Editor’s Note: This is the second in a series of articles to look at California’s workers’ compensation reform law in detail and what must be done to implement that law by Jan. 1, 2013.
California’s State Compensation Insurance Fund board could be voting in the next few days on a rate decrease of between 5 and 7 percent based on projected savings from a workers’ compensation overhaul bill signed into law two weeks ago.
But like State Fund, as they await regulations to implement the new law that are still being hammered out, many agents, brokers and carriers are working to get a handle on how much if any cost savings will be delivered by Senate Bill 863.
A lot depends on regulations that must be drafted before the law takes effect on Jan. 1, and even then most in the insurance industry say they don’t expect carriers to be lowering rates any time soon.
Senate Bill 863, signed into law nearly three weeks ago, promises to increase benefits for injured workers by an estimated $700 million, while lowering system wide costs. Estimates on those cost savings range from $1 billion in the first year to about half that.
Simply put no one really knows yet how much will be saved, and even the authority on workers’ comp rates, the California’s Workers’ Compensation Insurance Rating Bureau, has changed its mind a few times.
WCIRB’s governing board in August voted to authorize the WCIRB to make a Jan.1, 2013 filing recommending an average advisory pure premium rate that is 12.6 percent above the $2.38 average industry filed pure premium rate filed in July, a recommendation WCIRB said at the time was “subject to revision pending a review of workers’ compensation reform proposals under consideration in Sacramento.”
In September WCIRB said it may reduce its rate recommendation to 11.6 percent.
Then on Oct. 1 WCIRB proposed to lower the filing for Jan. 1, 2013. In a letter to Insurance Commissioner Dave Jones the bureau noted that “in light of the unusually high level of uncertainty surrounding yet to be developed regulations and the potential for significant additional SB 863 cost savings beyond that which is currently quantifiable, the WCIRB is not recommending a January 1, 2013 increase in the advisory pure premium rate level.”
WCIRB noted in its letter that reforms ushered in by Gov. Arnold Schwarzenegger’s administration “had a dramatic downward impact on claim costs and pure premium rates.”
While SB 863 is less broad-based than the Schwarzenegger reforms, it’s WCIRB’s belief the law will achieve significant system wide savings.
“If the provisions of SB 863, once fully implemented, were to eliminate 40 percent of this post-reform cost level deterioration, the need for any pure premium rate increase would be negated,” the letter states.
State Fund’s estimate is $543 million in immediate savings, with the brunt of that saved in a major reform within SB 863 that pertains to lien filings. State Fund’s savings estimate also figures in $600 million in increased permanent disability benefits for injured workers.
“We anticipate a rate reduction in the first quarter of 2013 in the range of anywhere to 5 to 7 percent,” said Jennifer Vargen, senior vice president of marketing and communications for State Fund. “We do believe this is meaningful reform that will reduce costs.”
Vargen was talking from a two-day strategic retreat session, which includes State Fund’s board. The board could decide on the rate reduction in the next day or two. If no decision is made, the board would decide on rates when they meet again in November.
State Fund and others have said any rate reductions are dependent on the emergency regulations that will be drafted by the Department of Industrial Relations’ Workers’ Compensation Division. DIR is holding public workshops to get stakeholder input. The first workshops were held in Oakland earlier this week, and more are coming, but DIR has yet to release any new dates or details on future workshops.
Just how those regulations come together is a big caveat to workers’ comp reform. And even State Fund, which has been supportive of the reforms since a proposal surfaced in August, is expressing caution that the anticipated savings in the law relies heavily on the regulations that must be drafted over the next few months.
“A lot will depend on the regulations,” Vargen said.
And there’s little time to write the regulations, discuss them and then figure out how they will be implemented before the law sets in on Jan. 1.
That dwindling time to create regulations is nearly as large a concern for some agents as the regulations themselves.
“Until the regulations are written there’s a lot we just don’t know,” said Mark Noonan, head of workers’ compensation at New York, N.Y.-based Integro Insurance Brokers, which writes a lot of workers’ comp business in California.
In fact, Noonan is concerned the needed reforms won’t be written and made public with enough time for people to digest a complex new law.
“Will we have them by Nov. 1? I don’t think so,” he said.
It’s his belief that at least two months are needed for the workers’ comp community to digest the reforms before they are implemented.
“I honestly don’t see them getting out much more than four or five weeks before the end of the year,” he said. “There’s going to be some flying by the seat of our pants in the beginning.”
