S&P Report Warns on California Workers’ Compensation

Downward pricing pressures threaten to send the California workers’ compensation market into another tailspin, according to a new report from Standard & Poor’s Ratings Services.

“The industry has barely recovered from the cutthroat pricing of the
mid-1990s,” commented Steve Dreyer, a managing director in Standard & Poor’s Insurance Ratings. “Now the commissioner seems to be inviting the same irresponsible behavior that caused the last crisis.”

In May 2004, California Insurance Commissioner John Garamendi issued an advisory calling for a 21 percent reduction in workers’ compensation premium rates, compared with a year before. And he has meted out praise or condemnation to insurers, depending on their adherence to his guidelines.

Much of Standard & Poor’s analysis centers on the California State
Compensation Insurance Fund (State Fund, or SCIF), which has “soaked up like a voracious sponge business abandoned by other insurers’ flight or failure,” the report states. After a six-fold increase in premiums in just four years, SCIF’s premiums/surplus ratio reached the “very precarious” level of 3.7 for 2003, compared with a safe level of 0.9 in 1999.

“State Fund could be in serious trouble if pricing for newer business proves inadequate,” said Standard & Poor’s credit analyst Jason Jones.

Any failure of SCIF, which wrote more than half of California premiums in 2003, would bring into play the California Insurance Guarantee Association (CIGA), which pays claims against insolvent insurers and which has just taken the unprecedented step of borrowing $750 million in the bond market to keep up with its workers’ compensation burden.

For private insurers, the most worrying aspect of this arrangement is
that CIGA can levy against them special bond assessments “at any time and without limitation” to meet its debt payments.

“No workers’ compensation insurer in California can consider itself
immune to the fortunes of SCIF, which remains in highly vulnerable
condition,” the report concludes. “If State Fund were to fail, private
carriers would have to pick up the pieces of a shattered system.”

Entitled ‘California Still Vulnerable in Workers’ Compensation Market,’
the complete analysis is available on RatingsDirect, Standard & Poor’s Web-based credit research and analysis system. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-9823 or sending an e-mail to research_request@standardandpoors.com.