CALIFORNIA STILL CRAZY AFTER ALL THESE YEARS
By Sky Barnhart
“After five years of product being given away, it’s a crazy, crazy market, and it’s put a lot of people on the producers’ side out of business.”
“Turbulent and chaotic”is how Bill White, president of Alliance Insurance Services in Canoga Park, describes the current workers’ compensation market in California. It’s been seven years since the 1993 reforms of the California workers’ comp system, but the picture is still one of chaos. Four months underway, the year 2000 looks like it will bring its own share of issues to resolve.
Rock-bottom rates head back up
The one thing on everyone’s mind is the inevitable raising of workers’ comp premiums. After hovering close to bottom since the overturning of the minimum-rate law in 1995, premiums are finally on an upswing. January started off with significant rate hikes across the board in workers’ comp, following a recommendation from Commissioner Quackenbush that insurers raise premiums by 18.4 percent. Although this move served to bring things back to a more even keel, rates still remain low for employers, compared to what they were before. Some of the rates employers have been enjoying are mere fractions of what they were five years ago. For example, rates for the garment industry, which were $7.80 five or six years ago, are now around the $2 mark. Those hardest hit by the rising rates will be the smaller businessesДthose that have been hanging on by their fingertips,” White said. In an attempt to create market share, companies have been selling severely underpriced business. Unfortunately, as White said, “they’ve discovered that market share doesn’t mean market profitsÐit just means writing more of underpriced business.”
Facing the consequences
In a graphic illustration of the disastrous effect of such underpricing, several California workers’ comp companies faced lowered ratings from A.M. Best Co. in March. Best said the downgrades were reflections of the poor workers’ comp market conditions in California, as well as issues of deteriorating operating performance specific to the companies. Pasadena-based PAULA Insurance Co. was dropped from “B++” to “B.” Western Growers Insurance Co. of Irvine, Calif., was downgraded to “B-” from “B+.” Fremont Compensation Insurance Group, based in Glendale, Calif., was lowered to “B++” from “A-.” Best’s announcement summed up the grave situation, saying: “Over the past two to three years, workers’ comp companies in California have based their reserving and pricing practices on the favorable loss trends of prior years and more recently low-level reinsurance arrangements, including those associated with Unicover. During this loss period, however, loss severity has increased, causing huge reserve deficiencies to build up.” According to the California Workers’ Compensation Insurance (CWCI) Rating Bureau, the state’s workers’ comp market had a reserve deficiency of $3.2 billion as of year-end 1998.
Insolvency issues
By far the most serious example is Calabasas-based Superior National Insurance Group Inc., the state’s largest private workers’ comp insurer, which was downgraded by Best from “B++” to “B-” on March 1. Two days later, it was seized by the California Department of Insurance (CDI). Citing Superior National’s “hazardous financial condition,” the CDI obtained a Conservation Order and is currently evaluating potential buyers. Meanwhile, a cut-through reinsurance agreement with Centre Insurance Company will ensure that policyholders’ claims are paid. If a buyer cannot be found, the insurer will be liquidated, according to the CDI. “The workers’ compensation market here in California is fiercely competitive,” Quackenbush said in a statement following the seizure. “A by-product of that reality is the possibility of circumstances arising such as these, where a carrier cannot remain competitive and financially solvent at the same time.” The feeling in the industry is that Superior is just the first rung of a ladder of looming insolvencies in the state. “I think you can draw a parallel between the market and the airline industry when they deregulated,” White said. “Basically you’re going to have a lot of companies go under or waltz with going bankrupt. You’re then going to have a period of time where other companies recognize the profit potential as prices go up, and those companies that don’t have the baggage of the claims that are underreserved are going to move in and take advantage of the situationÐbut we’re months away from that. Right now it’s a constricted market, and prices are going up between 15 and more percent.”
