Small firms miss comp rate cuts.

For months now, headlines and studies have trumpeted huge double-digit drops in workers' compensation premiums in California.

But for Ruben Guerra, those headlines seem like a cruel illusion.

Like many California employers, Guerra, the owner of R.G. Packaging & Designs, a two-person retail packaging and distribution business in the City of Commerce, saw his premiums skyrocket over the last several years. So he was pleased to see sweeping reforms enacted two years ago and expected to see his rates go down.

But when Guerra opened his January renewal quote from the State Compensation Insurance Fund, a quasi public insurer, he was stunned to see his premium was unchanged.

"I thought there was supposed to be a big decrease," Guerra said. "We've been reading about this now for months. But where's my decrease?"

Guerra is evidently not alone in wondering where his savings are.

According to a Union Bank of California survey released last week of 360 small business owners in Los Angeles County and 1,900 businesses statewide, a stunning 85 percent said they have not seen their workers' compensation premiums go down in the last year.

Sixty percent of the companies said their workers' compensation premiums were unchanged between January 2005 and January 2006, while roughly one in four companies said their workers' compensation premiums actually rose.

This comes despite four rounds of rate cut announcements from insurers averaging 38 percent over the past two years. It also flies in the face of a recent state-mandated study from Bickmore Risk Services that projected insurance rates to have fallen 46 percent between July 2003 and January of this year.

"This shouldn't be happening," said Norman Williams, spokesman for state Insurance Commissioner John Garamendi.

Multiple factors

Neither the study's authors nor state and insurance industry officials could offer firm explanations for the huge discrepancy. But they suggested that the companies surveyed--all with revenues of less than $5 million--are so small that they've simply been left behind as rates have plunged.

While these very small companies may not make headlines, they comprise the lion's share of employers locally and statewide. According to the state Employment Development Department, there were more than one million businesses with fewer than 20 employees in California as of July 1, 2004--or 89 percent of all businesses in the state. The percentage was similar for Los Angeles County, where 325,000 businesses reported having fewer than 20 employees on their payrolls.

Businesses this size rarely have the staff or the time to shop around for the best workers' compensation insurance rates. Guerra himself said he didn't do any comparison shopping. "I'll definitely do so next year," he said.

But even if they do shop around, very small companies tend to have little negotiating power. They are often considered too small to be attractive underwriting prospects for many insurers.

"Small accounts require lots of hours spent by the insurance carrier per employee covered. It's much more profitable for the carrier to write a single policy for 400 employees than it is to write policies for 100 companies each with four employees," Williams said. "That's just the way the marketplace works."

This may explain what happened to one of the survey respondents. Last September, Robert Schuster, owner of Hollywood Studio Rentals, received a notice from his carrier that his policy was being cancelled.

"The official reason they gave was that four years ago (in 2001), a claim was filed against my company," Schuster said. "But if that was the case, why didn't they drop me each of the last three years instead of renewing my policy? I think the real reason is that they didn't make enough profit on us."

Schuster searched around for another carrier, but got quotes that were substantially higher than he was paying. That prompted him to put into action a plan that had been in the works for a couple years: converting the company into a limited liability corporation.

Each of the employees was given just over five percent of the company's stock, which Schuster said makes them part owners of the company. With no employees to cover, Schuster said the company did not have to purchase workers' compensation insurance.

For the two months it took to set up the limited liability corporation, Schuster purchased workers' compensation coverage from State Fund, at about 30 percent higher than he was paying before.

But once the conversion took effect, Schuster said the company has saved money. "Paying them each five percent of the company's profits has turned out to be cheaper than paying workers' compensation," he said.

Impatient businesses

State insurance officials last week questioned the legality of Schuster's move and whether it was done specifically to get around the requirement that every employer carry workers' compensation coverage.

Whatever the case, it illustrates the impatience felt by small business owners over the slow pace of rate reductions. These companies took the brunt of the rate hikes in the early years of the decade as most of the private market disappeared and they were forced to sign up with State Fund at sharply higher rates. By early 2004, State Fund, which was initially intended as an insurer of last resort, comprised nearly 60 percent of the overall workers' compensation insurance market.

Soon after the workers' compensation reforms passed in April 2004, some mid-sized and larger companies were able to cut deals with private insurers that began coming back into the market. But most of the small companies remained with State Fund until recently.

Now, though, insurance industry officials say so many players have come into the market that small businesses no longer have to remain with State Fund, which has seen its market share drop to about one-third.

State Fund spokesman Jim Zelinski said the insurer is lowering its rates. "We are passing along savings to all of our policyholders regardless of size. In fact, in November we filed our fifth consecutive across-the-board rate decrease."

State Fund, he said, has also just instituted an additional 10 percent discount for employers with premiums under $75,000 that have good safety records.

At the same time, the private insurance market is also beginning to target smaller companies.

"There are carriers out there now that specialize in serving very small businesses. It's just a matter of those businesses shopping around until they find them," said Nicole Mahrt, spokeswoman for the American Insurance Association.

Beyond that, Mahrt said she could not explain why more respondents to the Union Bank survey saw their premiums rise than fall.

"The only other factors I can think of is that companies either had recent claims against them or they added employees," she said.

Indeed, small businesses tend to be among the fastest-growing companies. It's possible that some of the responding firms added employees and failed to take that into account when looking at their workers' compensation premiums. As a rule, the more employees a company has, the higher the workers' compensation premium.

But Union Bank chief economist Kei Matsuda said another phenomenon might be occurring.

"What could be happening is what I call a perception gap. Business owners see these headlines screaming 40 percent rate cuts, so they expect to see their own rates drop by that magnitude. If their premiums only go down 4 percent or 5 percent, they may think that's flat and respond that their premiums didn't change when in fact they did go down," Matsuda said.

Likewise, because many of these companies saw their workers' compensation premiums double or even triple earlier this decade, a drop of 5 percent seems minuscule by comparison.

Since the survey didn't ask business owners to quantify their workers' compensation premiums, there's no way to gauge this effect, Matsuda said.

Premium Relief?

Small business owners say they haven't seen workers' comp cuts.

Los Angeles County: 358 firms responding

Reporting premium increase: 26 percent

Reporting premium decrease: 14 percent

Premium stayed the same: 60 percent

State of California: 1,900 firms responding

Reporting premium increase: 29 percent

Reporting premium decrease: 15 percent

Premium stayed the same: 56 percent

Source: Union Bank of California 2006 Small Business Survey