Skyrocketing Prices Leaving Doubts In The Air

With California’s workers’ compensation market in a tailspin, Sacramento’s legislators, the governor and the state insurance commissioner are pulling out all the stops to repair a system that’s spiraling out of control.

They face a tall order, but if the solons in the Capitol don’t pass sweeping legislation overhauling the system, the country’s largest workers’ comp market could collapse, according to Calif. Insurance Comm-issioner John Garamendi. Runaway claims costs and exploding premiums are killing businesses in the state, and legislators have responded by introducing some 60 pieces of legislation.

On May 1, Garamendi and Gov. Gray Davis introduced their own agenda for healing the workers’ comp system, including a plan for a 24-hour care pilot project that would meld workers’ comp with health insurance. Their plan included endorsing some existing legislation aimed at addressing medical costs and other cost drivers as well as amending other bills to include their reform ideas.

But California’s workers’ comp problems are so vast and many that all the machinations may not be enough to truly fix the system.

One of the biggest problems is State Compensation Insurance Fund. Already under the regulatory control of the Department of Insurance, it’s wrestling with its biggest financial crisis in years and it doesn’t look like it’s going to improve any time soon, despite Garamendi’s best efforts to fix it.

Meanwhile, workers’ comp has become headache number one for employers up and down the state, according to a recent survey by the California Chamber of Commerce. Many employers this year have been hit with 100 percent rate increases and that’s just in one year. At the end of last year average workers’ comp rates reached $5.20 per $100 of payroll, the highest ever in the state, according to the Workers’ Compensation Insurance Rating Bureau (WCIRB).

Claims costs are also booming and they’re unpredictable, especially now after new benefit increase and reform laws go into effect over the next three years. There’s also uncertainty about how any reform legislation passed this year will play out in the long run. Against this tattered backdrop are private insurers, many of which are loathe to extend any further into California due to all the uncertainties. Companies that have been expanding in California, like Everest National Insurance Co., have opted to scale back growth. Other large national carriers are mainly writing cream of the crop accounts and there just isn’t much choice other than State Fund for smaller employers.

California is a scarred battlefield after the price wars of the late 1990s and many carriers dressing their wounds inflicted by adverse loss development. Development coupled with inadequate pricing has resulted in the industry being under-reserved by $13.5 billion, according to the latest estimate by the WCIRB. It’s no wonder insurers are wary of California and they’re watching it with a cautious eye.

“The focus of the insurance industry is going in two directions,” Michael Nolan, president of the California Workers’ Compensation Institute, said. “One is the day to day operational issues of continuing to write in a state and pricing it properly. But who is coming into the state? The answer is no one.”

“The other trend is that everybody has their eyes focused on Sacramento and whether bills being introduced will, at the end of the day, bring true reform to the system.”

Employers swoon
Employers’ frustration with increasing premiums has spilled over and prompted the Legislature to act. The horror stories are many and they’re mounting everyday. Take Nor-Cal Produce Inc. in West Sacramento, which saw its workers’ comp premium grow to $330,000 this year, up from $107,000 the year prior.

Then there’s Lawson Roofing, a 97-year old Bay Area firm that’s watched its workers’ comp rates pass the $1 million mark this year, up from $240,000 in 2002. The venerable Buck Knives in San Diego is packing up and moving its manufacturing to Idaho this year in part because of inflating workers’ comp costs.
Their experiences are reflected in the latest numbers coming from the Rating Bureau, indicating that the employers at the end of last year were paying $5.2 for workers’ comp per every $100 in payroll. That’s up from from $2.27 in 1999. This year, those figures could easily climb above $6, Garamendi opined.

The California Chamber of Commerce survey indicated that 35 percent of employers surveyed say that workers’ comp insurance expenses are the number one cost problem they face. In total, 30 percent mentioned workers’ comp as one of the biggest issues they’re dealing with.

And more rate increases are coming down the pike. On May 8, Garamendi held a hearing in San Francisco to review the Rating Bureau’s mid-year rate filing requesting a 10.6 percent across the board increase in pure premium rates. He will decide later this month to either accept the rate filing or reject it and order a different rate increase.

