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Washington comp rate equation anomaly results in rate hikes

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Nearly every state announced reduced rates for workers compensation insurance for 2024, while Washington told employers to expect a 4.9% rate hike.

Washington is the only one of the four so-called monopolistic states — private insurers cannot sell workers comp policies in North Dakota, Ohio and Wyoming either — to announce such an increase.

The decision by Washington bucks a yearslong trend in which employers across the country have paid less for comp coverage, and it marks the third consecutive rate increase imposed by the state.

This year’s hike follows a 4.8% increase in 2023 and a 3.1% increase in 2022, a spokesman with the Washington State Department of Labor & Industries wrote in an email.

Rising wages and increased health care costs are two primary drivers behind the raised rates, he wrote.

Unlike states that base workers comp rates on a percentage of payroll, Washington charges rates on an amount-per-hour basis calculated based on how many hours are worked, according to the spokesman.

This means when wages go up in Washington, premium collected remains the same, he said.

Insurance industry experts said Washington is an outlier with regard to how it charges workers comp rates, since in most states, premiums tend to rise with an increase in wages.

“In all my years of insurance pricing, both pro rata and excess, I did not come across any programs that used employee hours as the exposure base,” said Christopher Graham, senior industry analyst with Oldwick, New Jersey-based A.M. Best Co. Inc. “Everything … was priced as a percentage of payroll.”

State business leaders reacting to the Washington rate increase noted 4.9% is the average across all sectors, with some businesses likely to see even higher rates.

“We’re disappointed that Washington once again missed an opportunity to lower costs for employers and to help them navigate this challenging economy,” Kris Johnson, president of the Association of Washington Business, said in a statement, noting the state has the nation’s highest workers comp wage replacement benefits paid.

While the workers comp line in general has been healthy in recent years, it is more affected by economic trends than other lines, and issues like wages and health care costs can dictate how insurers set aside reserves for injured worker claims, said David Blades, associate director with A.M. Best Co. Inc.

One expert said Washington’s rising rates could be an indicator of a coming trend.

“Issues like provider consolidation are combining to push costs up and there are other structural things going on,” said Joe Paduda, Plainfield, New Hampshire-based principal with workers comp consultancy Health Strategy Associates.

“So, Washington is essentially doing what the rest of the industry is going to do in 2025, 2026,” he said.

Other industry analysts say the workers comp line should continue to see positive results.

“We’ve basically been pretty comfortable saying that we expect the 2023 combined ratio to again be under 100, which would be the 10th straight year of underwriting profitability,” said Jeff Eddinger, senior division executive with the Boca Raton, Florida-based National Council on Compensation Insurance. “We are saying that the environment is going to continue to contribute to declining loss costs in our states.”