California Workers’ Compensation – The Risk of Transferring Risk

California Workers’ Compensation – The Risk of Transferring Risk

Depending on the source, California’s $1.727 Trillion economy falls somewhere between the 3rd and 10th largest when compared to all other nations of the world. With a population estimated at nearly 37 Million, the cost of protecting the state’s workforce against industrial accidents and diseases is substantial.  Data from the Workers’ Compensation Insurance Rating Bureau (WCIRB) reports workers’ compensation insurance costs at $10.7 Billion for calendar year 2008.  But that is half of the staggering $23.5 Billion price tag in 2004.

Why such an enormous fluctuation?  With the advent of “open rating” in 1994, the state’s Department of Insurance (DOI) considerably relaxed the control it exerted on rates that insurers were allowed to charge their policy holders.  This resulted in overly aggressive competitive pricing, eventually causing 28 of the states insurers to be deemed insolvent.  Many other carriers simply stopped writing coverage and exited the state.   The most notable of reforms, Governor Schwarzenegger’s 2004 SB899, drastically reduced system costs and created a profitable environment for insurers.

But history often repeats itself. Even though claim frequency is declining, severity has been predicted to reach an all time high, with medical inflation being the main culprit. The most recent WCIRB report shows loss ratios have jumped to 118%.  This means that, on average, for every $1 an insurer collects in premium, it pays out $1.18 in expenses.  This ratio is expected to rise even higher as incurred claims develop over time.  And to make the situation even more ominous, an insurer’s cash flow is dependent upon payroll and investment returns.  Not a pretty picture considering the states current double digit unemployment and Wall Street’s recent historic plunge.

To avoid another rash of insolvencies that occurred in the earlier part of this decade, insurers have no choice but to cut costs and/or raise rates.  Regardless of whether the state’s insurance commissioner rejects the entire WCIRB recommended pure premium rate increase of 22.8% effective January 1, 2010, workers’ compensation insurance costs for California ’s employers appear to be on the rise.  The insurance carrier’s ability to apply debits or credits to each individual policy has the potential of significantly increasing premiums, even if they do not file for a rate increase.

So what does all this mean to the California employer, and equally important, to their employees?  Does it mean that workers’ compensation premiums will once again be the impetus for those industries most affected, reducing the size of their work force or worse yet, closing down their operations or moving them out of the state?  Does it mean that even though system costs will skyrocket, workers will receive little, if any, additional indemnity benefits?  Does it mean the entire California economy will realize slower growth at a time when it can least afford it?  Does it mean social services and other necessary state government functions will be reduced due to the loss of tax revenue from the negative impact of a yet another workers’ compensation crisis?  History has a tendency to repeat itself.

The insurance industry’s model is built on assuming the risk of its policy holders for a fair exchange of premium.  But in doing so, to what risks do those policy holders expose themselves?  How much control do they retain when they transfer their risk to an insurance company?  In an economic environment where insurers are forced to cut costs, including that of claims adjuster overhead, are injured employees receiving the high quality medical care and indemnity benefits they deserve?   Will policy holders receive the best possible loss prevention and safety services needed to maintain a safe and productive work environment?  If there is employee misuse and abuse of the system, is it being properly monitored and stopped?  Does this mean that another significant wealth transfer from business owner to insurance industry will take place?  History has a tendency to repeat itself --2004 premiums $23.5 Billion.

California law mandates an employer to provide workers’ compensation coverage to their employees by procuring an insurance policy or self-insuring, either individually or through a group.  Significant financial resources are required to individually self-insure.  But for those who are capable of meeting these requirements, significant benefits are realized in addition to the substantial cost savings over traditional insurance.  Commissioner Poizner rejected the 23.7% WCIRB pure premium advisory rate increase for July 1, 2009.  In his statement, he cites the inefficiency of insurance companies as the reason for increases in the system’s costs, and compared those results to self-insured employers whom he claims have experienced a net decrease in overall workers’ compensation costs during the same time periods.

Eligible middle market companies have an option little known to California business owners, i.e., the 501(c)6 mutual benefit corporation, also referred to as a SIG, or Self-Insured Group.  Empirical data exists from AMBest, the insurance industry rating authority, which proves this option can be, by far, the most efficient and effective means of providing workers’ compensation coverage on a long term basis for the market niches it serves.  If history repeats itself, like it so often does, a well managed SIG will rescue eligible California employers from the insurance market cycle villain, once and for all.

For more information on workers’ compensation self-insured groups (SIG), please contact Michael Kilzer at Strategic Workers’ Compensation Solutions. http://www.swcsllc.com/  mike@swcsllc.com  415-693-9200.