurance carriers have hit many in the construction contracting industry hard, since they often are required to show proof of insurance from an A-rated carrier to qualify for contracts. With fewer A-rated carriers, premiums have shot up for these contractors.
What’s more, state officials and industry observers say, there is no end in sight to the premium increases. In fact, the state Workers’ Compensation Insurance Rating Bureau has recommended a base-rate increase of 10% next year, following an 18% base-rate increase recommended for this year. It’s up to state Insurance Commissioner Harry Low to issue a final recommendation.
“It’s been a particularly bad year for insurance industry results,” said Dave Bellusci, chief actuary for the state bureau. “The loss figures coming in for 1998 and 1999 are significantly higher than initially expected.”
Since the workers’ comp insurance industry was deregulated four years ago, insurance carriers have been in a fierce premium price war. Repeated warnings from state regulators and the national insurance credit rating agencies that the carriers were pricing the premiums below the actual cost of claims had little effect. With each passing year, the situation worsened, as claims costs rose at double-digit rates.
State regulators and industry analysts remain puzzled as to why claims costs are rising so rapidly. They cite everything from higher medical costs and benefit payouts to a change in the law to require that the initial treating physician have the final say in treatment.
Crisis Hit Last Year
Finally, late last year, the crisis hit as major insurers like Superior National and Santa Monica-based Fremont General Corp. found they were running through all their reserves. Concerned about the solvency of these and other insurers, then-Insurance Commissioner Chuck Quackenbush recommended in November that all insurers raise their rates in the coming year by an average of 18.4%.
Around Christmas, employers all over the state were hit by sticker shock as the first wave of 2000 policy renewals rolled through. While the state workers’ comp bureau later found that premiums increased an average of 19% in the first quarter, there were widespread reports of premiums doubling and even tripling.
Increases of that magnitude have continued as policy renewals have come up during the year. Though final figures are not yet available, Bellusci said he expects a similar 19% to 20% average increase in premiums for the second quarter.
“If anything, July’s renewals were even higher, which means the increase might be greater for the third quarter,” Bellusci said.
No Relief in Sight
And there’s no relief in sight for the fourth quarter, largely because of the Superior National situation.
“Superior National was the state’s second-largest carrier, with 30,000 customers,” said Fritz Mutter, chief executive of Golden Pacific Insurance Services. “And every single one of those 30,000 customers is right now out there looking for insurance by the Oct. 26 deadline. With such a seller’s market, renewals for these companies are going to be sky high. And that’s going to have a ripple effect for other companies that have renewals coming up.”
Long Grove, Ill.-based Kemper Insurance Cos. acquired the renewal rights last month for former Superior National customers. But there is no guarantee that Kemper will renew every customer. In fact, according to Kemper executive vice president Jay Chase, renewals are being offered only to those companies that meet Kemper’s underwriting requirements.
And in some cases, Kemper’s premiums for renewals are doubling or tripling what a customer was paying to Superior National.
“We had a guy come in who was paying $32,000 a year to Superior National,” said Golden Pacific chief executive Fritz Mutter. “Kemper offered to renew them at $106,000. So they came to us in a panic and wanted to see if they can find something cheaper.”
Many Superior National customers have applied to the State Compensation Insurance Fund, the state’s largest workers’ comp carrier and long regarded as the insurer of last resort.
“Brokers have been bringing us increased business and a backlog has developed,” said state fund spokesman Jim Zelinski. “But we’ve readjusted our work schedules and are able to handle the additional applications.”
Other Insurers on Watch List
Meanwhile, state insurance officials have four or five other workers’ comp insurance carriers on their watch list, according to Department of Insurance deputy commissioner of financial surveillance Norris Clark.
“The market is in better shape than it was a year ago, but the fact that a base-rate increase is still necessary tells us that it is still not profitable,” Clark said.
In fact, analysts say, it may be several years before workers’ comp insurance carriers begin to show consistent profits. And that’s bad news for employers.
“You’re looking now at an overall reserve deficiency of nearly $6 billion for California workers’ comp carriers,” said Michelle Baurkot, senior financial analyst with AM Best Co. “That means reserves are that much lower than they should be to support the claims written. And with claims costs going up, it means that premiums also have to go up.”
“It took several years of writing premiums below cost to get the industry into this mess, and it’s going to take several years of premium increases to get the industry out of this mess,” Baurkot added. n
Fine is a staff writer at the Los Angeles Business Journal.