Pushing for reform
On the legislative side in California is SB 996, introduced in January by Sen. Patrick Johnston (D-Stockton) with the goal of boosting workers’ comp benefits by more than $1 billion. The bill is sponsored by the California Applicants’ Attorneys Association and the California Labor Federation. Peter Gorman, associate vice president and regional manager for the Alliance of American Insurers, testified on March 13 in the first of a series of hearings before the Workers’ Compensation Conference Committee. “One of the most important points that we wanted to get across to the Conference Committee is that our combined ratios are extremely highÐthey’re at 142Ðand this represents a significant new aspect to workers’ compensation in California,” Gorman said. “Insurers are carrying a large part of the risk and a large part of the loss at this point, and what we are asking for is some administrative reforms to reduce the costs of delivering benefits.” The Workers’ Compensation Insurance Rating Bureau estimates that increases in indemnity benefits under SB 996 would cost $2.6 billion over five years with increased utilizationÐa combined increase of 24.7 percent. Last year, Governor Davis vetoed a similar bill, SB 320, which would have brought benefit costs up by $2.3 billion, or 25 percent. “Last year there was no opportunity for legislative debate on the benefit increase bill, and because of that, the Governor vetoed it,” Gorman said. “This year it’s different, and what’s different is we have a Conference Committee. That assures that all parties will be listened to and have a chance to state their perspectives and their needs, similar to what happened in 1993, which resulted in major changes.” Each hearing will focus on a different aspect of the system, and the industry plans to raise its issues that are pertinent to each aspect; the most important issue being the full repeal of the treating physician presumption, Goreman said. Introduced in the ’93 reforms, this presumption often leads to an expensive “dueling docs” situation, where a medical specialist must testify against the initial treating physician. “Our association has made it very high priority to get reform this year,” Gorman said. “Our membersÐworkers’ comp writersÐare asking us to lead the effort. So we have been meeting with legislators and with the business community and with labor to try to get some help and consensus on the issues.” Alliance’s White agreed that everybody would like to see benefits improved. He described the chances of full passage of anything that increases the prices dramaticallyÐgiven what employers are going to be faced with this yearÐas “pretty remote.” “Right now we are one of the most expensive and one of the least benefit states in the country, so California has some real serious problems that it needs to address,” White said.
Still some bright spots
On the more positive side, the California Department of Industrial Relations (DIR)’s Division of Labor Statistics and Research found that job-related nonfatal injury/illness rates in 1998 reached a record low of 6.7 workers out of every 100Ðthe lowest rate since collection of these statistics began in 1971. According to the CWCI, although California workers’ comp insured claim frequency edged up slightly between the first and second quarters of last year, the second quarter frequency rate came in well below the level recorded for the same period of 1998. Another potential bright spot is the state’s new Workers’ Compensation Information System (WCIS), designed to substantially reduce the amount of required paperwork for carriers and self-insured employers. The system, which began phasing into operation on March 1, was developed and administered by the DIR’s Division of Workers’ Compensation (DWC). DWC spokesman Richard Stephens said the legislation in the ’93 reforms mandated the WCIS, “because there wasn’t a good database to show what was happening all the way through the workers’ comp system,” he said. “The new system recognizes national standards for data interchange established by the International Association of Industrial Accident Boards and Commissions.” The WCIS will electronically gather data on all workers’ comp claims filed in California, from the first report of injury through to conclusion of the case. In the process, millions of pieces of paper that are currently filed with the Department will be eliminated. “The impact on our customers, especially the claims administrators, self-insured employers and insurance carriers, is that they get to go to paperless reporting for a lot of their mandated reporting, so that’s a big advantage there,” Stephens said.
Moving into the 21st century
For once, California is behind the curve. “The national carriers are already doing this [paperless reporting] in other states…they’re up to speed and ready to move,” Stephens said. “For the smaller carriers, California-based, this is all new to them. They’ve just gone through the Y2K issue with their computer systemsÐmany of them just aren’t ready to start yet.” Many of these carriers have received a continuance to delay their reporting beyond the mandatory reporting date of March 1. Once the WCIS is up and running, it will allow policymakers and legislators to track the state’s performance and determine the need for change in a more timely manner. “We’re actually moving into the 21st century now,” Stephens commented. “That’s the direction the country is going and the world is going.” Hopefully, the California workers’ comp system, turbulent though it may be, can move along as well. “After five years of product being given away, it’s a crazy, crazy market, and it’s put a lot of people on the producers’ side out of business,” Alliance’s White said. “Basically, the prices have gone from about $11 billion + to about $5 billion +, so it’s been a huge price cut for the employers, and the employers have had the benefit of this for the last five years, but it’s over now!”