On those flights won’t be just agents, brokers and carriers, but California businesses, many of which have been hearing promises of rate reductions from Sacramento as SB 863 worked its way through legislature and was pushed for personally by Calif. Gov. Jerry Brown.
News of the reform deal has likely made life more difficult for agents and brokers, who are currently bringing to their clients renewals that likely reflect rate hikes, and not decreases, noted Jerry Azevedo, a spokesman for the Workers’ Compensation Action Network, a group that represents the interests of employers.
“Brokers are having to hand out rate increases across the board, but employers are hearing that Sacramento did this reform,” Azevedo said. “The brokers are in a real tight spot because their clients are seeing rate increases in their renewals but hearing all these good things Sacramento did for them.”
Veteran agents who have been selling workers’ comp for a while, and have seen many reforms in California take effect, say they must get the word out to clients that it will be a while before they see any savings in their workers’ comp costs.
“The savings components of this bill will take a period of time before you’ll feel any impact,” said Ken Kessler, executive vice president at HUB International of California Insurance Services Inc., who started in the business as a workers’ comp underwriter in 1973. “You could be looking at any from six months to 18 months before you get relief out of this bill, meanwhile carriers are making upward changes in their pricing.”
Since the workers’ comp line has been deteriorating for some time, carriers will first seek to “prop things up” with rate increases before they start cutting rates, Kessler said.
“Regardless of the reform the carriers are looking to get rate increases to right the ship,” Kessler added. “All of the activity that’s being filed for the state right now is all upward bound.”
According to WCIRB, the combined ratio for California workers comp insurers rose to 122 percent in 2011 from 117 percent in 2010. And a report issued in August by the California Workers’ Compensation Institute shows workers’ comp insurers’ loss and expense payments rose to nearly $12.5 billion in 2011, an increase of over $1 billion.
The report, compiled from statistics from WCIRB, shows that insurers’ medical, indemnity and administrative expenses rose to $12.479 billion in 2011. That’s up from roughly $11.2 billion in 2010, according to the report.
The latest filings as of September reveal mostly hefty rate increases. One of the largest filings is from Great Divide insurance Co, in the a WR Berkley Corp. group, which is for a 27.3 percent hike. Several Liberty Mutual Group companies – including Liberty Insurance Corp., Liberty Mutual Fire Insurance Co., Liberty Mutual Insurance Co., Employers Insurance Company of Wausau – have filed a 21 percent increase.
Some of the tamer September filings were from Employers’ Fire Insurance Co. (2.2 percent), Onebeacon America Insurance Co. (5.4 percent) and Sentry Select Insurance Co. (8.2 percent).
Only one company filed for no increase in September, Atlantic Specialty Insurance Co. There were only two filings for rate decreases for 2012, and less than 20 negative filings among the 400-plus filings since 2011.
Noonan of Integro said in addition to dealing with clients who may not understand why they aren’t seen rate decreases, agents and brokers are going to have to deal with educating clients on a complex new law in a matter of months, or weeks.
“It’s a complicated bill. I spent hours reading it,” he said. “Do I understand it all? No.”
Noonan, who is an attorney, said he’s tapped legal counsel to help him and others at his firm try and understand the new law.
There are several aspects of the new law agents and brokers must inform their clients about, Noonan said. Some of those include: provisions about silent PPO networks, which require written notice when medical provider networks are sold; a written notification requirement if an employee is not being treated within an approved MPN; and a time-limit on treatment authorization that could cost employers thousands of dollars for delays.
As the clock ticks away, those who have been through workers’ comp reforms before are referring to this period as “half time,” and they are urging swift movement on regulations.
“The signing of the bill was really only the start of the process,” Azevedo of WCAN said. “Like previous workers’ comp reforms, a lot of the finer points are going to get hashed out in a rule-making phase. That’s critical, because if the regulations are not written a timely manner and they don’t get it right, all of the projected savings are not going to materialize.”
He added, “We’re telling our members is this a significant overhaul of the workers’ comp system, and there is a lot here than can help in reducing the frictional and the litigation costs and stemming the tide in this really rapid increase in costs that we’ve seen in the last few years.”
HUB International’s Kessler believes SB 863 and its ensuing reforms will sooth the ailing workers’ comp system and reduce losses for a while.
But he’s been through a lot of reforms, and he’s certain of one thing: the system will need fixing again.
“I think when Arnold came in it helped,” Kessler said. “But over time there’s an erosion that typically happens. Eventually the system gets manipulated by the attorneys. It breaks down. Losses continue to escalate. The definition of what’s covered and what’s not expands. An adverse loss ratio develops.”
See previous stories in this series: