The insurance industry is wondering whether a new requirement from California Insurance Commissioner Dave Jones that workers’ compensation insurers report federal income tax savings is legal.
Jones wants insurers licensed to write workers’ comp in California to report the tax savings in an annual rate filing. He issued the order in light of the recent revision to the Federal Tax Schedule for 2018, which reduced the corporate tax rate from 35 percent to 21 percent.
According to Jones, that means that nationally insurers will now be able to retain even more of policyholder premiums as profit.
However, the insurance industry may see it differently.
The commissioner is empowered under Proposition 103 to review and adjust property/casualty rates, such as homeowners and auto insurance. But Prop 103 doesn’t include worker’s comp.
“Prop 103 does not give him the authority over workers’ compensation rates,” said Mark Sektnan, vice president of the Property Casualty Insurers Association.
Workers’ comp insurers in California use an advisory pure premium as a measure, but set their own rates. Both the pure premium and actual rates charged have been on their way down in California for some time.
“We have a highly competitive market, rates have been going down since 2004 pretty consistently, so it’s a little unclear what the commissioner is looking to gain here,” Sektnan said.
He noted that average charged workers’ comp rates for 2017 are 10 percent below those for 2016, and 17 percent below 2015, proving that insurers are passing along savings to their customers in California.
A forecast from the Workers’ Compensation Insurance Rating Bureau shows lower workers’ comp rates in California will bring down written premium once again this year. The WCIRB says written premium dropped in 2017 to $17.7 billion from $18.1 billion a year earlier after seven years of increase. The group says a similar drop in 2018.
Jones in late May adopted a revised workers’ compensation insurance advisory pure premium rate by lowering the benchmark to $1.74 per $100 of payroll for workers’ comp.
Jones also said in May that industry profitability appears to be substantial as a percentage of premium, and in January he said he had directed his staff to commence a regulatory review of insurers’ rates “given the major tax windfall under the new federal tax rules.”
Jones in his announcement on Monday said he wants any savings to insurers to be passed along to California businesses.
“This order will allow my department to examine workers’ compensation insurers’ savings and rates and provide transparency to the public,” Jones said in a statement. “I urge insurers to pass these savings along to policyholders.”
Jones’ order will require each insurer to submit a rate filing to report the dollar amount of their tax savings by Dec. 31 and on a yearly basis through 2020.
Insurers will need to provide details about how those savings impact their rates. The insurer must also provide a detailed explanation if they have determined that there is no rate impact, stating why the reduction in the federal corporate tax rate does not affect their rates.
Sektnan said the federal tax break will impact different carriers in different ways. For carriers that write workers’ comp out of Bermuda, for example, taxes could actually go up because of way in which the tax bill treats offshore accounts.
He said he couldn’t say right now if what Jones is attempting to do it legal.
“It’s something that we are analyzing at the moment,” Sektnan said.
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