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Statistics were compiled by Insurance Journal from data provided by the National Association of Independent Insurers, based on Best’s State/Line Report, Property/Casualty, 1999 Edition; OneSource (NAIC), and A.M. Best Company. Direct written premiums include state funds where applicable. Loss ratios exclude loss adjustment expenses. They are adjusted by dividends to policyholders. Combined ratios are calculated as the sum of the loss ratios, countrywide loss adjustment expense ratios and countrywide underwriting expense ratios.
ARIZONA: INTENSE COMPETITION CONTINUES FOR ARIZONA WORKER’ COMP MARKET
By Stefani Mingo
“The market throughout the country, but particularly in Arizona, has been extremely soft, but we are starting to see some indications of some hardening.”
Despite rate cuts over the last five years, the workers’ compensation market in Arizona is still faced with extremely competitive conditions.
“Even with rate cuts close to 50 percent, all carriers are still significantly deviating, offering up-front discounts from the filed rates. Those range anywhere from 25 percent typically to 40 percent,” said Chris Kamper, vice president of insurance operations with the Arizona State Compensation Fund.
The State Fund is Arizona’s largest workers’ comp carrier, writing roughly 35 percent of the statewide premium and 60 percent of the Arizona insured employers. The Fund is presently offering a -30 percent deviation from NCCI’s filed rates. The deviation will be valid through Sept. 30, 2000, and affects all new and renewal policies during the period from Oct. 1, 1999, through Sept. 30, 2000.
An average 15.6 percent workers’ comp rate decrease became effective Oct. 1, 1999, marking the fifth consecutive year for overall rate decreases in the state. Kamper said he expects to see another rate decrease, proposed by NCCI and approved by the Department of Insurance (DOI), over the course of the summer to be effective in October.
“But I would expectÐor my opinion isÐthat that rate decrease might not be a double-digit rate increase like we’ve experienced over the last couple of years,” Kamper said.
Bob Maxwell, state relations executive, National Council on Compensation Insurance Inc. (NCCI), has been busy gathering information on the Arizona workers’ comp market. “We’re looking at Arizona in comparison to some other states,” he said. “At this point, the state [of Arizona] seems to be consistent with what we’re seeing in other states.”
According to Maxwell, the 2000 legislative session looks to be a quiet one for the state’s workers’ comp market as a whole. On Feb. 16, HB 2017, sponsored by Representative Brimhall, passed the House of Representatives. The bill, which now moves on to the Senate, is the rating organization proposal advanced by the DOI that formalizes relationships among insurers, multiple licensed rating organizations, and the designated statistical agent.
“This is a bill that provides for a structure in the event that there is a multiple rating organization, which there isn’t in Arizona today,” Maxwell said. “We don’t see House Bill 2017 having a major impact on the competitive marketplace in Arizona.”
NCCI felt that several of the sections, as worded in the original proposal, could have impacted the cost or the stability of the workers’ comp market. HB 2017 was amended in the House to respond to concerns raised by the NCCI and others about certain elements of the legislation. The adopted changes include the elimination of a provision that would have prohibited an approved rating organization from serving as the designated statistical agent. Language allowing insurers to calculate their own experience modifications was also removed from the bill.
“The market throughout the country, but particularly in Arizona, has been extremely soft, but we are starting to see some indications of some hardening,” Kamper said. “We’re starting to see that some of the employers, particularly the large employers that we lost to the private-sector carriers, are beginning to return to us.”
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Statistics were compiled by Insurance Journal from data provided by the National Association of Independent Insurers, based on Best’s State/Line Report, Property/Casualty, 1999 Edition; OneSource (NAIC), and A.M. Best Company. Direct written premiums include state funds where applicable. Loss ratios exclude loss adjustment expenses. They are adjusted by dividends to policyholders. Combined ratios are calculated as the sum of the loss ratios, countrywide loss adjustment expense ratios and countrywide underwriting expense ratios.
NEVADA: COMPETITIVE ADVANTAGES EXIST IN NEVADA’S W/C MARKET
By Stefani Mingo
“For the workers’ comp industry, the upbeat economic news suggests additional upward pressure on both losses and premiums.”
