California Workers’ Comp: A Market on the Brink

Although they just squeaked past the January 1 crunch time, both carriers and buyers of workers’ compensation are having anything but a Happy New Year. Combined with the slipping economy, the crisis in the workers’ comp market could have drastic consequences for California and the rest of the nation; but for now, it’s just a waiting game. On Dec. 27, the market was thrown for a temporary loop when the California Department of Insurance (CDI) rejected the State Compensation Insurance Fund’s (SCIF) proposed 2001 rate filing. In response, SCIF temporarily suspended quotes for new and renewal policies with effective dates on or after Jan. 1, 2001.

Brokers scrambling to place Jan. 1 renewals went through a fire drill of what it might be like if SCIF ever really did cease writing business.

Eric Duell of Paula Financial’s business development department in Pasadena said his office was fielding distress calls from agents. “Going into the Jan. 1 cycle, which is obviously the heaviest for the state, I was receiving probably about 10 phone calls a day from agencies looking for appointments. And these were 911 phone calls-you know, ‘I don’t have a market: a number of California carriers have been closed. Can’t get to the State Fund. Don’t have anywhere else to go-will you please help me?'”

SCIF spokesman Ron Christensen said the Department’s reservations with the filing concerned “minutia.” “Their reservations were not with the proposed rate increase, which was 12 percent; their reservations were on our group discount plan for group accounts,” he said. “We have a preferred provider network and we have a Kaiser alliance, which are programs to reduce costs for claims-they had questions about those…but to change all this would impact how we devise the rates. So while we would continue to issue binders and insure people, we could not quote rates to them until this was resolved.”

The next day, SCIF reached a compromise with the CDI in which the 12 percent increase was approved, and the carrier reduced its group discounts from seven to six percent. The carrier is now back on track quoting prices and issuing renewals.

CDI Deputy Press Secretary Mike Silva described the situation with SCIF as “a simple case where the Department had differences, and those differences were resolved to the satisfaction of both parties.”

“SCIF can proceed with business as usual-we don’t see any problem with them writing this business,” he said. “It’s good to see there is a workers’ comp market in place for 2001.” Duell said the panicked calls died down as Jan. 1 came and went, and SCIF returned to normalcy. Although it was put on CreditWatch back in October, SCIF has since been removed and enjoys favorable ratings (“A” by Standard & Poor’s, “B++” by A.M. Best) and “extremely strong” capitalization, according to Best.

Cutting it close
As the dominant power in the state’s workers’ comp market, SCIF covers 43 percent of all California businesses with 211,000 policyholders in place at year-end 1999.

SCIF was created on Jan. 1, 1914, through the provisions of the Workers’ Compensation and Safety Laws of California. “An original appropriation of $100,000 was returned with interest to the State Treasurer in 1921 and no further appropriation was made,” A.M. Best stated in its Jan. 9, 2001, “Insurer Profile.” “The fund pays the same state premium tax as other carriers. The law provides that the fund shall compete fairly with other insurers and shall be no more nor less than self-supporting and shall return to its policyholders all excess premiums collected. Policyholders of the fund are exempt from financial loss assessment liability.”

SCIF operates like a mutual insurance carrier, returning approximately $4.8 billion in dividends to its policyholders since its establishment. “We’re not here to make a profit, we’re here to cover employers at cost,” Christensen said.

However, SCIF has been the target of accusations that it is “low-balling” its competition, charging lower prices than the private sector can afford.

“It’s crazy-that’s our response,” Christensen said. “From the end of the minimum rate law in 1995 on, many insurers charged rates that would not cover expenses and claims and the cost of doing business. The State Fund filed rates that we deemed appropriate to do that. During those years, our rate filings either matched or were above what the Department of Insurance recommended. This was not true of many of our competitors.

