Alliance Says Calif. WC Legislation Full of Loopholes; Premium Reductions Unrealistic

September 12, 2003

A 150-page bill that emerged from committee this week following late night bargaining is full of loopholes and won’t produce immediate savings on workers’ compensation policies as some are claiming. That’s the initial analysis following a first look at the complex legislation by the Alliance of American Insurers.

“Nothing we see so far suggests any room for near-term rate reductions,” said Peter Gorman, Alliance vice president and Western Regional manager. “The bill is riddled with loopholes that allow current abusers of the system to continue those abuses.

“While some have touted this as the salvation of the workers’ compensation system in California, the insurance industry has never promised reduced premiums in the immediate future based on the kinds of savings this bill will generate. The system is $14 billion under-reserved, meaning that it can expect to pay out $14 billion more in claims than it collected in premium because of unprecedented and uncontrolled medical inflation. That’s a big hole to dig out of before you can talk about rate reductions.”

Gorman said while some are claiming the changes called for in the legislation will generate $5-6 billion in cost reductions, the Alliance believes reductions will be much less than that, and savings on the order of $10-11 billion are needed before any premiums can be reduced.

“About half of the system reforms affect long-term future costs. Those are cost avoidance opportunities over 30 years, which means premiums will not have to be increased as much as anticipated. Many more costs are continuing to grow at a rapid rate, such as indemnification benefits. Keep in mind that the system has been growing about $5 billion per year recently, so it will take substantial cuts just to slow or stop the premium increases needed to keep up with these growing costs,” said Gorman

Gorman also disputed allegations that insurers will profit from the changes called for in the bill.

“The State Fund and the Guaranty Fund are holding the lion’s share of the liability. Most of the reform benefits will flow to them.” he said. “The legislature should be focused on not only restoring solvency to the system but restoring a competitive system if they are worried about controlling premium. Under a competitive system, cost savings are passed on to the policyholder,” added Gorman.

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