California Insurance Commissioner Steve Poizner has unveiled a series of reforms to address what he says are systemic and structural deficiencies in the state’s workers’ compensation system. He also recommended a 14.2 percent decrease in workers’ compensation pure premium rates, noting the market is vibrant and profitable. The advisory recommendation is used by the workers compensation insurance industry as a benchmark for filing its rates.
The Commissioner stated that workers’ comp insurers are “reaping tremendous benefits” from recent reforms to the system, currently enjoying historic record-low loss ratios of 37 percent. These ratios mean that insurers are only paying 37 cents in claims for every dollar collected in premium, he said.
“Recent reforms to the workers’ comp system have worked exceptionally well,” Poizner said. “Costs for insurers have dropped sharply, fueling an extremely healthy market driven by historic and unprecedented cost savings. While this is great news for insurers … I realize that California’s economy will only benefit if injured workers get medical attention quickly, and if the costs savings are fully passed on to employers.”
To address his concerns, the Commissioner developed a reform package and issued an order to the state’s workers’ comp rating bureau that addresses the following issues, among others:
1. Inaccurate Analysis/Rate Forecasting by the WCIRB – The Workers’ Compensation Insurance Rating Bureau (WCIRB) recently recommended only an 11.3 percent decrease in the pure premium rate. While there have been rapid and substantial changes to the system, the WCIRB has been plagued by a 12-year history of forecasting inaccuracy. WCIRB pre-reform recommended rates (1995-2000) were too low by 20 percent to 60 percent to pay claims, and post-reform rate recommendations (2004-2006) would have overpaid claims by 30 percent to 50 percent.
“The failure of the WCIRB to provide accurate forecasts adversely impacts the entire workers’ compensation marketplace,” Poizner said. “The systemic inaccuracies in the rating process are unacceptable. Therefore, I have ordered a top-to-bottom audit of WCIRB to improve its data collection and forecast development.”
2. Helping Injured Workers/Improving Workplace Safety — The commissioner said he is concerned that some injured workers are not getting proper and timely medical attention. To ensure that insurers haven’t instituted abusive utilization reviews, which may delay or prevent proper medical care to workers, Poizner ordered his department, in coordination with the Division of Workers’ Compensation, to begin market conduct exams of insurers to verify if benefits to injured workers are delivered promptly. The Commissioner also directed the WCIRB to develop a plan to overhaul its experience rating system (which examines an employers’ claims history for safety and loss prevention efforts and has gone unmodified for 12 years), so that businesses will have proper incentives to improve workplace safety.
“Quickly getting injured workers back on their feet, and back on the job, benefits employers and workers alike,” Poizner said. “Injured workers cannot afford delay in their treatment and businesses must do a better job of improving workplace safety.”
3. Increasing Competition in the System – Recent reforms have led to a workers’ comp market that is robust and healthy. The Commissioner said abundant opportunities exist for insurers wishing to expand, enter or re-enter the market. To encourage expansion and increase competition, he plans to host a Workers’ Compensation Summit that will highlight expansion opportunities in the state and examine how to provide continuing stimulation to the workers’ comp insurance market.
“Workers’ compensation insurance has again become a profitable business in California,” Poizner said. “I am going to promote California as a vibrant market where workers’ comp insurers can profitably expand their book of business. Even with the tremendous gains in the past few years, California’s workers comp rates still remain above the national average. This summit will increase the level of healthy competition among insurers and provide California employers with more affordable options.”
4. Reducing Rates/Fighting Fraud – In addition to calling for a 14.2 percent reduction in the pure premium rate — and for those savings to be passed through to businesses — Commissioner Poizner noted that fraud adds an unacceptable surcharge to the cost of insurance and must be dramatically reduced. To deter illegal activity and further lower costs, the Commissioner formed a blue ribbon Advisory Task Force on Insurance Fraud to determine the most effective ways to fight workers’ comp fraud.
“Lower rates to employers and improved workplace safety can have a direct, positive impact on California’s economic bottom line,” Poizner added. “These reforms move the system in the right direction.”
The Commissioner’s reform package followed what he said was extensive analysis of the workers’ comp system and a March hearing where the WCIRB submitted its rate filing to the Department of Insurance. The Commissioner’s pure premium rate recommendation would apply to policies beginning on or after July 1, 2007.
To view the Commissioner’s order, visit http://www.insurance.ca.gov/0400-news/0100-press-releases/0060-2007/upload/PPDecisionandOrder.pdf. A copy of the proposed decision is available at http://www.insurance.ca.gov/0400-news/0100-press-releases/0060-2007/upload/PPProposedDecision.pdf.
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