Rating Bureau Suggests Premium Increase to Combat Costs

Noting rising costs and a trend toward insolvencies, the Workers’ Compensation Insurance Rating Bureau’s governing committee voted to suggest an 8.5-percent gain in the average pure premium rate as part of its annual rate recommendation in California. The San Francisco-based WCIRB sent its recommendation to California Insurance Commissioner Harry Low, with a public hearing set to discuss the matter in San Francisco on Sept. 26.

Back in March, the WCIRB considered asking for a mid-year rate hike as a result of continued insurer losses, but after finding that only a 2-percent increase was warranted, decided to wait for its annual summer review.

“[Actuarial] meetings have looked at data, and it looks like 8.5-percent increases in advisory rates are called for,” said Jack Hannan, marketing and communications director for the WCIRB. “It is based on what our actuaries see and data they’re looking at.”

Rates for the proposed increase are based on a number of factors which include: insurer losses taken on during 2000 and previous accident years valued as of March 31 of this year; insurer loss adjustment costs for last year and previous years; the experience rating off-balance correction factor; and payroll and loss experience, by classification, which come from policies issued during 1998 and previous years.

The rate increase was first filed with the California Department of Insurance on July 25, followed by a CDI review of the document. The Sept. 26 hearing will address any issues that may remain after the review.

“The public hearing is basically a question-and-answer session,” Hannan commented. “The Bureau makes a presentation to a committee, then they will ask any questions they have of the Bureau. If any members of the public in attendance have questions, they can request also to speak before the Committee.”

According to Hannan, participants in last year’s hearing included Larry White, senior counsel for the CDI; Doug Barker, head of the CDI rate filing division; and Eric Johnson, the CDI’s actuary.

The last rate increase approved by Commissioner Low was a hike of 10.1 percent in the advisory pure premium in October 2000. At that time, Low noted the increase was due mainly to worsening severity in medical costs.

The system of open rating, which began in 1995, does not grant the Insurance Commissioner authority to fix rates for workers’ comp, but it does allow Low to offer the insurance industry essential information in order to set appropriate rates.

In an added correspondence sent to Low with the latest request for a rate increase, WCIRB President Robert Mike stated his concern regarding the extreme swings in recent loss development patterns. Mike notified Low that the Bureau will be studying accident year experience valued as of June 30 of this year as soon as it is obtained, and if appropriate, will restructure the pure premium rates suggested in the filing.

Mike also pointed out that legislation, which could impact the cost of workers’ comp benefits, is being considered and changes to the Inpatient Hospital Fee Schedule were recently adopted. The WCIRB plans to study the impact on the cost of benefits of any legislation that is passed, along with changes to the fee schedule. If the evaluation indicates a major change in the pricing of benefits, the Bureau will amend its filing to highlight the change for both the proposed Jan. 1, 2002 pure premium rates and the approved Jan. 1, 2001 pure premium rates which are now in effect.

Although Hannan said the Bureau does not get into characterizations of California’s workers’ comp market, he said that emerging statistics have indicated several themes.

“In this market, open-rating prices on policies have been too low or they don’t accurately reflect the risk,” he said. “We’ve seen a lot of companies for every dollar they’re receiving, they’re paying out a $1.40. That’s a tough way to do business in the long term. In general, we’ve seen rates start to harden and premiums seem to be going up, but not high enough. There are still a lot of cumulative losses from four or five years ago—those losses are still out there.”

Topics California Trends Workers' Compensation Pricing Trends