Calif. Commissioner Orders SCIF to Reduce Broker Commissions

Calif. Insurance Commissioner John Garamendi held a press conference March 3 addressing the workers’ compensation crisis in California. Specifically, Garamendi proposed a seven point plan to return State Compensation Insurance Fund to a state of financial stability. Below is the text of Garamendi’s speech to the media:

“Last week, I outlined my plan to address the serious crisis in the $15 billion California workers’ compensation system. The premium costs to employers are out of control and will continue to spiral upward unless legislative and regulatory action is taken immediately. The legislative action is needed to control medical costs, create uniformity and certainty in permanent disability benefits, reduce litigation, and establish standards of conduct for claims adjusters and appeals judges. Regulatory action is needed to preserve the fiscal integrity of insurance companies, reduce fraud, and coordinate state agencies’ activities.

Today, March 3, 2003, the State Compensation Insurance Fund has filed its annual financial statement, which provides evidence of an organization in need of aggressive action to right its financial ship. I am working directly with the management of the State Fund, California’s largest provider of workers’ comp insurance, to correct its financial problems. Over the past few years the fund’s premium writings have grown too rapidly because private insurance companies reduced their business in California and employers have been forced to insure through the State Fund. This extreme growth has led to serious financial problems at the fund. Meanwhile, its surplus has not increased commensurate to its written premium and reserve growth, and its total adjusted capital is not at a desirable level.

Failure to take action now could have disastrous consequences for both State Fund and the California economy. With nearly 54 percent of workers’ comp insurance policies that cover more than half the employers in the state, a solid, well run State Fund is absolutely essential. Therefore, my course as Insurance Commissioner is clear – the State Fund must be strengthened and preserved to ensure the viability of the state’s economic future. The course is clear for the Legislature as well – it must act immediately to stop the cost escalators that are so entrenched within the system.

I have worked diligently with State Fund management since taking office in January to address this situation. At my direction, they have prepared a comprehensive business plan designed to accomplish several major goals, including, but not limited to: Reducing premium income, increasing surplus and profitability, strengthening management and creating operating efficiencies. Some details of the plan are not yet complete, but the general elements are well conceived and comprehensive. The sum of these elements should yield a stable, profitable State Fund with the solid financial strength and the management expertise to accomplish its mission.

State Fund’s business plan includes the following steps:

1) State Fund will retain a management consultant to ensure that it operates as effectively and efficiently as possible. It will also retain a consultant to assist the new chief financial officer. This consultant will focus on finding additional opportunities to strengthen the capital structure of the organization.

2) State Fund will take steps to dramatically reduce new business. Business submitted by brokers and agents will have to demonstrate that insurance is not available from any other source.

3) Effective July 1, State Fund will implement a further rate increase on new and renewal policies. This increase will be adequate to ensure that premiums paid by policyholders are sufficient to pay all claims and claims-associated expenses and restore surplus to an adequate level.

4) State Fund will reduce broker commission rates and conduct a review of business submitted by brokers and their companies. Those brokers found to consistently write unprofitable books of business will lose their certification.

5) State Fund will explore reinsurance arrangements to reduce the strain on its surplus caused by the rapid growth in new and renewal business.

6) State Fund will also strengthen its underwriting practices to ensure control over the quality of new business it must write because there are no other markets for those accounts.

7) State Fund will review all of its accounts. It will then implement appropriate surcharges and reduce merit rating credits for unprofitable accounts upon renewal.

The combined impact of implementing rate increases, the reduction in commissions, and a renewed focus on profitable underwriting should help the State Fund’s surplus by more than $1 billion, and help achieve a reduction in the amount of premium written.

Secondly, it is imperative that private companies return to the California market to provide competition and capacity. These steps will stabilize State Fund and thereby help stabilize the state’s workers’ comp market and attract new insurers. If the State Fund, with more than 40 percent of the premium in the state market, can charge adequate rates that allow it to meet its financial obligations, other insurers should feel confident that they could write profitable business in California as well.

It is clear that the workers’ comp market in California is broken. We have the highest costs in the nation, yet our injured workers’ benefits rank in the lower third of all states. It is a system that is destined to crash if serious structural change is not enacted. Tough decisions must now be made, and I am prepared to make them with the help of the Legislature and the Governor.

In my recent proposal to fix workers’ comp, I listed seven areas of immediate focus, including improved financial oversight; medical cost containment; consistency in determining the level of permanent disability; improved coordination and communication standards for service decision makers.

These initial actions I’ve announced today to address the State Fund problem are an early and important part of my overall effort to correct California’s workers’ comp system. The only way California employers will see a reduction in their workers compensation costs is with strong regulatory action and quick and effective restructuring of the system by the legislature. In the days and months ahead it is imperative that we delve deep into the system to correct the underlying factors that are increasing costs and driving businesses out of California.”

Topics California Legislation Agencies Workers' Compensation Excess Surplus