Whatever the mid-year rate hike will be, most employers in the state will see premium bills much higher than what the pure premium rate increase calls for. That’s because Garamendi has ordered State Fund, which he now says commands 50 percent market share, to increase its rates July 1 at a rate level higher than the pure premium rate increase.

The Chamber has urged members to write or call their legislators asking them to address rising workers’ comp costs. The letter-writing campaign hasn’t fallen on deaf ears.

“The workers’ comp system is in a full-blown crisis and without major substantial reforms, California employers are going to be paying increasingly rising workers’ comp premiums,” Charles Bacchi, lobbyist for the Chamber, said. “But we’re pleased that there’s a growing recognition that the worker’ comp crisis is something that needs to be addressed this year.”

Bills moving at brisk pace
The Assembly Insurance Committee and the Senate Labor and Industrial Relations Committee met in the last weeks of April hashing through a slough of bills. While Democrat-backed bills were generally passed, this year the majority party threw a few lucky Republicans a bone and approved some of their reform bills too.

But the main reform vehicles are authored by high-profile Democrats like Assembly Insurance Chair Juan Vargas, D-Chula Vista, Senate Labor and Industrial Relations Chair Richard Alarcon, D-San Fernando Valley, and Jackie Speier, D-Hillsborough, and chair of the Senate Insurance Committee.

Not only does the leadership at the Capitol support these bills, so do Garamendi and Davis, who are using them in part to carry their 11-point plan for fixing the system. At a recent press conference touting their strategy, they said the Legislature needs to act with urgency.

“This legislation will provide quantifiable reductions in the costs of the system,” Garamendi said, adding that the package could save as much as $1.5 billion from the system and allow the industry to take down reserves by $4 billion. “If this Legislature does not act on it, this system will crash.”

Two bills that have been identified as vehicles for their plan include SB 228 by Alarcon and SB 354 by Speier. Those bills already contain reform proposals, but more will be amended in over the coming weeks.

SB 228 would require fee schedules for workers’ compensation to be linked to the so-called “Resource Based Relative Value Scale” fee schedule used by Medicare. SB 228 would cap most medical procedures at 120 percent of what Medicare pays for them. It would also mandate the creation of other fee schedules that cover costs that aren’t addressed in current fee schedules.

A recent study conducted by the Commission on Health and Safety and Workers’ Compensation (CHSWC) concluded that switching to such a system would save between $800,000 to $1.1 billion annually from the state’s $18 billion workers’ comp system. Moreover, changing the fee schedule would reduce current claims reserves in the state by $3.5 billion, the study concluded.

“Our study has shown that the current system is unnecessarily complex,” Christine Baker, executive officer of the CHSWC, said. “The lack of fee schedules lead to inefficiencies and higher costs.”

Davis and Garamendi have proposed other amendments requiring workers’ comp insurers to pay doctors bills within 30 days and impose a 15 percent late penalty if they don’t.

Another bill that’s about to undergo some serious amending, is Speier’s SB 354. This bill, which currently addresses the use of chiropractors in workers’ comp, is slated for amendments addressing the governor’s plan, according to Brian Perkins, spokesman for Speier’s office.

The proposed amendments include creating an independent medical review process to resolve disputes about medical treatment and creating a pilot program allowing employers to use the same HMO (health maintenance organization) for healthcare as they do for workers’ comp injuries.

Bacchi said that the Chamber is not opposed to the idea of using some sort of HMO utilization controls in workers’ compensation, but the two systems would not be easy to link. Still, he cautioned, “There are fundamental differences between the two systems. There are serious questions that need to be answered about which system would change to look more like the other.”

There are also substantial bills in the Assembly, including Vargas’ AB 227, which like Alarcon’s bill requires the development of an outpatient surgery fee schedule; and Republican Keith Richman’s AB 1483, which would require every physician who treats injured workers to be certified as a “Qualified Workers’ Compensation Physician.” The Assembly Insurance Committee passed these bills April 30.

