Garamendi rattles insurers over workers' comp reform.

His remarks spur visions of profit-killing price wars

California insurance czar John Garamendi's statements about workers' compensation reform have many in the industry worried he will tamper with those aspects of the system that work while giving short shrift to the fundamental causes of soaring workers' compensation costs.

At a recent hearing Department of Insurance Commissioner Garamendi called for an examination of whether the current system of a minimum price and competition based on dividends and service should be changed to encourage competition based mostly on price. Several insurers said that could drive the system further into the red.

"Competing on just price would be disastrous for the social needs of the system," said Stanley Zax, president of Woodland Hills-based Zenith National Insurance Group. "The purpose of the dividend system is to stimulate safety practices on the part of business."

While workers' compensation insurers are free to charge any price above a state-established minimum, most companies hug to the minimum rate and then compete on dividends they return to employers based on their claims in a given period.

Another insurer also questioned Garamendi's direction. "I don't know where it's going with him," said Jim Little, president and chief executive officer of Santa Monica-based Fremont Insurance Group Inc. "I think, like most of my peers in the industry, we're taking a wait-and-see approach to the situation. My real concern here is that the issue of rate increases is diffusing real attention from the real causes that are driving these costs: rampant litigation in a system that should be no-fault."

"There is a lot of quivering in the boots (at insurance companies)," noted a recent issue of Workers Comp Executive, a Danville, Calif.-based semi-monthly industry publication which first reported on the impact of Garamendi's comments. The insurance commissioner made the comments at an Oct. 22 hearing to consider a request for a 11.9 percent boost in the minimum rate which workers' compensation insurers can charge customers.

Insurers were also concerned by Garamendi's statements that he will take a tough line when deciding whether to approve the rate increase proposed by the Workers' Compensation Insurance Rating Bureau of California, a 12-member governing committee for the workers' compensation system.

"This hearing represents my first formal attempt to bring discipline to an insurance system run amok," said Garamendi. "No longer will the insurance commissioner blindly support the insurance industry's proposed rate increases without intense scrutiny. I intend to demand efficiency and reform from every party that adds unnecessary costs to the system."

Insurers claim the requested rate increase simply reflects the rising cost of doing business. They expressed concern that Garamendi might decide to deny the increase on political grounds, which could be the first step toward squeezing profitability out of the system for insurers.

Workers Comp Executive reported that Garamendi's staff has privately told industry insiders that a 6 percent increase is the maximum that will be allowed.

Despite rising costs, workers' compensation has been one of the few bright spots for property/casualty insurers in California. Unlike other states, where failure to support adequate rates has led to underpricing and driven insurers out of the market, the California workers' compensation market has been one of the most consistently profitable for property/casualty insurers.

"We view the California workers' compensation specialists as the exact type of property/casualty stock that investors should be pursuing during the current down phase of the property/casualty market," wrote Steven Gavios, a Kidder, Peabody & Co. stock analyst, in a Oct. 18 insurance industry report. "We say this because the minimum rate law in California workers' comp precludes price competition, thus allowing the companies to evade the peaks and troughs of the P/C pricing cycle."

At the hearing, Garamendi entered a copy of his Proposition 103 rate regulations into the record in an act some took as tangible evidence that he may focus the spotlight on workers' compensation insurers' profits and expenses, as he did in his battles with auto insurers over implementation of Proposition 103.

The debate over workers' compensation reform, however, differs in many respects from the Proposition 103-driven efforts to reform the auto insurance industry.

Far from having a clear-cut order from the public to roll back rates, as Garamendi did in the case of Proposition 103 and auto insurance, workers' compensation is a complex battleground of businesses, labor groups and insurance companies with few suggesting that insurer gouging is the primary issue.

"Among business people we've educated about the expenses driving the increases in workers' compensation insurance, most don't blame the insurance companies," said Lori Kammerer, managing director of Californians for Compensation Reform, an organization of 3,000 employers doing business in California that is pushing for workers' compensation reform. "It's always easy to blame the person forced to pay the bill."

But many businesses are livid about fraud and abuse they say the system invites and also with administration of the Workers Compensation Bureau.

The Rate Study Commission, established by the 1989 Workers Compensation Reform Act, is scheduled to present a report on the pricing aspects of workers' compensation insurance by March 1, 1992.

Workers' compensation is a 78-year-old, state-mandated system which was designed to provide health insurance coverage to workers' injured on the job. The system was intended to be no-fault: in return for prompt and certain payments of benefits, workers gave up the right to sue.

Rising costs at all ends, however, have thrown the system out of whack, and several attempts to reform it, most notably the 1989 Reform Act, have been dismissed as dismal failures.

For many employers, workers' compensation premiums are now their second-largest expense. They represent 3 percent of payroll for the average company in the state, and are a primary consideration cited by many companies in deciding whether to leave California.

The situation is even worse in Southern California, where costs are twice as high as in the northern part of the state, according to Alan Tebb, general manager of the California Workers' Compensation Institute, a research arm of the Workers Compensation Bureau.

Yet despite the amount of money spent on workers' compensation, California ranks 35th among the states in the level of compensation provided to workers, Tebb said.

That seeming incongruity is explained by rising litigation and health care costs, further exacerbated by employee preference for using the workers' compensation system instead of traditional health insurance, a widening variety of stress-related and non-traditional maladies claimed by workers, and a greater frequency of claims than in other states.