Big workers' comp savings on way out: reforms drop fees so low that premiums will likely rise.

The era of rapidly falling workers' compensation bills for California employers may be nearing an end, nearly four years after sweeping reforms were enacted.

In recent policy renewals, employers are generally seeing smaller decreases in their premiums than in past years. Some employers in riskier industries or with poorer claim track records are even seeing increases.

What's more, a non-profit agency charged with tracking workers' compensation insurance trends is recommending an increase in base premiums of 4.2 percent--the first such increase in four years. Agency officials say premiums have fallen so far that they are now slightly below the cost of administering claims, which has stayed flat over the past four years.

If state Insurance Commissioner Steve Poizner follows through on the recommended increase later this month, it would send a powerful signal to the insurance industry that further substantial premium cuts are not warranted.

'The workers' compensation decreases appear to have bottomed out," stud Mario Guerra, president of Scanlon-Guerra-Jacobson Insurance Brokers in Woodland Hills. "You will likely not be seeing double-digit premium decreases (next year) like we have the past three years."

This year, Guerra said his clients are seeing smaller decreases--in the range of 10 percent to 15 percent--than in past years, when it was common to see rate drops twice as large.

Furthermore, Guerra said he's hearing from his broker peers that it's more difficult now for a company to get rate cuts if they have a less-than-stellar claims track record.

Indeed, the reduction in premiums has slowed dramatically at Cerritos-based InstaGraphic Systems, which employs about 120 people and makes heat transfer prints and machines for the apparel, textile and medical industries.

The firm's 2006 workers' compensation renewal quote plunged 46 percent from the year before. But the July 2007 renewal reflected only a 5 percent reduction. What's more, according to co,wrier Janet Wells, the base workers' compensation rate actually went up 9 percent; only a substantial discount for a good safety record kept the total premium payment from going up as well.

"After three years of decreases averaging 28 percent a year, we were back close to what we were paying in 2000 before all the increases hit," Wells said. "So I'm not surprised that we didn't get another double-digit cut this year; that can only go on for so long."

Positive underwriting 

So far, though, actual rate increases are a rarity, thanks to intense competition among workers' compensation insurance carriers. "The predominant majority of carriers still find California a good place to do business and they continue to report favorable underwriting results," said Mark Zwickel, executive vice president of commercial insurance line in the L.A. office of Lockton Insurance and Risk Management Specialists.

That's a far cry from earlier this decade when the workers' compensation insurance market virtually collapsed in California after carriers had written policies below cost for years as deregulation took hold. At one point in early 2004, there were so few commercial carriers writing policies that the State Compensation Insurance Fund, the quasi-public insurance carrier of last resort, had roughly 60 percent of the total market.

And during that era, starting in 2000 and continuing through 2003, workers' compensation insurance premiums doubled on average, although some companies saw their premiums increase three-fold or even four-fold. On average, premiums consumed 6 percent of payroll, twice as much as in any other state.

The outcry from employers was seized on as a campaign issue by Arnold Schwarzenegger during the 2003 recall election. After becoming governor, one of Schwarzenegger's first acts was to push through the Legislature an overhaul of the workers' compensation system.

Instead of going to their own doctors, injured workers are now required to first seek treatment from doctors referred by the employer's insurance carrier. Disability payments and treatment plans were also made to conform to more stringent national standards.

As a result of the reforms, the number of claims began to drop, as did the medical treatment cost component of the claims.

It took almost a year for insurers to feel comfortable enough with the reforms to begin dropping rates, but once they did, they lowered premiums with a vengeance. In 2005 and into 2006, annual policy renewals at many firms plunged 20 percent or 30 percent or even more. And if one insurer wouldn't drop rates enough for an employer's satisfaction, that company could seek another carrier that would. Several new insurance players came into the market, including Agoura Hills-based Employers' Direct Insurance Co., recently purchased by Allegheny Corp.

Valencia-based Landscape Development Inc., a landscaping firm with 850 employees statewide, had a typical experience. Chief Financial Officer Timothy Myers said that in the last four years, his firm's rates have gone down an average of 20 percent to 30 percent annually. Last week, the company's carrier, Cypress Insurance, a member of the Berkshire Hathaway Homestate Cos. group of insurers, renewed the policy with a 22 percent rate cut.

[GRAPHIC OMITTED]

"All I can say is 'God bless Gov. Schwarzenegger.' Since he took office, our premiums have gone down by two-thirds," Myers said.

Indeed, across California, premium rates have plunged about 60 percent between July 2003 and July 2007, according to Dave Bellusci, senior vice president and chief actuary of the California Workers' Compensation Insurance Rating Bureau, a non-profit association of insurers that tracks claims data. Premiums now consume less than 3 percent of payroll, down from 6.5 percent in mid-2003.

However, Bellusci said, the cost to administer claims has not gone down. It has remained steady as paperwork associated with claims has increased. Much of this paperwork is the result of greater numbers of challenges to insurer denials of treatment. "The claims are just as complex as ever, if not more so," he said.

Not wanting to risk a repeat of the fiasco of the late 1990s when insurers joined in a mad rush to the bottom and wrote premiums well below the cost of claims, the rating bureau last month recommended a 4.2 percent increase in the base premium rate. In essence, the recommendation sends a signal to the industry to be wary of over-reaching with rate cuts.

The bureau's recommendation is now on the desk of Insurance Commissioner Poizner, whose office has scheduled a hearing for Oct. 23 on the issue. After that, Poizner will have 30 days to act on the recommendation; he can accept it, or offer his own recommendation for rates. Last May, Poizner recommended a 14 percent drop in the base rate, citing 2006 figures showing that insurers were paying out only 37 cents in claims for every dollar written in premium.

Though insurers are not obligated to follow Poizner's recommendation, in most cases, it serves as the benchmark for the industry; if there's a change in direction, most carriers generally go along, differing only in magnitude.

Whatever the case, brokers say that any recommended rate increase won't be considered by carriers until renewals starting on Jan. 1. "Even then, any increases are likely to be small--nothing on the scale of what we were seeing five years ago," Guerra said.

Over the longer haul, rates could increase more if benefit levels are increased or treatment criteria loosened. Ever since the reforms passed in 2004, labor unions and injured workers and their legal advocates have been pushing to relax those reforms. Each year, at their behest, the Legislature has passed bills to increase disability payouts or restore the right of injured workers to seek treatment from their own doctors.

But each year, Gov. Schwarzenegger has acquiesced to the wishes of employer lobbyists and vetoed these bills. This year, Schwarzenegger once again is expected to veto a bill now on his desk to raise benefit levels.

However, behind the scenes, there's now a grudging acceptance from insurers and some employer representatives that the 2004 reforms may have over-reached, raising the prospects that they may agree to a benefit increase next year taking effect in 2009--especially in the area of long-term disability payments. If that happens, premiums would almost certainly increase beginning late next year.

Howard Fine 

Staff Reporter