A Rare California Policy Success Trying to Survive

July 18, 2005

This month new workers’ compensation insurance rates went into effect in California. And thanks to reforms championed early on by State Sen. Charles Poochigian and Assemblyman Abel Maldonado, and later pushed by Gov. Arnold Schwarzenegger, workers’ comp rates are plummeting. But despite the good news, opponents are working tirelessly to gut the reforms. If successful, they will create California’s next financial crisis.

Responding to skyrocketing workers’ comp costs that were forcing businesses to shut down, the state legislature passed a series of historic reforms beginning with AB 227 and SB 228, signed by former governor Gray Davis days before the 2003 recall. Governor Schwarzeneg-ger then negotiated a sweeping overhaul of the system, SB 899, signed in April 2004. Opponents predicted the reforms would fail.

Steve Lopez, columnist for the Los Angeles Times, called SB 899 a “phony reform bill” because it did not force insurance companies to pass on cost savings. He wrote about insurers, “They’re working on the honor system.” This displays a lack of understanding of how markets work.

Insurers might not want to pass on savings, but competition forces them to do so. And they have. Average workers’ comp rates fell 16 percent from the fourth quarter of 2003 to the third quarter of 2004. But the full effects of the reforms are just now being felt.

Workers’ comp insurance rates during the next six months will be a head-spinning 15-percent less, on average, from the previous six-month period. Many rate decreases are even bigger: Hartford and St. Paul Travelers 18 percent, Oak River 20 percent, State Fund up to 20 percent, Republic Indemnity 25 percent, and Zurich American a whopping 26 percent. Despite this unprecedented 31-percent decline in premiums from before the recall, opponents don’t let the facts get in the way of their attacks on the reforms.

Angie Wei, lobbyist for the California Labor Federation, said, “employers are not even getting the benefit” from the savings in workers’ comp costs. “It’s time for rate regulation,” she said. Many legislators agree.

State Senator Richard Alarcon (D-Sun Valley), is pushing his perennial bill to cap workers’ comp premiums (SB 46). It passed the Senate, stalled in the Assembly, but will re-emerge next year. Not only will the bill do nothing to help self-insured employers (about 20 percent of California businesses), it also sends the wrong signal to insurance carriers at a time when they are returning to California.

Just weeks ago, the California Insurance Company began writing workers’ comp policies in California. CompWest Insurance was licensed at the end of 2004 followed by Warren Buffet’s Berkshire Hathaway subsidiary, National Liability and Fire Insurance. Other carriers are waiting for licenses. The willingness to enter California is a sign of a market on the mend due to the recent reforms.

Price controls would end this bullish stampede back into the Golden State. Only six states impose price controls on workers’ comp because most states have learned that controls do not help consumers long term. Another development that doesn’t help is the litany of lawsuits attacking the reforms.

The California Labor Federation, California Applicants’ Attorneys Association, and their front group Voters Injured at Work have filed lawsuits to invalidate key elements of the reforms: the new medical-provider networks, apportionment provisions, and the new permanent disability rating schedule. If left intact, the new schedule would cut premiums up to $1 billion annually The applicants’ bar and labor leaders want to derail the reforms, which threaten their pocketbooks. But if the attacks are successful, Californians will have to deal with yet another financial crisis.

Price controls will slash revenues to workers’ comp insurers, while medical and indemnity payouts will soar if courts invalidate the reforms. Revenues will fall; costs will skyrocket-a recipe for disaster. Eventually, many carriers will be driven to bankruptcy, necessitating huge bailouts of insurers by state taxpayers.

Assembly Speaker Fabian Nunez said that he and other opponents of the reforms “do not trust market forces.” They should rethink this dated view. Market competition works, and it has dramatically lowered rates. Businesses will enjoy a 31-percent rate cut if the reforms are allowed to continue, freeing money for new hires and better employee benefits.

Anyone who operates a business or has a job in California should thank Governor Schwarzenegger for this dramatic turn-around in workers’ comp, which has saved tens of thousands of jobs. To avert a financial crisis, lawmakers must reject price controls and let the workers’ comp reforms continue to improve California’s business climate.

Lawrence J. McQuillan, Ph.D., is director of Business and Economic Studies at the Pacific Research Institute for Public Policy in Sacramento. He can
be contacted at LMcQuillan@

pacificresearch.org.

From This Issue

Insurance Journal West July 18, 2005
July 18, 2005
Insurance Journal West Magazine

2005 Excess, Surplus and Specialty Markets Directory, Vol. I

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