Workers’ Comp Crisis Taking Hold in State

For California employers, it’s another case of deregulation gone awry.

By HOWARD FINE

Staff Reporter

When state legislators moved to deregulate the workers’ compensation insurance market almost a decade ago, they envisioned increased competition that would drive down employer premiums. And for five years, that’s what happened.

But now, just as with last year’s electricity market meltdown, the state workers’ compensation insurance system is in full-blown crisis. And, once again, California employers are footing the bill through sharply higher premiums.

These increases, which for some businesses have been up to 300 percent, are expected to continue. And perhaps just as threatening is that the state insurer of last resort, the State Compensation Insurance Fund, could run into financial difficulties as employers flock to it as workers’ comp insurance carriers fall.

In the last two years, at least eight carriers most of them based in the state have been declared insolvent and taken over by regulatory authorities, while others have exited the business.

A guarantee fund set up to ensure payments to policyholders in the event an insurance carrier becomes insolvent is itself in financial difficulty as it is faced with payouts totaling nearly $1 billion a year.

In the hopes of preventing future insolvencies, state Insurance Commissioner Harry Low is pushing legislation that would partially re-regulate the workers’ comp insurance market. Added to this is a $2.5 billion benefit increase pushed through the Legislature two months ago.

“The bad news for the business owner is that prices are up and they will continue to go up for the foreseeable future,” said Fritz Mutter, president and chief executive of Golden Pacific Insurance Services, a Monrovia-based commercial insurance brokerage. “I don’t see prices coming down again any time soon.”

The premium increases have ranged from 15 percent to 35 percent for employers with good claims records and anywhere from 50 percent to 300 percent for employers with more spotty records. “If I can secure a 25 percent premium increase for a client, they may be flabbergasted, but I’m ecstatic,” Mutter said.

Caused by deregulation

So how did the market reach a point where insolvencies have become almost commonplace and a 25 percent increase can be considered a blessing for an employer? As with energy, much of the blame is laid to a headlong rush into deregulation.

From 1995 through 1999, insurers priced their workers’ comp premiums below cost in a bid to grab market share. Employers saved billions of dollars in those years as the total dollar amount of written premiums shrank by one-third, from $9 billion a year to $6 billion a year.

But in the process, insurers racked up huge deficits as medical and other costs associated with claims continued to soar. By 1999, the state’s workers’ comp carriers were paying out a whopping $1.74 for claims and related expenses for every dollar they took in, according to the state Workers’ Compensation Insurance Rating Bureau, the regulatory agency that tracks workers’ comp rates.

The historical norm for payouts is about $1.10 for every premium dollar, with the difference being made up by investment income.

“This was a combined loss ratio that was almost unprecedented, anywhere at any time,” said Dave Bellusci, senior vice president and chief actuary for the WCIRB. “There was no way that could continue for any length of time. The piper had to be paid.”

And, beginning in 2000, the party ended. The first shock came when Superior National, the state’s second largest carrier in terms of workers’ comp premium volume, became insolvent and had to be seized by insurance regulators. A number of other insolvencies followed, including Reliance Insurance, Sable Co. and HIH America Compensation and Liability Co.

More seizures

The string of insolvencies got even longer this month as two Pennsylvania insurers, Legion Insurance Co. and Villanova Insurance Co., were seized by regulators in that state. As of last year, Legion was the third largest underwriter of workers’ comp premiums in California, according to market share figures collected by the state Department of Insurance.

Besides pushing up premium prices, these insolvencies have had two potentially catastrophic effects: they severely strained the California Insurance Guarantee Association, the fund set up to cover claims of insolvent insurers, and they forced huge numbers of employers to the State Compensation Insurance Fund.

CIGA typically paid out about $50 million a year to cover the claims of insolvent insurers. But over the last year, the fund has been paying out $80 million every month almost $1 billion primarily to cover the claims of Superior National and Reliance Insurance.

Faced with the threat of insolvency, state legislators last year rushed through an increase in the insurer assessment for the workers’ comp portion of the CIGA fund from 1 percent to 2 percent of total premiums. Under state law, those assessments are passed directly through to policyholders.

But, in a compromise move to blunt opposition from employers, the Legislature made the increase temporary, only for one year. That wasn’t enough to close the gap and now CIGA and state officials are pushing for an extension of that increase for three more years

One employer group, the California Manufacturers and Technology Association, is opposed to the move.

“We’re opposed to requiring this assessment be passed through to employers; it should be up to the insurers to figure out how best to meet that assessment,” said CMTA lobbyist Willie Washington.

Meanwhile, the State Compensation Insurance Fund has seen a flood of new clients as the rest of the market suffers a meltdown. While other insurers either left the market or raised rates an average of 30 percent or more, State Fund, which was in more solid financial condition, boosted rates by 22 percent on Jan. 1.

Six years ago, State Fund held 22 percent of the market for total premium dollars, near its historical norm. But today, its market share has doubled, to about 45 percent nearly half the entire workers’ comp insurance market with the vast majority of the new policyholders coming on board in the last 18 months.

Official concern

“We’re probably the only company in the country saying, ‘Stop! No more clients!’ said State Fund spokesman Ron Christensen.

This sudden growth has prompted concern about State Fund’s ability to handle all the new claims that will be coming in. If the fund were to become insolvent, the effect on California employers and the economy at large would be significant, rivaling or even exceeding the impact of last year’s energy crisis.

“We are closely monitoring them,” said state Insurance Commissioner Harry Low. “We’re reviewing them to see if they are paying out more than they are taking in. So far, we see no immediate threat of insolvency.”

Christensen said the fund is financially sound. The concern, he said, is that its ability to handle sudden catastrophic claims such as from a terrorist attack might be strained. (Injuries in the workplace during a terrorist attack or even an earthquake are generally covered by workers’ compensation.)

Meanwhile, Low is pushing for more authority to force insurers to maintain adequate rates in effect, a partial re-regulation of the workers’ comp insurance system. He has sponsored AB 1985, which is being carried by Assembly Insurance Committee Chairman (and former Democratic Insurance Commissioner candidate) Tom Calderon, D-Montebello.

“The idea is to prevent these insolvencies by stepping in early,” Low said.

The bill, which will be heard in the Assembly Insurance Committee this Wednesday, faces opposition from employer groups wary of a return to the minimum rate system they so despised in the 1980s and early 1990s.

Ironically, Low’s push is coming as the current rash of insolvencies may be nearing an end. That’s because the in-state carriers primarily offering workers’ comp insurance have largely been forced from the market, either through insolvency or takeover. (Just last month, Santa Monica-based Fremont General Corp. sold its workers’ comp unit to Employers Insurance Co. of Nevada.)

The only players still standing besides State Fund are huge national carriers with deep pockets from multiple lines of insurance.