By Mark Webb
On November 18, 2010, Insurance Commissioner Steve Poizner denied the request of the Workers’ Compensation Insurance Rating Bureau (WCIRB) to increase pure premium rates in the workers’ compensation system by an aggregate 27.7% over the prior approved pure premium. The Department’s actuaries recommended an increase of 20.4% overall based on the same data presented by the WCIRB. (Proposed Decision, File Number REG-2010-00014, p.4) These numbers reflect the cumulative effect of the refusal of the Department of Insurance to raise pure premium rates over the past several years, approving only one increase of 5 percent effective January 1, 2009 while rejecting recommendations for increases for January 1, 2008, July 1, 2009, January 1, 2010, and now January 1, 2011.
The Commissioner’s order, however, raises far more questions than the interpretation of data and application of actuarial methodologies. In 1993, the California Legislature passed the current workers’ compensation insurance competitive rate law, Senate Bill 30 (Johnston). SB 30 repealed the so-called “minimum rate law” by which the Commissioner had been approving rates since 1915. The requirements of a rating organization under SB 30 are virtually identical to requirements in many other states. In this region, Colorado, Montana, Nevada, New Mexico, Oregon, and Utah require a rating organization, the National Council on Compensation Insurance, Inc. (NCCI) to file “advisory loss costs” – also known as “advisory pure premium”. This is generally the loss and loss adjustment expense components of the rate. The approved pure premium rate is not binding on insurers in California. The rest of the costs included in developing premium are based on filings made by individual carriers.
In California’s Insurance Code, “pure premium rate” is defined as, “…that portion of the rate which represents the loss cost per unit of exposure, including loss adjustment expense.” [Insurance Code § 11730(f)] This is, for example, identical to Colorado’s definition of “pure premium rate”, “…that portion of rate which represents the loss cost per unit of exposure, including loss adjustment expenses.” [CRS 10-4-402(2.4)]. Somehow, however, this process, which is replicated in various forms throughout the country, only becomes mystifying in California.
Prior to the 1990s, most states regulated workers’ compensation insurance rates through an administered pricing mechanism that included all losses and expenses. The primary argument for that system was that excessive competition among insurance companies caused carriers to set premiums too low, leading to insurer insolvencies. Since that time, most states have moved to “loss cost” rating systems that rely more heavily on market competition by requiring insurers to individually file their own expense and profit components of a rate filing while allowing a rating organization to file the loss costs portion of the rate. [See: “Senate Staff Analysis and Economic Impact Statement”, CS/SB 1926, Florida Legislature, March 9, 2004, p.3.]
Given the major insolvencies of a decade ago, it should not come as a surprise that the California Legislature has focused on insurer solvency in its actions over the past decade. Assembly Bill 1985 (Calderon) was enacted to give the Department more authority to intervene when rates are inadequate in order to, “…restore pricing and underwriting stability to the market, which will provide adequate revenues to fund benefit level increases.” (Senate Floor Analysis, AB 1985, June 17, 2002) Senate Bill 316 (Yee), effective January 1, 2008, included within its provisions a study of the insurer insolvencies in 1998-2002. The recommendations from that study by the Commission on Health and Safety and Workers’ Compensation have been largely ignored, even though their research indicated that the ultimate cost of insolvencies to employers will be $4.9 billion. [Dixon, et al., “California’s Volatile Workers’ Compensation Insurance Market: Problems and Recommendations for Change” (2009) RAND Institute for Civil Justice for the Commission on Health and Safety and Workers’ Compensation, p.xv.]
The Commissioner’s order undermines the wall between the activities of the WCIRB in developing pure premium rates and the conduct of individual insurers competing in the workers’ compensation insurance marketplace. The intent behind loss cost model rating laws is to foster competition. Tying the pure premium process to individual insurer filings and profitability is not consistent with the requirement of developing “adequate” pure premium rates. The distribution of this product through agents and brokers comes with it the protection of trade secrets and proprietary information and strict adherence to anti-trust requirements. This is essential for the proper functioning of a competitive market and yet there is no indication that the proposed new role of the WCIRB will have safeguards against what may be considered anti-competitive behavior.
The considerable reductions in premium, the ebb and flow of capital into this marketplace, and the increasing loss ratios of insurers show that competition is working. The notion that the pure premium requests are a “…cover for the insurance industry in its justification for higher rates” is unsupported in the marketplace and, indeed, in the collective history of competitive rating since its effective date on January 1, 1995.
Furthermore, the accusation that insurers have not implemented cost savings measures is irreconcilable with the realities of a competitive marketplace. Whether pharmacy benefits management systems (PBMs), medical provider networks (MPNs), utilization review services, or efforts to work with employers to return injured workers to work; many insurers work with their agents and brokers to manage costs to employers. Some do this better than others, to be sure, especially in an environment where the insurance purchasing decisions of many distressed businesses are based solely on price, but the Commissioner’s allegations cut too wide a swath.
With the exception of the State Compensation Insurance Fund, no carrier has ten percent of this market. Individual carriers make individual business decisions on where to write, what to write, and how to write it, and brokers are not lacking for markets. This is what SB 30 was intended to foster. No one business or group is immune from criticism in California’s complex workers’ compensation system, but the recommendations in the Commissioner’s order do not lead us closer to a building a better system for the stakeholders we serve.