Commercial Insurance Update – California’s Workers Compensation System: On The Verge of Collapse?

please click here for the original pdf

February 2001

California’s Workers Compensation System: On the Verge of Collapse?

The California workers compensation insurance market is in trouble. In 1998, it is estimated that for every dollar the industry took in, it spent $1.47. In 1999 this increased to $1.53, and year 2000 is not expected to be any better.

California has been operating under a system of “open rating” since 1995. Prior to that time, we were subject to a “minimum rate” law. In other words, the minimum rates that could be charged by an insurance company were specified by the Workers Compensation Insurance Rating Bureau.

(for graphs refer to the original pdf)

Since 1995, companies have been free to submit their own rates to the Bureau for approval. This has resulted in significant price decreases, which have resulted in poor operating results for a number of California workers compensation insurance carriers (see graph on the original pdf).

Unfortunately, during this time of significant rate decreases, there were also significant claim cost increases. It is estimated that indemnity claims (claims on which there was time lost from work) have increased 73% since 1994.

This confluence of factors has created a number of problems within the California workers compensation market place.

In March of 2000, the largest private writer of workers compensation in California, Superior National Insurance Companies, was seized by the Department of Insurance. The California Insurance Guarantee Association (CIGA) will have to step forward and pay the claims that Superior National cannot pay.

 

The maximum that can be charged by law under CIGA is 1% of estimated premiums, and the Superior National liquidation will maximize that CIGA charge.

The big concern is, what if other companies require liquidation as well?

Fremont General Corporation and its related entities are currently under increased regulatory over- sight by the California Department of Insurance. Fremont has closed 16 of its 24 production and claim servicing offices and cut its work force in half. If Fremont were to be liquidated, there is some question as to where the money would come from to pay the anticipated claims.

In addition to Superior National and Fremont, a number of other companies have either withdrawn from the California workers compensation market place, substantially reduced their underwriting appetite, or dramatically increased their pricing.

In addition to the poor operating results, it is also anticipated that the industry may be under-reserved by more than $5 billion. Bear in mind that the annual premiums in California total approximately $10 billion or so.

Prices began to go up last year. It was recommended that insurance companies increase their rates by approximately 18.2% effective January 1, 2000. Effective January 1st of 2001, Insurance Commissioner Harry Low proposed a 10.1% average increase in pure premium rate.

Industry experts, however, agree that this is not nearly enough, and most insurance companies are raising prices 20% to 50%, and sometimes higher on their 2001 renewals.

The bottom line is that workers compensation rates in California are increasing, and will probably continue to increase in the short run until the insurance companies either return to profitability, or at least lose less money.

The pricing increases underscore the fact that the only way for a firm to truly manage its workers compensation costs effectively is to proactively manage and control its claims.

 

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.