The latest buzz at the Capitol is that the entire issue may end up in a conference committee, which would bring in members of both houses to hash out comprehensive workers’ comp reform. There are varying opinions if this will or will not happen though, despite the fact that Vargas brought it up at a recent hearing.

“I still don’t think they (the Legislature) have a clear sense of what they want to do,” Mark Sektnan, Western region vice president for the American Insurance Association, said. “It would be hard to keep a conference committee focused especially when you have so many competing interests with different priorities.”
Bill goes after State Fund

Garamendi is clearly growing frustrated with State Fund, particularly its board of directors and executive committee. His duel with the executive committee stepped up a notch at the end of April when he backed legislation that would change the makeup of the board of directors. He also stated his intentions to make more of State Fund’s top management exempt positions, which would make them more easily hired and fired.

The changes to the board are contained in AB 1357, authored by Assembly member Barbara Matthews (D-Merced).

That bill also passed out of the Assembly Insurance Committee on the promise that State Fund and Garamendi would meet to iron out their differences, according to Pat Quintana, government relations manager for State Fund. If they don’t come to agreement, language addressing the executive committee could be back in the bill.

Garamendi said that the insurer is teetering on the rim of insolvency. Garamendi is forcing State Fund to implement a revitalization plan, including cutting commissions and sloughing off business. And now it’s also necessary for new business to State Fund to show proof of three declinations-or at least proof of a diligent search for coverage-before going to State Fund.

The next stage of his plan takes effect in July when State Fund has to raise rates more than what the pure premium rate increase calls for. Even that won’t be enough to pull SCIF from its bog of red ink, Garamendi admits. The final responsibility lies in the hands of the Legislature to pass Garamendi’s and Davis’ legislative packet, according to the Insurance Commissioner.

State Fund maintains that it’s financial stability is not as questionable as everyone thinks. “At the end of 2002 we had $8.8 billion in reserves, and our reserves were deemed reasonable,” Jim Zelinski, spokesman for State Fund, said. He had no further comment.

However, Garamendi contends, “This company is in deep, deep trouble,” he said. “If there’s a failure to take strong legislative action, State Fund faces collapse.”

Dominating the marketplace
For the time, being, however, it looks as if State Fund will continue dominating the marketplace and grow, which doesn’t bode well. Most carriers that already write business in the state don’t seem interested in dipping in their toes any deeper than they already are, brokers say.

One company that recently decided to cool its jets is Everest National Insurance Co., which ended last year with $396 million in premium in California, ranking it as the largest private carrier in the state. This year it’s taking three rate increases (January, May and July) and capping growth at $500 million this year, according to Steve Hartsook, vice president of Marketing for American All Risk Services, Everest’s managing general agent in California.

The cap could force the company to non-renew some business, especially in light of its 14.6 percent rate increase this month, according to a letter AARIS recently sent out to brokers.

“As best we can we are going to renew business,” Hartsook said. “And it’s causing us to concentrate on small to medium-sized accounts and nothing larger than $500,000.”

Other national carriers are trying to hedge their risk in the state by offering large deductibles. Liberty Mutual has a minimum $250,000 deductible, as does Chubb Insurance Group, Zurich Insurance, American International Group and Travelers Insurance.

And often they prefer to write more than one line for employers.

“They’ll say ‘we don’t want to write any comp on a mono-line basis,'” Larry Evans, a broker with Sacramento-based John O. Bronson Co., said. “If you can bring another line with you, then they’ll talk.”

Evans added that he hasn’t seen any
other carriers making inroads into the California
market.

Insurers’ wariness of the market is echoed in some of the rating agencies’ opinions of California as a shattered system.

“California has been pretty well hammered over the last several years,” Robert Farnham, analyst with A.M. Best Co., said. “There are a few carriers in the market that can only grow so much. Zenith [Insurance Co.], for example, can only grow so much before it has to shut off the spigot at some point. But to fix State Fund’s problems regulators in California have to be able to attract some carriers into the market.”

