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SACRAMENTO, Calif.-California regulators will reject an embattled proposal that would change the way workers compensation insurers calculate experience modification factors, according to both supporters and opponents of the plan.

Under the proposal pitched to the California Department of Insurance by the Workers Compensation Insurance Rating Bureau of California, employers' experience modification factors would be based solely on claim frequency and not claim severity.

The California department is expected to announce soon its decision on the proposal by the rating bureau.

But, opposition from a divided insurance industry and a lack of employer support doomed the plan from the outset, said David Bellusci, senior vp and chief actuary for the San Francisco-based ratings bureau.

"Employer associations tended to be supportive but lukewarm, so there wasn't enough momentum," he said. "And some of the opposition from the insurance industry was very strong. You just couldn't seem to build up a consensus to move forward."

The proposal attempts to address a longstanding conflict between employers and insurers over excess case reserves. Under current law, every employer receives an experience modification based partly on both frequency and severity of claims that must be used by an insurer to calculate the employer's premium.

Some employers would have been helped and some would have been hurt by the fundamental change in experience modification.

For example, an employer with high frequency of claims under the proposed system could have to pay more in premium than an employer with fewer but more severe claims.

"Reserves for years have been a big issue," Mr. Bellusci said. "A lot of employers just don't like the fact that their reserve amounts are going in, and sometimes claims settle for less than the reserves and it is still being counted against (the employers). So this is trying to address that. And in recent months, there has been quite a bit of litigation on this issue, too."

Among the noteworthy court cases is one in which a Los Angeles jury last fall ordered the State Compensation Insurance Fund to pay $20.3 million to Joe Notrica Inc.

The jury found that the workers comp fund acted in bad faith and the Superior Court judge prohibited the fund from reserving claims for their "maximum probable potential" and instead ordered SCIF to return to its prior standard of reserving an amount the insurer reasonably expects to pay (BI, Sept. 4, 1995).

SCIF, which in September called the ruling a "miscarriage of justice," is appealing the decision and is one of the insurance companies that supported the WCRB's proposal.

The WCRB began developing its proposal long before the jury's decision in the Notrica case.

"At State Fund, we are in favor of it predominantly because it does address the larger issue of employer lawsuits over claims reserves," said Frank Floyd, communications and education center director for the San Francisco-based insurer.

"It's not the best solution, but it's one solution."

Insurers opposed to the plan have legitimate concerns, Mr. Floyd said.

For example, the American Insurance Assn. said the plan is flawed because it would not account for claim costs and would thus reduce employer incentive to provide a safe workplace.

Employers have been critical of insurer reserving practices and explanations of how the reserves are set, said Charles Bader, executive director of the Californians for Compensation Reform, a business group in Sacramento. But, in pitching its proposal to employer groups, the WCRB was not clear on how it would solve problems.

Additionally, "open rating kind of makes ex mods almost a passe issue," Mr. Bader said.

The advent of open rating brought rates tumbling down as insurers have fought for market share in the state. As rates dive, some employers have become apathetic about issues such as loss reserves.

The WCRB was itself divided on its proposal, according to observers. The organization's governing board split 5-4 on whether to pursue it.

The WCRB is a non-profit agency and licensee of the insurance commissioner, with governing board members who represent labor, employers and insurers.