California Insurance Commissioner John Garamendi announced that workers’ compensation insurers in the state filed rate reductions averaging -14.6 percent for policies incepting on or after July 1, 2005 bringing the cumulative rate reduction to -26.78 percent since reforms were enacted.
The decreases indicate that employers should see lower workers’ compensation premium bills as workers’ comp claims costs continue to plummet. However, the industry’s premium reductions still lag far behind the cumulative pure premium rate decreases (claims costs) recommended by the Commissioner since the reforms went into effect in 2003 and 2004. Since then he has recommended reductions of -36.5 percent in the pure premium rate, while the industry has made reductions of just -26.78 percent during that same period.
“Employers have received some much needed relief,” the Commissioner said. “But it hasn’t come fast enough, and it doesn’t reflect the tremendous savings to insurers from the reforms.”
AB 227, SB 228 and SB 899 were significant pieces of legislation modeled on the Commissioner’s Roadmap to Reform, which helped cut at least $5 billion annually from the workers’ compensation system. They went into effect in 2003 and 2004, reversing the upward trajectory of workers’ comp costs that were strangling businesses across the state.
As insurers have implemented the reforms, their loss ratios—the amount they pay for claims compared to premium—has dropped from 87 percent in 2002 to just 41 percent in 2005—an unprecedented reduction in the cost of claims. The intent of the reforms was to release employers from the burden of these costs, said the Commissioner, and insurers must lift that burden.
In addition to the Commissioner’s -36.5 percent cumulative pure premium rate reduction, the Workers’ Compensation Insurance Rating Bureau has recommended a further -5.2 percent pure premium rate reduction to take effect on Jan. 1, 2006. The Commissioner will hold a hearing to determine whether to adopt the recommendation on Sept. 16, 2005.
The Department has completed analysis of the premium reductions filed by the top 25 workers’ compensation insurers to determine how much of the pure premium rate reduction was actually passed through to employers and whether loss cost modifiers were changed to hold back savings. Through the use of loss cost modifiers and rating plans, insurers’ rates vary from the pure premium rate (only claims costs).
“The plummeting cost of claims has clearly benefited insurance companies,” said Garamendi. “Now, California’s small businesses deserve immediate, mid-term premium reductions from their insurance carriers. They shouldn’t have to wait until they renew their policies.”
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