“Teetering on the brink of crisis, California has been the poster child for difficulties in the workers’ compensation arena for a few years now,” an April study by Standard and Poor’s Rating Service concluded. “With vastly improved pricing, the picture may brighten for insurers, but the depth of reserving difficulties and an ongoing trend of burgeoning loss costs will make any recovery a protracted one.”

And that includes any legislative solutions. Even though 2003 is shaping up to be one of the most active years for workers’ compensation in modern history, any fixes sprouting in Sacramento could likely take years to work themselves into the system. In other words, it’s going to get bumpier before the road smooths.

Top 25 Writers
(Excludes State Compensation Insurance Fund)
Workers’ Compensation
CALIFORNIA All Numbers 000 Omitted
Workers’ Compensation
2002 Direct Premiums Written	2002 Direct Premiums Earned	2002 Direct Losses Incurred		2001 Direct Premiums Written	2001 Direct Premiums Earned	2001 Direct Losses Incurred
1	Everest National Insurance Co.	497,353		395,239	251,197	237,926	177,603	104,122
2	Zenith Insurance Co.	314,117		301,549	207,046	209,998	204,084	144,919
3	American Home Assurance Co.	183,555		138,166	166,657	94,765	95,175	62,180
4	Liberty Mutual Fire Insurance	158,650		147,244	152,297	164,319	165,878	267,222
5	Zurich American Insurance Co.	154,630		152,983	98,998	129,322	118,181	79,814
6	Lumbermens Mutual Casualty Co.	142,943		132,262	96,697	121,561	90,694	43,343
7	Republic Indemnity of Calif.	135,290		131,752	74,630	131,765	130,798	120,039
8	Travelers Indemnity Co. of Illinois	133,957		80,417	120,262	66,977	41,602	46,831
9	Harbor Specialty Insurance Co.	117,953		117,369	73,403	27,275	20,559	16,317
10	Clarendon National Insurance Co.	116,511		104,065	120,364	100,357	83,251	9,958
11	National Union Fire Ins. Co. of Pitts.	110,996		81,582	199,463	93,697	79,795	87,341
12	Federal Insurance Co.	110,742		84,102	47,538	61,731	55,313	44,385
13	Commerce & Industry Insurance Co.	105,906		81,044	53,740	55,341	34,878	18,808
14	Mid-Century Insurance Co.	98,174		103,486	105,242	128,317	137,139	186,413
15	American Protection Insurance Co.	87,964		77,495	87,565	64,071	64,297	53,717
16	Pacific Employers Insurance Co.	76,176		64,241	17,062	47,698	41,110	27,019
17	Indemnity Insurance Co. of North America	74,214		76,118	74,906	43,325	41,968	45,844
18	St. Paul Fire & Marine Insurance Co.	73,125		66,314	62,335	64,588	57,292	35,871
19	Preferred Employers Insurance Co.	70,430		64,715	41,184	35,986	32,578	19,658
20	Commerical Casualty Insurance Co.	69,497		65,200	50,218	6,488	4,641	4,341
21	American Manufacturers Mut Ins. Co.	69,463		63,638	54,061	57,486	50,386	35,573
22	Combined Specialty Insurance Co.	69,048		50,475	45,096	29,980	31,806	25,602
23	United States Fire Insurance Co.	68,887		57,496	46,155	40,774	32,986	25,249
24	Majestic Insurance Co.	68,042		73,293	42,205	54,054	55,528	43,434
25	XI Specialty Insurance Co.	66,161		51,453	34,138	15,344	11,830	4,781
Top 25 CALIFORNIA Workers’ Compensation		3,173,784		2,761,698	2,322,459	2,083,175	1,895,372	1,552,781
ALL other CALIFORNIA Workers’ Compensation		2,182,051		2,094,223	2,501,078	2,718,086	2,747,316	3,495,952
TOTAL CALIFORNIA Workers’ Compensation		5,355,835		4,855,921	4,823,537	4,801,261	4,606,688	5,048,733

Topics California Carriers Agencies Legislation Workers' Compensation