Calif. State Senator Amends Rate Regulation Plan

April 8, 2004

  • April 8, 2004 at 11:30 am
    claude stephenson CPCU says:
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    In all due respects, I do not think Mr. Alarcon understands this vehicles.

    Politics drive benefits up. Benefits drive rates up.

    He cannot roll rates back without causing a disaster. He should have some understanding of the bills he helped pass which do not go into effect until the first of this year. Two of those alone would cause an estimated 12% rate increase.

    If he is really brave enough to start reducing benefits, he can then take down the rates in proportion to the decrease in benefits. There are no free lunches.

    The system went on for 8 decades working fairly well until someone introduced the idea of “open rating.” This introduced greed, badly thought out policies, and killed the market place. Most companies who experimented with this concept got burned badly and are no longer writing in this state.

    Open rating should be thrown out.

    The rates are breakeven actuarily at 66% loss ratio on pure premium. Company overhead will run 35% to 40% on top of that. Most will run around 37%. They cannot make up the deficit on the stock market. Open rating introduced discount tables that were down right bizzare. They made the deficits grow by leaps and bounds. I had one case I put out right after the ugly animal raised its head. One company bid $56,000 and informed me manual was $66,000. Another offered to write the case for $49,000. Another, $36,000. Then along came the entrepreneur and offered to do it for $23,000.

    Not only did these depresed rates run the company out of the state in a single year, but it nearly sunk the customers two years later when the rating bureau’s experience rating fromula kicked in with its penalties. Had this client bought the policy for the actuarily sound $66000, he would have been in good shape for the next five years. Instead, he went for the lowest priced product. His losses ran as expected. Two years later he has a 184% rate modification and has grown from a five man shop to 25 man shop.

    The reader can see the pain.

    We need a responsibly designed system.
    We need to get the open rating idea out of it and go back to the old system and a standard rate book.
    We need to get the lawyers under control and redefine when a case may seek litigation. Then there are the doctors who are just running money mills. We need to come up with a legal system of auditing clinics who practice industrial medicine. When a doctor spends only 3 minutes with each patient, he is not practicing medicine. Some barely average 3 minues per visit with each patient. This is nothing less than milking the system.

    Back to the original formual: politics drive benefits; benefits drive rates up or down, according to what the politicians mandate. To talk about rolling rates down or up is irresponsible if the benefit structure and service structure are not recognized for what they are and addressed in concert with the desire for a less costly system.

    Claude Stephenson, CPCU, CLU, M.Ed.

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