California Comp Rates Continue to Rise

by Jeffrey Cavignac, CPCU, ARM, RPLU, CRIS, MLIS – President, Cavignac & Associates
The Workers’ Compensation Insurance Rating Bureau (WCIRB or “The Bureau”) recently published their analysis on Insurer Experience through 2012.  It’s not pretty!  Although underwriting results improved modestly, the numbers are still dismal.  Insurance companies are losing a lot of money in this line and are taking steps to fix the problem.  Translation – higher rates.  So how did we get to where we are, where are we going and what does this mean to you?

From 2003 to 2009, the average rate in California dropped from $6.29 per $100 of payroll to $2.10.  This was caused by some changes to benefits for injured workers, but more importantly, it was due to increased competition among insurance companies.  Insurance companies’ surplus had started to increase and a number of companies that had abandoned the workers’ compensation marketplace decided to jump back in.  They were joined by a number of new entrants as well.  Simple economics tells us that when supply goes up and demand stays the same, prices will go down and that is exactly what happened.

This significant drop in rates at a time when claims costs continued to rise created a tough environment for Workers’ compensation insurers.  The industry went from a substantial underwriting profit to substantial underwriting losses.  Underwriting profitability is measured by the combined ratio.  The combined ratio is arrived at by adding losses plus expenses and dividing by premium.  A 100% combined ratio is break even.  Below that amount you make money, above that, you lose money.  In the last 5 years the combined ratio has been well over 100%, ranging from 116% to 137% with a 5 year average of 130%!  In other words, for the last 5 years, for every dollar in premium the industry has collected, they have spent $1.30 in expenses and losses.

It’s no wonder rates are going up.  Since 2009, the Industry Average Charged Rate per $100 of Payroll has increased 24% from $2.10 to $2.60. Recognize, however, that this is still nearly 60% below the average rate in 2003 ($6.29)!  Rates will continue to rise, and although I don’t anticipate they will reach 2003 levels, they still have a way to go in order to bring profitability back to this line of coverage. So what can an employer do to effectively manage these costs?

In the long run, the only way to reduce workers’ compensation costs is to reduce the frequency and severity of the claims that drive those costs.  This requires a proactive Risk Control program that integrates Safety, Human Resources and Claims Management.  In the short run, you need to understand what your costs will be so you can budget accordingly.  You should have an idea of what your Experience Modification will be a year before it’s published and you should formally estimate your mod in the 7th month following your renewal (payroll and losses need to be reported to the Bureau in the 6th month after your expiration).  It is a good idea to talk with your underwriters early to find out what their rates will be when you renew and also to discuss with your broker an effective marketing strategy for your renewal.

You cannot control the insurance marketplace, but you can control your company’s exposures.  Workers’ compensation insurance is more of a finance mechanism than an insurance mechanism.  Ultimately, you will pay for your claims through insurance programs.  Money spent up front to manage those claims will pay huge dividends.