Employers get good deals in workers' comp turnabout.

Insurance firms' competition revives following reforms

The tide seems to have turned in favor of Los Angeles employers when it comes to buying workers' compensation insurance. Many workers' comp companies now are competing aggressively for business throughout L.A. County, an area shunned by insurers only two or three years ago.

Indeed, back in 1991 and 1992, mounting underwriting losses from ever-escalating claims prompted one insurance company after another to announce they were either withdrawing from the Los Angeles market altogether or severely cutting back on their exposure. Some insurers went so far as to relocate their Los Angeles corporate offices to Northern California in an effort to re-identify their marketing emphasis.

Competition today appears fiercest among California-based carriers, most of whom claim they never abandoned Los Angeles but continued to write business during the city's direst hour of need.

"Pacific Rim never ran out of town," said Stanley Braun, president and chief executive of The Pacific Rim Assurance Co., a workers' comp insurer based in Woodland Hills. "We made a commitment when we started the company to serve the community in good times and bad. We never felt the option to pack up and exit when times were tough and then hire a U-Haul and come back."

Approximately 50 percent of Pacific Rim's business is written in Los Angeles. And its L.A.-area business is likely to increase, said Braun, following a $16.8 million infusion into the company's coffers last month. That $16.8 million was the bulk of a $20 million private placement by Pacific Rim's parent company, Pac Rim Holding Corp. That private placement was undertaken specifically to expand Pacific Rim's underwriting capacity.

"L.A. County has always been a very difficult community to conduct business in, with the extra expense burden of heavy litigation and heavy fraudulent claims," Braun said. With the crackdown on fraud claims by the state Attorney General's Office, coupled with passage of the workers' compensation reform bills last July, "many insurance companies have started to come back. It's their option to do so, but they come back with uncertainties and lack of commitment."

A five-bill reform package overhauling California's beleaguered workers' comp system passed during the 1993 legislative session. Key to the package was Assembly Bill 119, which requires employees to prove stress and psychiatric injuries are "predominantly" caused by the work environment in order to successfully file a claim.

Jim Little, president and chief executive of Fremont Compensation Insurance Co. of Glendale, said that carrier is aggressively competing for new L.A.-based accounts.

"Because of the elimination of the fraud-type claims from the system, we find many more employers, who maybe three years ago might not have met our underwriting standards, do meet them today," Little said.

Businesses facing large layoffs, for example, might have been precluded from coverage in the past due to their vulnerability to large numbers of stress claims from laid-off workers. But with stress-injury awards now much harder to come by, such businesses are having a much easier time finding coverage.

Little attributed the turnaround to anti-fraud legislation. "Most of the stress claims were driven by unscrupulous providers milking the system," he said. "The fraud legislation has created strong enforcement and driven the mills from the marketplace. And there has been a corresponding dramatic decrease in the (number of) claims being filed."

Competition for business has "definitely increased. There are not a lot of new players, but those who stayed are all much more aggressive," Little said.

And just how do insurers compete within the confines of current state law, which sets a minimum rate for workers' compensation insurance?

The answer is through rebating, a simple concept but one that, in practice, is somewhat convoluted. While rebating is allowed under Proposition 103 (the insurance reform initiative passed in 1988), rebating by insurers violates California's minimum rate law. Hence, insurance companies pay excess commissions of 20 to 25 percent to their agents and brokers, and let those agents and brokers pass along the rebates. The circuitry route won't be necessary as of Jan. 1, 1995, when open rating replaces the minimum rate law.

Under that pending deregulation, insurers will be free to set their rates as low as they want.

"Everybody is trying to get market share in anticipation of open rating," said one company underwriter. "They are buying their book of business so that when it (open rating) does hit, they can go through and pick and choose which risks they want -- the idea being that the incumbent usually is in a stronger position to renew the business."

Cypress Insurance Co. is paying up to 20-percent commissions on selected accounts to get the business, a change that has been driven by Southern California employers in anticipation of the elimination of the minimum rate law, said Brad Kinstler, president of the San Mateo-based insurer.

"Employers are not really sure what they should buy," he said. "Typically, on workers' comp, they have bought dividend plans. But today, they are unsure whether or not carriers will be paying their proposed dividends. So they look for up-front dollars as opposed to dividends paid out after a policy expires."

Dividend plans, which comprise the vast majority of workers' comp policies sold, are those under which the insurer charges a business premiums in excess of the amount needed to provide coverage. Then, at the end of the year, that business is issued a dividend based on its implementation of workplace safety measures and reduction in claims. In essence, the plan acts as an incentive for businesses to reduce claims and improve workplace safety. Businesses with a low-claims year can look forward to healthy dividends.

But now cash-strapped businesses, concerned that dividends may not be forthcoming, are looking for breaks at the beginning of the year rather than when the policy expires.

Cypress writes 50 percent of its business in Southern California, with the majority of that in Los Angeles County. "We never pulled out even through 1990 and '91," Kinstler added. "Now, there are a larger number of risks (insured businesses) that will be profitable in the Los Angeles Basin because of the fraud statutes, and the efforts by insurers themselves to reduce fraud."

Paul Kuhn, president of Workers' Compensation & Indemnity Co. of California in the Orange County city of Brea, said, "Essentially, open rating is here. Pricing has been through the format of commission rebates. And informally, this is the way it's being handled." Over 50 percent of Workers' Compensation & Indemnity's business is in Los Angeles County.

Not all insurers are clamoring to write business in Los Angeles, however. Aetna Life & Casualty, the Hartford-based carrier that exited the L.A. market two years ago, said Aetna "has not changed its posture."

And San Francisco-based Industrial Indemnity Insurance Co. "is still very selective when it comes to Los Angeles," said President George Scarpato.

Likewise, Cigna Insurance Co.'s presence will not soon be felt. "Our appetite in Los Angeles has not changed as a result of the recent legislation," said Warren Levy, a Cigna spokesman.

But some carriers have seen a change. Superior National Insurance Co. of Calabasas, which dramatically decreased its workers' comp writings in Southern California over the past few years, declined to comment on its current marketing stance in Los Angeles until its new president officially takes office June 1. But J. Chris Seaman, Superior's chief financial officer, said the Southern California business that remains on the company's books "is really popping some nice returns, especially in Los Angeles."