In 1995, the Nevada State Legislature voted to make the industrial insurance system competitive, and to move from a monopolistic system to a three-way system beginning July 1, 1999. Over the past nine months, the workers’ compensation marketplace has been busy adjusting to the change to a competitive climate.
Both proponents and opponents of the bill agreed it was a measure necessary to salvage the workers’ comp system in Nevada. Five years ago, the system faced $2.2 billion in long-term unfunded liabilities and was on the verge of folding, but has since recovered financially.
Immediately after the new law passed, 64 carriers filed applications with the Nevada Division of Insurance (DOI) to sell workers’ comp policies. As of Feb. 22, 238 carriers held certificates of authority allowing them to do business in the state. Seven had applications pending. “Really and truly, there are only a handful of states in the U.S. that are not three-way,” said Kathy Marlon, president of Sierra Insurance Group (SIG).
Nevada’s move from a monopolistic state to a three-way state not only gives employers the ability to choose from a variety of industry optionsÐprivate carriers licensed in Nevada, Employers Insurance Company of Nevada (EICON), or self-insured groupsÐit also creates opportunities for the retail agent.
“I think that the agents, and definitely the employers, are looking at this as a great opportunity,” said Bob Riordan, executive vice president of SIG. “It’s a chance for agents to offer the full services that they have in their agencies by matching workers’ comp with package policies, personal lines policies, or whatever else the agent has in his or her portfolio. It’s also a way of helping control the entire insurance program for his or her clients, and it has the side potential of a little extra income on a bottom line for the agent.”
Located in Las Vegas, SIG currently provides workers’ comp coverage in nine states. In 1993, Sierra Health Services, parent company of SIG, made its initial entrance into the Nevada workers’ comp market, capturing 25 percent of the marketÐthe maximum allowed under Nevada state law.
“The free enterprise system is working at its fullest efficiency,” Riordan said. “Employers now have the ability to enjoy competition, which in turn, brings better services…loss control, claims, price, different types of products…into the marketplace.” Prior to July 1, EICON set one rate for everyone in a class, regardless of the experience of the policyholder. Now, in today’s competitive market, insurers underwrite or actively select risks, and the policyholder can shop around for insurance; however, rather than being compelled to take all risks as required under a monopolistic system, insurance providers are able to select risks based on their underwriting criteria. The DOI designated the National Council on Compensation Insurance Inc. (NCCI) as the state’s workers’ comp advisory organization. When NCCI proposes rules and rates, it falls to the DOI to approve them. Thus, it is the DOIÐnot NCCIÐthat regulates the pricing of workers’ comp insurance in Nevada.
According to Bob Selli, vice president of underwriting for SIG, Nevada is a unique state when it comes to rating a workers’ comp risk. “Because the old State Fund system and the new rating system were so different, the state set up a plan to minimize the impact in the first couple of years to all of the employers within Nevada,” Selli said. “They essentially fixed an up-and-down swing from the previous premium that an insured was paying when they were insured by the state.”
Nevada law restricts predatory pricing of workers’ comp for the first two years. Beginning July 1, 2000, insurers cannot deviate more than 15 percent below approved rates. Competitive rating will begin on July 1, 2001.
A proposed rate change became effective on Jan. 1. The rate increase reflected the impact of the benefit increases in the benefit system as a result of legislation enacted during the 1999 Legislature.
“That [benefit increase] was sort of a deal that was made in order for all the State Fund to go private,” SIG’s Marlon said. “The tradeoff was that there was going to be a benefit increase allowed.” Marlon went on to say that she does not expect another benefit increase in 2001.
“What we’ll probably see in this next session in 2001 will be a lot of clean-up language from some of the technical things that didn’t get ironed out that still need to be fixed,” Marlon said. “The state of the market todayÐit’s good. We know that open rating comes into play July 1, 2001, and depending on the health of the workers’ comp market at that time, there could be some fluctuation in rates.”
According to Martin H. Wolf, director of economic research and senior economist at the NCCI, Nevada’s economy is continuing to grow strongly.
For the workers’ comp industry, the upbeat economic news suggests additional upward pressure on both losses and premiums. As with any industry, Wolf anticipates that some economic factors will impact the loss ratio positively, while others will impact it negatively.
