AIA Issues Statement Regarding California Workers’ Comp Pure Premium Rates

June 1, 2004

The American Insurance Association (AIA) issued a statement in response to California Insurance Commissioner John Garamendi’s announcement of his pure premium advisory rate recommendation of 20.9 percent; the recommendation is based on enactment of significant workers’ compensation reforms.

“Commissioner Garamendi’s recommended advisory rate demonstrates that the legislature and Governor Schwarzenegger took seriously the need to cut excessive costs that plague the system, hurt California’s businesses and delay care for injured workers,” said Ken Gibson, Vice President for AIA’s Western Region.

“It is encouraging that the Workers’ Compensation Insurance Rating Bureau (WCIRB) and the commissioner both project several billions in cost savings from SB 899, authored by Senator Chuck Poochigian (R-Fresno),” he said. “If the reforms are properly and responsibly implemented – and not eroded by litigation or regulatory mishaps – the three bills enacted in 2003 and 2004 will translate into a much healthier, more competitive insurance market in California. Insurers urge Commissioner Garamendi to use his office to monitor the implementation process and make sure all of the cost savings he is projecting actually materialize.

“A healthier, competitive market will give all of the major stakeholders what they each need: employers will have choices; insurers will regain confidence through a predictable, stable system; and injured workers will have a quality, efficient benefit delivery system. As greater capital is attracted to the California market, and more carriers are participating in the marketplace, employers and injured workers will reap the benefits.

“Commissioner Garamendi’s pure premium rate recommendation is based on projections and estimates of cost savings. The challenge now is to see these projections become reality. We must make sure that the promises to end the abuse and over-utilization of the system are kept during the rule-making process. There is still a great deal of work to be done before California’s workers’ compensation system will be considered healthy. A very sick patient does not get well overnight, and it will take some time for these reforms to cure the system’s ills. The prognosis by the WCIRB and the commissioner is optimistic and encouraging. Those who have been over-utilizing and abusing the system have now been told by the legislature and the governor that their way of doing business is no longer acceptable.

“Going forward, insurers must evaluate the commissioner’s recommendation and understand his methodology for estimating the cost savings. The law permits each company to apply these projections to their own book of business and consider their own individual loss experience and reserves to pay future claims. The impact on individual businesses will depend on their type of operation and loss experience. We have every confidence that as cost savings materialize the market will respond to policyholder demands.

“The estimated combined impact of the three measures recently enacted is significant. Just a year ago (in July 2003), the WCIRB was recommending that a 12 percent increase in rates was necessary to keep up with escalating loss costs. We have come a long way in making fundamental system changes that are projected to curb the double-digit cost increases that had become a way of life.”

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