Recent findings of the nonprofit Workers’ Compensation Insurance Rating Bureau (WCIRB) of California present a rather bleak picture of the current state of California’s workers’ comp industry.
WCIRB’s summary was a review of preliminary insurer reports of loss and premium experience valued as of the year ending 1999. California’s 1999 written premium was estimated to be at $7.2 billion, its highest level since 1994 and 9 percent above 1998’s $6.6 billion.
David M. Bellusci, chief actuary for the WCIRB, discussed some of report’s key findings. “There was a big drop-off in premiums in 1994 and 1995, when it went from almost $9 billion to less than $6 billion,” Bellusci said. “That was primarily due to the combination of claim frequency dropping, [and] prior to open rating, there were some decreases mandated and then the big drop in rates from open rating…Since then we’ve had gradually increasing premium. What’s happened there is essentially a growing economy.”
Bellusci noted that even though market rates have continued to decline, the decline has been offset by higher salaries and more workers in the workforce.
There was also some shift particularly on the public sector; because the rates were so low, many self-insured employers have moved back into the insurance market. “Those things have caused that premium to gradually increase over the last five years or so despite the fact that rates have been coming down,” he said.
Another significant finding estimated the ultimate 1998 and 1999 combined loss and expense ratios at 142 percent and 143 percent, respectively.
“What this chart tried to show is, for each year of accident, a ratio of what we project will be the ultimate cost of accidents in that year as well as the insured expenses for that year compared to the premiums that were earned,” Bellusci explained. “If you take a long-term average, it’s probably somewhere around 110.
“In the last four or five years, a couple of things have happened. For one the prices have come down and continue to come down because of the market forces. It’s been a real cutthroat price competition that’s driven the premiums down far below where they’ve been in relation to costs in the past. At the same time, while the number of claims has continued to decline, the average costs of those claims has increased. In fact, the increases on the average have more than offset the decline in the number of claims…These are by far the highest ratios we’ve ever seen and clearly can’t be sustained long-term.”
Bellusci zeroed in on another key point in the report; that is that the WCIRB estimated ultimate accident year 1999 losses to exceed the amount of losses reported as of yearend 1999 by $2 billion.
Furthermore, the estimate of total losses for all accident years as of Dec. 31, 1999, exceeded reported losses by $4.7 billion. “That’s clearly higher than we’ve ever seen,” he said. “That’s almost a year premium that’s owed to past claimants that will have to come out of future earnings.”
Looking towards the coming year, Bellusci said 2000 may look a little better than the past year.
However, he pointed out that even if there are some significant pricing increases, a dramatic turnaround shouldn’t be expected. “The hole’s so deep that it’s going to take a couple of years to dig out of it,” he said.
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