“So in 1999, when the bottom fell out and it looked like the whole system was teetering… many insurers stopped writing, didn’t renew, wouldn’t provide quotes, wouldn’t write new business, doubled or tripled their rates. The State Fund came in with a rate increase of about 9 percent, but we suddenly became the low-cost company. It wasn’t like that before. We lost thousands of accounts from ’95 to ’99 because we were high-priced-we kept adjusting the rates to cover costs.” Paula’s Duell described 1997 and 1998 as “war years” for the California workers’ comp industry, during which time the State Fund’s top line actually dropped. “They actually watched business walk away. So they are certainly not, as a lot of companies have been doing or trying to do, digging out from a reserve deficiency…I think a question that they’ll have to answer themselves is just the ability to process it. But we’re not burning the State Fund in effigy.”

By the numbers
Combined ratios in California are at record highs, according to the Workers’ Comp Insurance Rating Bureau (WCIRB). The combined ratio for accident year 1999 is 153 percent, with a loss ratio of 118 percent.

“The 1998 and 1999 years continue to develop at record levels, particularly for medical,” WCIRB Chief Actuary Dave Bellusci stated in a report issued Jan. 8. “If this deterioration and recent claim cost inflation trends continue, we don’t anticipate a dramatic improvement in accident year results for 2000, despite average rate increases this year of almost 20 percent and continued declines in claim frequency.”

The WCIRB’s report revealed that, even excluding any potential deficiency in reported reserves for the 2000 accident year, total statewide losses reported for accident years through 1999 as of Sept. 30, 2000, are $5.1 billion less than the WCIRB’s estimate of losses for those years. “In the absence of mitigation of these loss trends or dramatic reserve strengthening, this deficiency, when the complete results for the 2000 year are reported, could be in excess of $7 billion,” Bellusci stated.

Average insurer rates for policies written in the first nine months of 2000 are 19 percent above the average rates charged on 1999 policies, but the rates are 7 percent below the approved year 2000 pure premium rates. The report projects ultimate accident year losses for 1999 to be $8.2 billion, the highest amount ever projected by the WCIRB.

What’s an employer to do?
The options are dwindling for employers desperate to secure coverage for their employees, especially in the beginning of the year. With the disintegration of Superior National, California’s largest private insurer, in March of 2000, things got tight and the subsequent drop in ratings of other big carriers has limited options still further.

Businesses may be forced to move their employees out of state or cut down on operations in order to conserve costs. Small businesses may shut their doors entirely due to a lack of affordable coverage.

Richard Stephens, spokesman for the California Division of Workers’ Comp, said: “From our perspective, I would think what’s important is that employers have to be able to get insurance. The law requires them to have it and so their ability to obtain insurance and presumably at a good rate is important. The safeguard for that is, I guess, the State Compensation Insurance Fund.”

Bill White, president of Alliance Insurance Agency in Canoga Park, Calif., emphasized the impact any lapse in State Fund’s well-being would have on the marketplace. “Without the State Fund, we would have a mess on our hands, because there’s simply no one else to pick up the pieces. There’s no one with the desire or the capital or the ability to deal with the hundreds and hundreds of employers that need insurance.”

Employers considering their 2001 budget are in need of some kind of consistency in pricing, but this is not always possible in such a volatile market. “Certainly if an employer has budgeted for $50,000 and ends up paying $150,000, that’s an issue,” Paula’s Duell said. “But at the same time, I don’t believe that workers’ compensation insurance is a strategic buy for most companies. Some of our growers spend $11 million a year on cardboard boxes for their produce, and they spend $150,000 on their workers’ comp. So [if] they saved a penny on every box that they buy, that’s certainly more of a strategic buying decision than workers’ comp is…Certainly some of the smaller employers will struggle and especially if it’s a big surprise for them-they didn’t budget for it.”

Insurance Commissioner Harry Low has already taken a crucial first step with his approval of the 10.1 percent average increase in pure premium rates, but more legislative action may be necessary to turn things around in 2001. A workers’ comp hearing is set for Feb. 14 in Sacramento.

