Workers’ Comp to Face New Crisis as State Fund Teeters

By HOWARD FINE

Staff Reporter

California officials are scrambling to avert what could be the biggest crisis yet to hit the troubled workers’ compensation system: the closing off of new policies by the State Compensation Insurance Fund, the de-facto insurer of last resort.

Under a compromise proposal that emerged last week, employers seeking coverage from State Fund would first have to show proof they couldn’t get coverage anywhere. And State Fund itself would be required to boost its own premium rates significantly.

Both moves could sharply raise workers’ compensation premiums for all employers as early as mid-year. Premiums have already doubled, on average, in the past four years.

State Fund has seen thousands of new customers over the last three years, as the rest of the insurance market has suffered through near-meltdown conditions. Regulators have long been concerned that State Fund would not be able to handle a flood of injury claims from all these new customers.

Then, two weeks ago, State Fund President Dianne Oki told a legislative committee that the fund would have to stop writing new policies soon or face severe financial problems.

Her comments sent shock waves through state government and the business sector, raising the specter of companies unable to obtain workers’ compensation insurance coverage at any cost. By law, every employer must carry workers’ compensation insurance or face stiff civil and criminal penalties.

In response, state Insurance Commissioner John Garamendi said last week that State Fund would remain the insurer of last resort but warned that employers would have to show proof they were unable to get insurance elsewhere before they could get coverage from State Fund.

“Efforts must be made by brokers and agents who are placing business with State Fund to seek other carriers,” Garamendi said. “Only if they cannot will they be allowed to place business with State Fund.”

He also said he would require State Fund to boost its rates “significantly” in an attempt to discourage employers from signing up.

As the proposal stood last week, an agent acting on behalf of an employer who has either been dropped by their current carrier or who is seeking to renew with State Fund must obtain three rejection letters from other carriers before seeking coverage with State Fund.

While this may ease the financial strain on State Fund, it could cause workers’ compensation premiums to spike further.

“This could raise rates for employers and could even open them up to predatory pricing from insurers,” said Charles Bacchi, a lobbyist for the California Chamber of Commerce. Because insurance carriers would know that if they agree to provide coverage for an employer, that employer could not then go to State Fund, the carriers could double or even triple their premium offer, he said.

Bacchi pointed to another development: the Workers Compensation Insurance Rating Bureau recommended an 11 percent mid-year increase in the base premium rate, on top of two similar-sized increases last year. Garamendi’s approval is expected in the next few weeks, at which point it will likely be adopted as the minimum premium increase in the insurance marketplace.

Controlling authority

Meanwhile, questions arose last week over whether Garamendi had the authority to order State Fund to write new policies.

Garamendi’s agency is charged with ensuring the solvency of all insurance carriers, including State Fund. But State Fund, a quasi-governmental body, is not an ordinary insurer. The governor appoints its board members but it is entirely funded by policyholder premiums.

The 1913 law that set up the State Compensation Insurance Fund only states it should “provide an available workers’ compensation insurance market for California employers” and that the fund be “competitive” with other carriers in the market.

Oki’s testimony assumed that State Fund has the authority to turn away customers; Garamendi and his staff looked at the same language and concluded it doesn’t.

State Fund spokesman Jim Zelinski said Fund officials are in discussions with Garamendi’s office over how to resolve the situation and that while those discussions were taking place, he could not comment on what actions it would take.

Industry speculation has State Fund curtailing new policies around mid-year, concurrent with the rate increase. Whether that curtailment would involve a complete cutoff or Garamendi’s compromise remains to be seen.

“Oki’s comments seem to indicate a lot of urgency, so whatever happens will likely be within weeks or a few months, not a year or two down the road,” said Nils Wright, editor of newsletter Workers’ Compensation Executive.

The crisis has been building over the last three years. As private carriers have pulled back from the market or sharply raised premiums, employers have flocked to State Fund under the presumption that coverage must be offered to any employer seeking it. Until recently, State Fund’s premiums were generally lower than comparable premium offers from private carriers.

Four years ago, State Fund held 20 percent of all the workers’ compensation premiums in the state; it now holds around 50 percent. Most of these new premium dollars have been amassed over the last 18 months, mostly for small businesses in risky industries where private carriers decided either to raise rates sharply or drop altogether.

Rapid run-up

While many companies in other lines of business would welcome such a surge, fears have mounted that State Fund will be unable to pay claims that have come in. Garamendi’s predecessor, Harry Low, warned of potential solvency problems for the carrier, adding that should State Fund become insolvent, it would have a major impact on the entire California economy.

In an attempt to slow down the surge, State Fund enacted a sharp increase in premiums last summer, averaging about 20 percent. But with premium hikes elsewhere averaging 30 percent to 40 percent, it remained a comparative bargain and employers kept coming.

In all, 39,000 new employer customers have come to State Fund in the last two years, bringing the total to 266,000, 17 percent more than in 2000.

Whether this influx could force State Fund into financial difficulty is a matter of debate in state government circles.

A key gauge of State Fund’s size is in the premium dollars it takes in each year. That figure tripled in two years, to $5.36 billion at the end of 2002 from $1.73 billion at the end of 2000.

State regulators point to this premium growth and say it’s been too rapid and that State Fund holds too much of the market to withstand a surge in claims. But others say that because the premium growth has far outstripped the increase in policyholders, State Fund is not in serious financial danger.

“The numbers bear out that their premiums are up, but they don’t appear to have seriously increased their exposure,” said Michael Mattoch, staff consultant to the Assembly Insurance Committee. “That’s why Oki’s comments caused such a shock.”