Calif. Workers’ Compensation

Reduced rates and renewed competition in Calif.

California workers’ compensation insurance rates are taking a turn for the better. Thanks to reform legislation, employers should have more access to reasonable rates. In fact, rates are roughly equivalent to 1995 rates, according to the California Division of Workers’ Compensation.

The DWC recently released the results of a study on the effects of the 2003 and 2004 legislative reforms on workers’ comp rates in the state. “Rates have been reduced and competition has returned to California’s market,” according to DWC acting administrative director Carrie Nevans.

The findings substantiate what a number of sources believed: The California Department of Insurance, the Workers’ Compensation Insurance Rating Bureau and other analysts that follow the California workers’ comp market have noticed rates steadily decreasing with the adoption of the initial reforms back in 2003. Rates are now roughly 46 percent below where they were pre-reform, the report indicates.

Greg Trout of Bickmore Risk Services of Sacramento, which conducted the study, said the firm’s mid-range estimate of the savings translated from the reduced rates is $8.1 billion. “The change has significantly and positively impacted the employer community in California and has brought us back in line with other states in our region as well as other urban states like Florida, New York and Texas.”

Previously, California had the highest workers’ comp rates in the nation, Trout said. From Bickmore’s analysis of employers’ rate classifications codes across the nation, California, ranked the fifth highest, as of Jan. 1, 2006, and has the potential to go lower.

As a result of the reduction in claims cost, experts say the private market is recovering to the point where providers are aggressively seeking workers’ comp business. In the past, private insurers basically abandoned the market and the State Compensation Insurance Fund held the majority of market share. According to the study, State Fund’s market share is steadily decreasing from a high of 70 percent in 2003 to 36 percent in 2005.

“Our share is going to be what it’s going to be based on market forces,” said SCIF spokesman Jim Zelinski. “We are simply here to … ensure that California employers have an available market that is provided to them at cost.”

The DWC study indicates that because of reforms, insurers have been able to build surpluses. Certain aspects of the reform legislation were retroactive, so they were applied to existing cases of claims already open and allowed insurers to restate their projected claims costs, Trout explains. That’s led to an estimated savings of $5.4 billion to $9.4 billion, the study noted.

“That basically goes to the bottom line of insurance companies and has the effect of replenishing their capital surplus, which in turn allows them to write more business, if they so desire, either in California or in other states,” Trout said. He indicated that SCIF also has benefited – it has had the same positive result of reduced claims costs for its open inventory of claims, he said.

As part of the study, Bickmore looked at the accuracy of the rates developed by the Rating Bureau and approved by the California Department of Insurance and found their estimates were not substantially different from what had been projected and developed by those two organizations.

“We are projecting slightly greater reduction, but it’s basically because of different assumptions and different timing. We had more information available to us than the other two organizations did when they had to make their recommendations, so we found with this new information that rates are headed even further down in the future,” Trout said. He noted there is uncertainty about the final status of the reform because of ongoing legal and regulatory scrutiny.

There are even some efforts in California to rollback certain aspects of the reform, potentially even retroactively. “These uncertainties tend to cause insurers to be a little more conservative in their move toward market share or reducing their rates further,” he said. “In view of this uncertainty, they’re returning roughly 86 percent of where we feel their costs are and where their ultimate loss rates are … [that] tends to keep costs up slightly higher than they would be.”

The study can be downloaded in its entirety from the DWC Web site: www. dir.ca.gov/dwc.

Topics California Legislation Workers' Compensation Talent