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California workers comp reform measures have yet to hold down rates

Recent reform measures may not curb claims enough for insurers


Workers compensation insurers are handing significant price increases to renewing California policyholders, while confusion reigns over whether new reforms will hold down rates, observers said.

California Gov. Jerry Brown signed the reforms into law last month, saying they will reverse a four-year trend of rate increases. News reports followed, relaying the message that employers can expect to see substantial savings generated by the reforms, observers said.

Yet insurers continue to raise their prices for many renewing accounts while also submitting filings with the California Department of Insurance seeking rate increases for 2013.

The official statements and news stories of potential savings delivered while insurers file for rate increases, along with conflicting analytical reports on reform savings, have caused confusion among insurance buyers, sources said.

“I would say overall there is a great deal of confusion because of conflicting messaging being delivered out in the marketplace from a variety of sources,” said Mark Zwickel, executive vice president for Lockton Cos. L.L.C. in Los Angeles.

But it's clear that insurers are attempting to offset combined ratios averaging 138% for California workers comp business by raising their renewal prices, sometimes by eliminating scheduled credits they previously gave their policyholders, according to brokers and underwriters.

“The combined ratios are extremely high, and investment income is extremely low, and every carrier is saying they need rate,” Mr. Zwickel said.


Liberty Mutual Holding Co., for example, recently filed for a 21% rate increase effective Jan. 1, 2013, for its business units writing workers comp in California.

“We are very supportive of the reforms, and they should help start to fix a troubled market,” said Christopher Cunniff, workers comp product manager for Liberty Mutual commercial insurance in Boston.

The California market's troubles include very high costs for legal representation and medical care, Mr. Cunniff said. And given low interest rates, insurers would need to post combined ratios closer to 100% to show profitability, he added.

Provisions of the reforms include an independent review process for medical treatment and billing disputes, fee schedules for home health care, language interpretation and other comp-related services, and fees for current and future lien filings.

The goal is to create a more efficient workers comp system and there is hope that costs will stabilize, said Phil Millhollon, executive director of the California Self-Insurers Association in Danville, Calif.

But whether that occurs will depend on employers increasing their involvement in the creation of regulations needed to implement the reforms, Mr. Millhollon said.

The San Francisco-based Workers' Compensation Insurance Rating Bureau of California recently estimated that even though the reforms will boost permanent disability benefits, they are expected to reduce costs by about 4.9% for 2013.

Liberty Mutual concurs with the WCIRB's cost reduction estimate, but given the combined ratios that insurers are experiencing, that amount of savings is not sufficient to make up for insurers' profitability gap, Mr. Cunniff said.


In August, the WCIRB filed for a 12.6% rate increase for renewals beginning in January 2013. But in light of the reforms and continued deterioration in insurance loss expenses, it amended that filing on Oct. 1, saying it would recommend holding rates flat.

It said it was doing so, however, amid “a high level of uncertainty” about how the reforms and accompanying regulations that must still be adopted will affect insurance costs.

News about the WCIRB's amended rate filing and the organization's uncertainty about expected regulations also fueled market confusion about which way rates are headed.

But holding rates flat is an illusion because the California reforms will not address rising medical costs, said John Chino, senior area vice president in Irvine, Calif., for broker Arthur J. Gallagher & Co. It also remains questionable whether the reforms will affect legal expenses to a significant degree, he added.

“Knowing the reality of the situation, we expect that our clients will continue to get rate increases,” Mr. Chino said.

Even amid flat rates, insurers in California can continue raising the price policyholders pay for coverage by eliminating scheduled credits, Mr. Chino said.

Scheduled credits are price discounts that underwriters provide clients during profitable times. But throughout the past two years, insurers gradually have eliminated them in California, effectively raising the price of insurance.


“We can have this illusion of no rate increase, but the scheduled credits are going away,” Mr. Chino said. “They are going to be very rare.”

Additionally, a 2009 change in the way insurers calculate California employers' modification rating factors has allowed insurers to collect additional premiums, Mr. Chino said.

Fortunately for policyholders, plenty of insurers remain willing to underwrite California workers comp business, observers said.

But a review of 230 Lockton clients renewing workers comp policies covering about $9.5 billion in predominantly California payroll shows prices increased 12% on average from September 2011 through September 2012, Mr. Zwickel said.

The increase is inclusive of changes in employers' experience modification factors and varies based on the account's size, loss experience and class of business, he said.

The level of price increases insurers had sought had moderated over several months, but began to accelerate again this month, Mr. Zwickel said.