Report on California Workers’ Comp Shows Sharp Increase in ALAE Costs

Allocated loss adjustment expense costs have increased sharply over the last several years despite implementation of many of the components of a workers’ compensation reform law intended to reduce total loss adjustment expense levels, a report out today from the Workers’ Compensation Insurance Rating Bureau.

ALAE levels have historically been much higher in California than in other states, according to the WCIRB report.

Because ALAE costs are a significant component of pure premium rates, the WCIRB regularly studies the costs underlying the high ALAE in California as well as the factors driving the recent increases in ALAE levels.

The findings from the WCIRB report and include:

The average ALAE cost per claim has increased by more than five-fold in the last 25 years. In addition, despite the implementation in 2013 of Senate Bill 863, the workers’ comp reform law, average ALAE costs have increased by 20 percent since 2012.
California ALAE costs as a percentage of losses are the highest of any state. They are 10 points higher than the second highest state and more than twice the median.
Recent increases in ALAE levels are related to both increases in the frequency of claims involving significant ALAE costs in addition to the average ALAE cost on those claims.
Studies of recent indemnity claim frequency increases have shown that cumulative injury claims have been a key driver of indemnity claim frequency.
Significant ALAE costs can be incurred during the process of settling claims, and the rate at which claims have been settling has been accelerating.
A majority of permanent disability claims involve an applicant’s attorney and Workers’ Compensation Appeals Board appearances, while for nearly 40 percent of represented claims the first notice of the claim was from the injured worker’s representative.
Liens are a significant driver of total loss adjustment expense costs including ALAE costs. SB 863 included a number of provisions intended to reduce the number of lien filings. Although lien filings dropped in 2013 and 2014, they increased in 2015 and through the first half of 2016.
While roughly 70 percent of ALAE costs are for defense attorney expenses and medical cost containment program costs, other components such as deposition, surveillance and investigation, and subpoena preparation costs are significant contributors to total ALAE levels.