Open-rating price war depleting reserves of workers' comp carriers.

L.A. COUNTY - How low can they go?

That's what California's workers' compensation insurers are wondering about premiums, which have continued to plummet since the state scrapped its network of fixed rates for a more competitive - not to mention more chaotic - open-rating system last year.

For many businesses in the L.A.-area, workers' compensation premiums have fallen by more than 50 percent since open ratings took effect Jan. 1, 1995. And while that's been a welcome windfall for business owners, a number of insurance companies are beginning to feel the strain of a price war that shows few signs of letting up.

The open-rating system removed government-mandated minimums and granted insurance companies the ability to determine their own premiums. The change sparked a blizzard of price competition in the workers' compensation industry, with companies slashing their rates in a mad scramble to capture new market share, as well as to retain the clients they already had.

In some cases, insurers have cut so deep that they've been operating at a loss for the better part of the year, industry sources said.

Others have begun to pull out of the state. Three years ago, Glendale-based Fremont Compensation Insurance Co. did 90 percent of its business in California. Now, it does less than 30 percent here. Instead, the company has been aggressively expanding into the Midwest; it is the No. 1 comp insurer in Illinois, and also is active in Michigan, Iowa, Wisconsin and Missouri.

Low-balling nixed

"Geographic diversity was always desirable, but with open rating, it's become a necessity," said Bob Gore, a Fremont spokesman. "Fremont competes responsibly. We won't get caught up in the low-bailing business."

Others haven't been so cautious, according to Bob Young, spokesman for the California Workers' Compensation Institute, the industry's research arm.

"The relation of the price of the policy to the actual cost of doing business is not really there any more," he said. "Companies have been writing business at less than their loss costs. And you can't stay in business that long if you're doing that.... It's become quite crazy out there."

That came as no surprise when open rating first took effect. But most carriers expected that rates would have bottomed out and stabilized by now, said Fritz Mutter, president of Golden Pacific Insurance Service Inc., a full-service insurance brokerage in Pasadena.

Premiums down 34 percent

Instead, almost a year and a half later, "prices are continuing to decline," Mutter said. "Competition is still pretty furious out there."

According to the Workers' Compensation Insurance Rating Bureau, which tracks the industry for the California Department of Insurance, the amount of direct-written workers' compensation premium has fallen from $9 billion in 1993 to an estimated $5.9 billion in 1995 - a drop of about 34 percent.

Such deep cuts in revenues "hurt carriers and agents," said Mutter. "We have to do the same amount of work for, in some cases, less than half the amount of income. We have to maintain the same service level. We can't cut services in half, even if revenues are down by that much."

In fact, according to industry sources, a number of companies have begun to do just that, cutting back in areas such as customer service, claims management and safety and engineering programs.

Even Golden Pacific, which has managed to expand under open ratings, has begun to outsource some of its safety programs, Mutter said. And Fremont Compensation was forced to lay off about 100 employees in California.

Richard Weibe, spokesman for the state's Department of Insurance, maintains that the package of workers' compensation reforms passed in 1993 generally has been a success, especially for California employers.

He also said the flurry of rate-cutting has not eliminated competition among the more than 200 comp insurers operating in the state.

Some insurers 'at risk'

But Weibe admitted that "some companies might be at risk."

The Department of Insurance is closely monitoring the industry - in effect, maintaining a "watch list" of troubled carriers - Weibe said, "so that corrective action can be taken before serious insolvency issues arise."

Weibe declined to name any companies being watched, saying such information is restricted to the department's financial analysts and the companies involved. But, he said, "it would not surprise me to learn that some are workers' compensation carriers. There is some concern about the solvency of some of these companies."

As evidence of that concern, Insurance Commissioner Chuck Quackenbush recently approved an 11.3-percent increase in "premium advisory rates." Advisory rates are based on loss costs. The Worker's Compensation Insurance Ratings Bureau, which gathers statistics for the Department of Insurance, recently found that loss costs had increased an average of 11.3 percent in 1995; Quackenbush is advising that premiums eventually rise to meet those costs. Although carriers are under no obligation to heed the commissioner's suggestions, advisory rates often establish a benchmark level for pricing in the industry.

Indeed, most observers say the wild ride has to end some time soon.

"Nobody wants to be the first to raise their rates," said Golden Pacific's Mutter. "But something's got to give."