California Workers’ Comp Premium Grows But Claim Severity Continues to Rise

By Don Jergler | March 15, 2012

An annual report from the Workers’ Compensation Insurance Rating Bureau of California shows that for the second consecutive year statewide workers’ compensation premiums levels rose in 2011, but that continually growing costs of claims has eroded statewide underwriting results.

The estimated statewide written premium grew roughly $600 million from $7.1 billion in 2010 to an estimated $7.7 billion in 2011, according to the report. Premium remains below pre-recession levels in 2007, and nearly $9 billion below the high in 2004 before workers’ compensation reforms.

The report also shows the average cost of claims also experienced “modest growth” in 2011 and insurer expense ratios continued to remain high.

“As a result of the increases in claims costs and expenses, the increase in written premium was insufficient to reduce the accident year combined loss and expense ratio for 2011 …,” the report states.

Increasing claim severities between 2006 and 2009, reduced premium levels, and high expense ratios have eroded statewide underwriting results, and WCIRB estimates a statewide combined loss and expense ratio for accident years 2009 and 2010 of 130 percent, the highest combined ratio since accident year 2001.

WCIRB cites the latest report from the National Association of Insurance Commissioners showing that for the third straight year, the California workers’ compensation insurance industry’s average return on net worth of 5.2 percent was well below the Fortune Magazine — All Industry average of 12.7 percent in 2010.

“Given indications of continued growth in claims costs and loss adjustment expenses, the WCIRB does not expect significant improvement in 2011,” the report states.

The report follows a report earlier this week issued by the California Workers’ Compensation Institute, which shows that for the fifth consecutive year increases in the average loss per claim – led by escalating medical losses – pushed up total workers’ compensation costs for cities, counties and other public agencies in the state last year.

“I think the (WCIRB) report confirms what we have already known – is that the workers’ comp market in California is suffering from increased costs,” said Mark Sektnan, president of the Association of California Insurance Companies.

Sektnan pointed to data in the WCIRB report that shows that while claim frequency continues to move downward, the severity of claims are in the rise.

“It means that the cost of each case is getting higher,” he said.

There are a number of reasons for this upward trend, many of which Sektnan believes start with the deterioration in the objective standards for workers’ comp cases set in 2003 with the establishment of American Medical Association guidelines on claims.

Individual courts have been ignoring these standards, and few landmark individual cases have set a standard for flaunting these guidelines, Sektnan said, pointing to the 2009 decisions in Ogilvie and Almaraz/Guzman.

The report also cites those cases as being a continued influence on workers’ comp:

“Lawmakers in Sacramento continued to focus their efforts on tackling California’s budget crisis and unacceptably high unemployment. As a result, no major legislative or regulatory changes impacting workers’ compensation were adopted in 2011. There was also no major judicial action impacting workers’ compensation in 2011; however, the industry continues to grapple with the ramifications of the 2009 Ogilvie and Almaraz/Guzman decisions.”

Sektnan noted that such cases are yielding a growing number of considerations for awards in individual workers’ comp cases.

“Court cases have started to erode nature of system and allowed additional elements to be considered,” he said, adding that considerations like sleep apnea, sexual dysfunction and psychological claims are becoming more commonplace in workers’ comp cases.

“We’re starting to see psych claims being a part of almost every claim,” he said.

Multiple body part claims, in which often the parts end up adding up to more than the sum, are also on the rise, Sektnan said, adding, “There are claims where people can be over 100 percent disabled.”

Jerry Azevedo, a spokesman for Workers’ Compensation Action Network, a group that represents the interests of employers, expressed concern about signs of rising claim severity in the report.

“In this economic environment, it’s safe to say that employers are on high alert when it comes to the increasing costs for workers’ compensation,” he said. “We know that claims costs are up significantly and that rates have started to creep up as a result. The red flag in this report is that the rate increases haven’t been enough for insurers to break even and there’s real problems in the form of more claims, more litigation and liens. Unless we start taking some action to reduce costs in California, larger rate increases are likely.”

Claim frequency in California has declined steadily for decades, and WCIRB estimates that there will be roughly 16 indemnity claims per 1,000 full-time employees in 2011 compared with nearly 50 per 1,000 full-time employees in 1991.

The decline is generally attributed to shifts in the state’s economy to less hazardous occupations, increased mechanization and greater attention to workplace safety, but in 2010 indemnity claim frequency rose sharply, while indemnity claim frequency was unchanged through the first nine months of 2011, according to the report.

“WCIRB has identified a number of factors contributing to the 2010 increase in claim frequency, including an increase in cumulative injury claims, growth in the number of late-reported claims, and a shift in the mix of medical-only claims and indemnity claims,” the report states. “The WCIRB is continuing its investigation of recent claim patterns to determine whether the 2010 increase is a single-year aberration attributable to recent economic patterns or an indication of a permanent shift in the long-term claim frequency trend.”

However, while the report reveals claim severity increased, the report states it only increased modestly.

“Following several years of increasing average claim costs after the full implementation of the reforms in 2005, claim severity growth moderated in 2010,” the report states. “Based on preliminary data, only a small increase is anticipated for 2011.”

According to the report, the preliminary estimate of the average cost of an accident year 2011 indemnity claim is roughly $67,000, which is at least 40 percent higher than the average cost of a 2005 claim but is only 2 percent higher than the average cost of a 2009 indemnity claim.

WCIRB believes some of the recent moderation of claim severity trends can be attributed to an increased frequency of smaller indemnity claims.

Despite no change in advisory pure premium rates in 2011, many insurers filed for manual rate increases.

The WCIRB report shows average filed manual rates as of July 1, 2011 were $3.27, but insurers continued to discount their filed manual rates.

The industry average charged rate for 2011 was $2.37, “a significant discount from the industry average filed manual rate,” and nearly $4 below the industry average charged rate in the second half of 2003 before worker’s comp reforms, the report states.

Despite discounting, the average charged rate has increased for the last three years, and for the first nine months of 2011 it was almost 10 percent over that for 2008, according to the report.

In November, California Insurance Commissioner Dave Jones approved an average advisory pure premium rate of $2.30 per $100 of payroll, slightly below the industry average filed pure premium rate as of July 1, 2011 of $2.37. The advisory rate change was effective Jan. 1.

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