Transamerica will cut back local workers' comp selling.

It calls L.A. Basin business too costly and troublesome

Transamerica Insurance Group will slash its workers' compensation business in the Los Angeles Basin by more than one-third by late 1992 in response to soaring local costs.

"California is the largest workers' comp market in the country -- and has recently become the most troublesome to us," said Ken Fujino, president of Los Angeles-based Transamerica Workers Compensation, a subsidiary of Transamerica Insurance, which in turn is a subsidiary of San Francisco-based Transamerica Corp.

"The L.A. area has particular difficulties," said Fujino. "We've tried to work hard to operate successfully in this environment -- and we have not succeeded in turning it around. Only major legislative or judicial change can put L.A. back in shape and we can't wait for reform -- we have to take action now."

Fujino said that Transamerica Workers Compensation, which forecasts Los Angeles Basin written premiums of $75 million in 1991, anticipates reducing premiums by 36 percent to $48 million in 1992. The cutback plan was first reported in the Dec. 2 edition of the Weekly Insider, a publication of the Independent Insurance Agents and Brokers of California.

Further cuts are possible if losses continue to mount, Fujino said. "If we can't improve the situation from this plan, we will consider reducing further," he said.

The retrenchment concerns industry experts who fear that more insurers will pull out of the Los Angeles Basin market, leaving local businesses no choice but to resort to the already dominant state fund. The state system insures the 22 percent of the market that is not covered by private-sector firms and is widely viewed as less efficient and less service-oriented than private insurers.

Fujino said that Transamerica will begin immediately curtailing writing new business in the L.A. Basin area, which he defined as including the counties of Santa Barbara, Ventura, Los Angeles, San Bernardino and Riverside -- but not San Diego and Orange.

Fujino stressed that Transamerica would not cancel policies before their term ended.

Transamerica was the sixth-largest workers' compensation insurer in California in 1990, with 4.8 percent of the total market share, according to data from A.M. Best Co. Market share data for Southern California or the Los Angeles Basin was not available.

The company also announced that it will cut its agency force in the Los Angeles Basin from 150 to less than 50 agents. The remaining agents will focus on unspecified submarkets of workers' compensation which continue to be profitable for the company.

Transamerica's announcement, which surprised the industry, was the second major pullback by a workers' compensation insurer from the Los Angeles market this year.

In January, large workers' compensation player Industrial Indemnity announced the San Francisco-based company would sharply reduce its workers' compensation business in Los Angeles and Orange counties. It's using essentially the same strategy as has been announced for Transamerica: limiting new underwriting and renewals to lucrative workers' compensation submarkets.

One insurance executive said that the pullbacks by Transamerica and Industrial Indemnity reflect inefficiencies common to large insurance companies not focused on the local market.

"I think we are starting to see a complete realignment of the workers' compensation industry," said Stanley Braun, chief executive of Pac Rim Holdings Corp., a small but rapidly expanding workers' compensation insurer based in Encino. "In Los Angeles and Orange counties, the dominant area of the state, there is a different approach than in the past. (Large companies) have expense ratios far in excess of ours and other small companies. If you aren't cost effective here, you have no staying power."

Braun said that large companies' California market share has declined from two-thirds of the pie to half.

Since most insurers don't charge more than the minimum price level established by state regulators, there is a natural inclination to shift business to the northern half of the state where costs are less, experts said.

Behind the cuts, he said, are escalating litigation, fraud, medical and rehabilitation costs and a continued weakness in the local economy which has led to cost increases which far outpace those in Northern California.

Southern California workers' compensation applicants, for instance, spend 2.5 times as much as their Northern California counterparts on forensic medical examinations to buttress legal cases, said Bill Molmen, general counsel for the California Workers Compensation Institute, a trade research group.

Industry experts said Transamerica's pullout was a move that is in the shareholders' best interests but one which may prove unpopular with local policyholders, agents and the California Department of Insurance.

Some industry experts said that while the pullback reflects cost problems being experienced by all industry players, it also signals unresolved deeper problems at Transamerica Workers Compensation.

"They have had more shifts than anyone on the block" in management and focus, said one expert, noting that the company has vacillated between targeting its services at smaller and larger risks and has cost ratios that are below average for national companies but still far above many smaller, local companies'.

Workers' compensation is a 78-year-old state-mandated system which is 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 payment of benefits, workers gave up the right to sue.

Rapidly increasing costs across the board, however, have thrown the system out of whack. California was considered one of the healthiest workers' compensation markets in the nation as late as early 1991, when several comp insurers conducted successful initial public offerings. Since then, however, the climate -- and the market prices of the California companies' stocks -- has soured because of skyrocketing costs and fears that state Insurance Commissioner John Garamendi may reform the industry at workers' comp insurers' expense.

"All of a sudden companies have started to see their claims bills pick up," said one stock analyst who requested anonymity. "And Garamendi is making noise that this is his next area of interest. It's making it a real nasty area."