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Statistics were compiled by Insurance Journal from data provided by the National Association of Independent Insurers, based on Best’s State/Line Report, Property/Casualty, 1999 Edition; OneSource (NAIC), and A.M. Best Company. Direct written premiums include state funds where applicable. Loss ratios exclude loss adjustment expenses. They are adjusted by dividends to policyholders. Combined ratios are calculated as the sum of the loss ratios, countrywide loss adjustment expense ratios and countrywide underwriting expense ratios.
OREGON: PRIVATE CARRIERS STRUGGLE IN OREGON’S 3-WAY SYSTEM
By Catherine Tapia
Prices have dropped to a point where it is probably becoming increasingly difficult for carriers to turn a profit.
Oregon’s workers’ comp system provides employers with three options for purchasing coverage. The first is that employers can provide coverage for their employees directly through a self-insured program. Secondly, employers can purchase coverage through the state fund, in this case the SAIF Corporation, which is owned by the state of Oregon and is said to hold approximately one-third of the state’s market share. Thirdly, employers can purchase coverage from competitively positioned private carriers.
“The system in Oregon now is very well balanced between meeting the needs of workers and employers,” said Tom Towslee, public affairs manager for SAIF. “In the 1980s, the system was believed to have been tilted too far in favor of workers…A massive reform package was passed in 1990.”
The largest private carrier in the state, Liberty Northwest Insurance, has approximately 16 percent of the market premium.
“The lion’s share of the private insurer premium is multi-state accounts,” said Stephen L. Beckham, public affairs president of Liberty Northwest. “Private insurers generally have been unable to succeed in competing for state-only accounts, given the competitive advantages the state provides for SAIF Corp.”
Such advantages include exemptions from federal taxation and from certain investment requirements. As a result, SAIF’s dividends paid last year reportedly exceeded net insurance premiums. “Unchanged, this situation will continue to erode the health of the competitive workers’ comp market in Oregon and force private insurers from the state,” Beckham said.
Towslee said according to indications noted by SAIF, there may be two or three more years of rate reduction in Oregon, adding that prices have dropped to a point where it is probably becoming increasingly difficult for carriers to turn a profit.
“As a state fund, we’re not particularly concerned about profits,” he said. “We are concerned about maintaining a competitive system and making sure that employers in the state have a choice about where they obtain their coverage. But we don’t make the rate reductions. As long as the Insurance Commissioner keeps lowering rates, that’s good for the employers in the state. “We have not seen rate increases since 1989, and there’s nothing to indicate that we’re going to have any radical increases in rates in the future.”
With respect to legislative issues, Towslee said Oregon’s system had been pretty non-controversial for about 10 years. “It’s becoming more controversial, but it’s pretty much been off everybody’s radar screen,” he said. “While we’re getting some indication that certain segments of workers who feel that the system is not meeting their needs are becoming more vocal about their criticism of the system, we’ve seen no complaints by employers. We see very few complaints by insurers, and it’s really not an issue that the legislature is focused on at the moment.”
However, in terms of benefit delivery system, there are some potentially incendiary issues emerging. “The effect these will have on the system overall will depend on negotiations, spearheaded by the Governor, between management and labor representatives,” Beckham said. “Organized labor has increasingly perceived that the cumulative effects of the reforms from 1987 through last session have progressively disenfranchised workers and precluded a legal remedy.
“The lead case regarding this issue is Smothers v. Gresham Transfer, a Liberty Northwest case now at the Supreme Court. Depending upon what type of decision is issued by the court, the ‘exclusive remedy’ foundation of workers’ compensation could be at risk.”
Melvin Sorensen, assistant vice president, Northwest region, for the National Association of Independent Insurers (NAII), referred to a recent Best’s Review article analyzing the health of workers’ comp markets in various states. “Oregon was specifically referenced and did not really stack very well,” he noted. Indeed, the analysts remarked that Oregon’s workers’ comp market appeared “on the verge of distress.” If private carriers, employers, employees and public policymakers in Oregon fail to evaluate and address the factors contributing to such an analysis, Sorensen concluded that Oregon’s three-way workers’ comp system might end up significantly impaired in the not-so-distant future.
