The era of rapidly falling workers’ compensation bills for employers may be nearing an end, nearly four years after sweeping reforms were enacted.
In recent policy renewals, employers generally are seeing smaller decreases in their premiums than in past years.
“Rate reductions are slower,” said Steve Horoshak, a senior vice president with USI of Southern California Insurance Services in Irvine, part of Briarcliff Manor, N.Y.-based USI Holdings Corp.
Higher medical costs are a main driver of the moderating increases, Horoshak said.
What’s more, a nonprofit agency charged with tracking workers’ compensation insurance trends is recommending an increase in base premiums of 4.2%,the first such increase in four years.
If state Insurance Commissioner Steve Poizner follows through on the recommended increase later this month, it would send a powerful signal to insurers that further substantial premium cuts aren’t warranted.
Cuts of 10% to 15%
Brokers say their clients are seeing smaller decreases,in the range of 10% to 15%,than in past years, when it was common to see rate drops twice as large.
The reduction in premiums has slowed dramatically at Cerritos-based InstaGraphic Systems, which employs about 120 people and makes heat transfer prints and machines for the apparel, textile and medical industries.
The company’s 2006 workers’ compensation renewal quote plunged 46% from the year before. But the July 2007 renewal reflected only a 5% reduction.
The base workers’ compensation rate actually went up 9%,only a substantial discount for a good safety record kept the total premium payment from going up as well, co-owner Janet Wells said.
“After three years of decreases averaging 28% a year, we were back close to what we were paying in 2000 before all the increases hit,” Wells said. “So I’m not surprised that we didn’t get another double-digit cut this year. That can only go on for so long.”
So far, actual rate increases are a rarity, thanks to intense competition among workers’ compensation insurance carriers.
“It’s still very competitive out there,” Horoshak said.
That’s a far cry from earlier this decade when the workers’ compensation insurance market virtually collapsed in California after carriers had written policies below cost for years as deregulation took hold. At one point in early 2004, there were so few commercial carriers writing policies that the State Compensation Insurance Fund, the quasi-public insurance carrier of last resort, had roughly 60% of the market.
Starting in 2000 and continuing through 2003, workers’ compensation insurance premiums doubled on average, though some companies saw their premiums increase threefold or even fourfold.
Campaign Issue
The outcry from employers was seized on as a campaign issue by Arnold Schwarzenegger during the 2003 recall election. After becoming governor, one of Schwarzenegger’s first acts was to push through the Legislature an overhaul of the workers’ compensation system.
It took almost a year for insurers to feel comfortable enough with the reforms to begin dropping rates. Once they did, they lowered premiums with a vengeance.
Across California, premium rates have plunged about 60% from July 2003 and July 2007, according to Dave Bellusci, senior vice president and chief actuary of the California Workers’ Compensation Insurance Rating Bureau, a nonprofit association of insurers that tracks claims data.
Premiums now consume less than 3% of payroll, down from 6.5% in mid-2003.
But the cost to administer claims hasn’t gone down, Bellusci said. It has remained steady as paperwork associated with claims has increased. Much of this paperwork is the result of greater numbers of challenges to insurer denials of treatment.
“The claims are just as complex as ever, if not more so,” he said.
Not wanting to risk a repeat of the fiasco of the late 1990s when insurers joined in a mad rush to the bottom and wrote premiums well below the cost of claims, the rating bureau last month recommended a 4.2% increase in the base premium rate. In essence, the recommendation sends a signal to the industry to be wary of over-reaching with rate cuts.
The bureau’s recommendation now is on the desk of Insurance Commissioner Poizner, whose office has scheduled a hearing for Oct. 23 on the issue. After that, Poizner will have 30 days to act on the recommendation. He can accept it, or offer his own recommendation for rates.
Last May, Poizner recommended a 14% drop in the base rate, citing 2006 figures showing that insurers were paying out only 37 cents in claims for every dollar written in premium.
Insurers are not obligated to follow Poizner’s lead. But in most cases, it serves as the benchmark for the industry.
Whatever the case, brokers say that any recommended rate increase won’t be considered by carriers until renewals start on Jan. 1.
Long Term
Over the longer haul, rates could increase more if benefit levels are increased or treatment criteria loosened. Ever since the reforms passed in 2004, labor unions and injured workers and their legal advocates have been pushing to relax those reforms.
Each year, at their behest, the Legislature has passed bills to increase disability payouts or restore the right of injured workers to seek treatment from their own doctors.
But each year, Gov. Schwarzenegger has acquiesced to the wishes of employer lobbyists and vetoed these bills. This year, Schwarzenegger once again is expected to veto a bill now on his desk to raise benefit levels.
Fine is a staff writer with the Los Angeles Business Journal.
