Six Factors Create Volatility in Calif. Workers’ Comp Insurance Market

December 18, 2009

“Since insurance rates were partially deregulated in 1995, the California workers’ compensation insurance market has been very volatile. For reasons that go beyond price deregulation, there have been dramatic swings in insurers’ underwriting profits and the share of coverage written by private insurance carriers, and a substantial number of insurers, including some of the largest market participants, have failed,” according to a new report on California’s Workers’ Compensation Insurance Market. The report, which was approved by The Commission on Health and Safety and Workers’ Compensation, said, “The price paid for workers’ compensation insurance by California’s employers has been volatile since 1995 as well, continuing the considerable variation that occurred in earlier years.”

The six factors the report identifies as having contributed to the insurance market volatility and the large number of insolvencies following price deregulation in the past 15 years are:
• inaccurate projections of claim costs;
• pricing below expected costs;
• reinsurance contracts that gave insurers and reinsurers insufficient stake in the profitability of the policies they wrote;
• managing general agents who had little financial interest in the ultimate profitability of policies;
• underreserving for claim costs by insurers; and
• insurer policyholder surplus that was inadequate to provide a cushion against adverse events.

The report suggests that “the actions of some managing general agents exacerbated the volatile market conditions following open rating and contributed to some insolvencies.”

MGAs were active both in the primary California workers’ compensation insurance market following open rating and in the reinsurance markets to which the primary carriers turned, the report said.

The problem, the report notes, is that in many cases, when an MGA is compensated through a flat percentage of the total gross amount of premium that is booked in a given year, that creates a conflict between the MGA’s growth goals and the insurers’ or reinsurers’profitability concerns.

MGAs are often given authority to negotiate and bind insurance policies (‘given the pen’) but are not required to invest in the insurer’s balance sheet. Because losses in workers’ compensation take many years to develop, the profitability of the policies they write is not clear for at least three or four years.”

The repot suggests several policy changes can reduce the severity of these problems in the future.

To view the report, visit

CHSWC is charged with examining the health and safety and workers’ compensation systems in California and recommending administrative or legislative modifications to improve their operation. The Commission was established to conduct a continuing examination of the workers’ compensation system and of the state’s activities to prevent industrial injuries and occupational illnesses and to examine those programs in other states.

Source: DIR

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