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Statistics were compiled by Insurance Journal from data provided by the National Association of Independent Insurers, based on Best’s State/Line Report, Property/Casualty, 1999 Edition; OneSource (NAIC), and A.M. Best Company. Direct written premiums include state funds where applicable. Loss ratios exclude loss adjustment expenses. They are adjusted by dividends to policyholders. Combined ratios are calculated as the sum of the loss ratios, countrywide loss adjustment expense ratios and countrywide underwriting expense ratios.
WASHINGTON: WASHINGTON’S W/C SYSTEM MAINTAINS UNIQUE MONOPOLY
By Catherine Tapia
“Without competitive structure, employers [and employees] in the state of Washington…by definition are left without choices.”
Even among the handful of states that have a monopolistic workers’ compensation system, the two-way state of Washington is distinguished by some significant differences. In 1911, public carriers were removed from workers’ comp for what was referred to as extra-hazardous coverage for employment.
In 1971, the Washington Legislature changed the coverage to say there is hazard in all employment.
Consequently, employers basically have access to either self-insurance or participation in the state fund. The choices available to the vast majority of those employers are quite restrictive, and there is virtually no authority to access a private carrier for workers’ comp.
Washington’s workers’ comp program is administered by the state-run Industrial Insurance Fund. Douglas Connell, assistant director of insurance services for Washington’s Department of Labor and Industry, described some of the unique characteristics of the state’s system.
“Our premiums are based on worker hours, not on a percentage of payroll,” he said. “We’re the only carrier that I’m aware of that has a base of hours.” The advantage of this type of base is that it is “flat,” regardless of what an employer pays; in other words, all employers start out with the same base.
“Payroll approach has a built-in inflationary condition,” Connell continued, adding that benefits are tied to the state’s average wage, which has increased in the last few years. “Last year it was 8.4 percent. If we were a payroll base, we would automatically be receiving more money in our premium. But because we [use] hours, that doesn’t impact our premium base, just our benefits schedule.”
Furthermore, employers and employees contribute to the program, and there are three basic premiums. First is the accident fund premium, paid 100 percent by employers and used for compensation benefits. Second is the medical aid premium, which is shared jointly by employers and employees. Third is the supplemental pension; like medical aid, it is insured jointly by employers and employees.
Connell said there are about 170,000 strictly state fund claims a year, and another 40,000-50,000 can be added onto that from the self-insured side. “We collect about $900+ million a year on our premium side,” he said. “So we’re a pretty good-sized carrier if you look at a lot of the other states. On the financial side, we are very healthy right now. Our total reserve is running about $8.8 billion, and our contingency reserve is running about 1.6 billion…That’s why we have not had a rate increase in about six years.”
In the Workers’ Compensation System Performance Audit, completed by Ted Welch on Dec. 11, 1998, for the Joint Legislative Audit Review Committee, it was determined that Washington was on the 75th percentile as far as benefits and the 25th percentile as far as costs.
“[Welch] went on to say he felt that because we are an exclusive carrier, that puts us in a very good position as far as helping control a lot of our costs,” Connell said.
Mel Sorensen, NAII assistant vice president, Northwest region, stated the opinion that Washington is in a distinct minority position relative to workers’ comp and has not really afforded Washington employers and employees the choices that are available in the vast majority of other states.
“From our standpoint, that is a regrettable decision,” Sorensen said. “We think that competition is a valuable tool for increasing service and price considerations. Without competitive structure, employers [and employees] in the state of Washington…by definition are left without choices and are stuck with the service that the state chooses to give and stuck with the rates that the state chooses to provide.”
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Statistics were compiled by Insurance Journal from data provided by the National Association of Independent Insurers, based on Best’s State/Line Report, Property/Casualty, 1999 Edition; OneSource (NAIC), and A.M. Best Company. Direct written premiums include state funds where applicable. Loss ratios exclude loss adjustment expenses. They are adjusted by dividends to policyholders. Combined ratios are calculated as the sum of the loss ratios, countrywide loss adjustment expense ratios and countrywide underwriting expense ratios.
Topics California Carriers Profit Loss Agencies Legislation Claims Workers' Compensation Underwriting Washington Property AM Best Property Casualty Oregon Casualty Arizona
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