California dreaming turns to nightmares for comp companies

California dreaming turns to nightmares for comp companies

Although the California workers comp market finally is improving, that improvement is working down from an egregious accident year combined ratio of 174 in 1999, according to the Workers Compensation Insurance Rating Bureau (WCIRB). A 20-point improvement in 2000 is nothing to sneeze at, but that still left the industry sitting at 154. Early estimates from WCIRB are that the industry will show a combined of 132 in 2001, made up of a 90% loss ratio, 22% loss adjustment expense ratio, and 20% expense ratio. However, WCIRB Chief Actuary Dave Bellusci warns that “the 90% loss ratio is very green, based on 12 months of paid losses. If the sharp loss development that has occurred over the last several years continues, the ultimate cost of 2001 injuries could be well above the 12-month estimate.”

The improvement has come at the expense of California businesses, which have had to pay a much higher rate for workers comp coverage. The WCIRB reports that the average insurer rates for policies written in 2001 were 22% above the average rates charged on 2000 policies and 50% above those charged in 1999. And self-insuring has not proven to be a picnic either-the California Self Insurance Security Fund has a deficit of at least $13 million, with another $3 million in unfounded liabilities expected before press time. Self-insured entities will be asked to pony up to relieve the deficit.

And there has been no improvement in the underlying problem, which is severity. The WCIRB reports that the average 2001 indemnity claim was approximately $43,300, 11% higher than the average cost in 2000 and more than double the average of a 1995 claim. This represents an annual growth rate since 1995 of 12%, which is well above the general inflation rate and even above the medical inflation rate. The good news on the accident side has been the steady decrease in frequency. Indemnity claim frequency for 2001 is estimated to be 9% lower than 2000 and is 55% of its all-time high in 1991.

Piled on top of rising prices, serious market dislocations also have hit employers in California, as a number of major writers of workers comp have left the market. Superior National, which was the third largest writer of comp in 1999, was liquidated in 2000. Fremont General Group, the second largest writer in 2000, and Legion Insurance Company, the fifth largest writer in that year, have been placed under regulatory supervision. HIH America Group, the 10th largest writer in 1999, was placed in conservatorship in March of 2001. And Paula Insurance Company, the state’s 19th largest writer, was placed in conservatorship in April.

And now, Governor Gray Davis has signed AB 749, which increases workers comp benefits by an estimated annual cost of $3.5 billion during its five-year phase-in period, according to WCIRB estimates. The governor’s office claims the benefits will increase system costs by $2.4 billion, which is partially offset by reforms that are anticipated to shave $1.5 billion for a net increase of “only” $900 million. The reforms include: an extension of medical control, which will help to reduce unnecessary utilization of medical treatment, and provision of incentives for smaller employers that establish return-to-work programs.

The insurance industry termed the governor’s estimates “unrealistic” and indicated the final cost would be higher. Whatever the final number, the impact of the bill is expected to be an overall increase in workers comp rates of an additional 10% to 20%.

Some observers suggest that the California experience may well be a harbinger of things to come in other states, as the economy evolves from manufacturing to service and accidents become less frequent but involve more complicated and costly losses like stress, carpal tunnel, eye problems and so on.

Copyright Rough Notes Co., Inc. Jun 2002

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