“Commissioner Low is enthusiastic to work with the various entities, including the Legislature, on improving the situation,” Silva said. “The Commissioner is excited about creating partnerships to improve the workers’ comp market. The Legislature is in a special session now, but it’s going back to its normal session within the next month.”

The CDI has dedicated a page on its website to “Why Workers’ Compensation Rates are Going Up,” in response to the high volume of calls from concerned consumers.

Waiting it out
The next few months are bound to be interesting, to say the least. Silva said the CDI is adopting a “wait-and-see” attitude, and it’s not the only one. Regulators and rating bureaus alike will be keeping a close eye on California’s comp carriers.

Who are the companies to watch? “Well, from the standpoint of whether they’re going to survive or not, companies such as Fremont, Paula, Frontier-those are companies that are obviously having some severe problems, and the stock price reflects it,” Alliance’s White said.

Fremont General Corp. and related entities remain under increased regulatory oversight by the CDI, according to Silva. In November, Fremont made an agreement with the CDI to “file by Jan. 1, 2001, a detailed business plan that sets forth forecasted premium writings, losses and expenses for 2001…Furthermore, forecasted new and renewal premium writings shall not exceed $400 million.”

As part of its continuing cost-cutting efforts, Fremont plans to close 16 of its 24 production and claim servicing offices and eliminate 465 jobs. It has already cut its workforce by 50 percent since June 30.

Painting a brighter picture
However, not everyone in the industry sees doom and gloom in California’s work comp future. White finds the idea that employers may soon be unable to purchase coverage at any price an “exaggeration.” “It’s actually not that much of a disorderly market,” he said. “January 1 was very, very disorganized because of the State Fund filing and the fact that they had to re-file, and then business was left hanging without quotations, etc. But somehow or other, the marketplace got through it.”

Duell was also philosophical. “As far as the industry crashing and burning, I don’t tend to be that pessimistic. There’s not bad business in California-I think it’s underpriced business. And employers are certainly going to bite the bullet if they haven’t already on their pricing. They’re going to have to, come next year’s renewal, if they didn’t do it this year. We’ve looked at our book for a long enough time to know that there are certain rates that you can’t make money on…If you look at a book that drove some carriers down, it’s not bad business, it’s just underpriced.”

The ups and downs of the market are inevitable, CWIC’s Stephens said. “I don’t know that a lot of this is really all unexpected. [The repeal of the minimum rate law] was designed to address the rising costs and making it more competitive would do that probably-that was the thinking at least.”

Unfortunately, increased competition is one thing; severe underpricing is quite another.

What’s next?
“It’s a cliche, but the market is going to right itself,” Christensen said. “I think a couple more carriers are going to fail; I think that’s a given.

“Last year, when the crisis became extremely visible to the DOI and everybody, it looked like a lot of insurers said, ‘we’ve got to bail out and make this up immediately.’ I think it’s a process that’s going to take a couple of years of adjusting rates so that you don’t collect $1 for every $1.40 you’re going to pay out. That’s the only way for it to get on its feet again.”

Alliance’s White is predicting continued price escalation over the next few months. “Golden Eagle has just announced that they’re not going to write any workers’ comp for the next few months, even if they have the packages,” he said. “So that’s going to further shrink the available market, and that’s going to put further pressure on the State Fund and the other more entrepreneurial companies [who] see an opportunity to jump into a marketplace now where the prices are rising very sharply. But workers’ comp is going to be available, one way or the other.”

Although this certainly doesn’t mean a flood of people will be coming into the marketplace any time soon, White believes the substantial price increases over the next year will make California a more appealing market than it has been for the last five or six years.

“From the standpoint of new entries, I think the nationals will start at some point seeing California as an opportunity,” he said. “And this is kind of a reoccurring thing. This is not the first time this marketplace has gone through these kinds of problems.”

Topics California Carriers Workers' Compensation