AAI Labels Calif. Workers’ Comp Rating Bill ‘Regulatory Overkill’

A bill working its way through the California Assembly that would give the insurance commissioner greater authority over workers compensation rates is contrary to the state’s open competition rating law and will only serve to hurt competition in the state, according to the Alliance of American Insurers.

“AB 1985 would, in essence, switch the current open competition method of setting workers compensation rates in California to prior approval,” Peter Gorman, vice president of the Alliance’s Western Region, commented. “The proposal is regulatory overkill where a few minor adjustments and clarification of existing law would suffice.” The genesis of the legislation is concerns about rate adequacy in the state’s workers compensation market, which has seen the demise of several insurers over the past few years.

However, Gorman noted that the problem isn’t inadequate rates being charged, but rapidly rising and unexpected medical and indemnity costs.

“Since the open competition law went into effect in 1995, carriers’ inability to accurately forecast dramatically increasing and unprecedented loss costs have contributed to the current market distress,” Gorman explained. “This situation is beginning to correct itself with major rate increases being filed with the department without regulatory intervention.”

Gorman pointed out that the commissioner already has more than enough authority under existing law to intervene prior to insolvency to force carriers to charge adequate rates. Currently, sections of the state insurance code give the commissioner authority to order rates increased when they are found to be inadequate and to require actuarial justification of rates when they appear to be inadequate. California law also empowers the insurance commissioner to order a company to cease and desist conduct that would render the insurer insolvent.

“What the current code does not do is provide the commissioner with prior approval authority over all rates, including final rates charged by insurers,” Gorman said. “The commissioner only is required to approve advisory loss costs. Carriers then add their administrative costs to these and file them with the Insurance Department.”

According to the AAI, a particularly burdensome part of AB 1985 would permit the commissioner to disapprove an insurer’s rate or supplementary rate information if the rates are not justified by credible and verifiable supporting information. “This eliminates all judgment-based scheduled rating plans,” Gorman said. “Most company rating plans must rely on judgment and this requirement could preclude most company rating plans. For example, AB 1985 would prohibit a carrier from granting a discount to an employer who installs safety equipment at the time the policy is written because the discount plan would never meet the bill’s “credible and verifiable” actuarial test.

“If approved, AB 1985 would roll back the clock to a time that no longer is appropriate to today’s competitive marketplace,” Gorman remarked. “Employers now demand that carriers respond quickly and on an individual account basis. AB 1985, on the other hand, replaces pricing flexibility with a straightjacket that would make workers’ compensation premiums less responsive to changes in costs.”

Topics California Carriers Legislation Workers' Compensation