Cost of Workers' Comp Rising for State Employers
By HOWARD FINE
Employers in L.A. and throughout the state, already reeling from double-digit increases in workers' comp premiums over the last two years, are bracing for a triple dose of rate hikes likely to drive up premium rates at least another 20 percent over the next six months.
Last month, the state's dominant workers' comp carrier, the State Compensation Insurance Fund, raised rates an average of 19 percent to stave off financial problems. Then, two weeks ago, a state agency recommended an 11.9 percent increase in basic workers' comp insurance rates for next year. On top of this, benefit increases for injured workers enacted this past February are slated to take effect on Jan. 1.
"The rates are going up and up and there's no end in sight," said Fritz Mutter, president of Golden Pacific Insurance, an insurance brokerage in Pasadena.
The rate increases are being driven by a combination of factors: years of underpricing by insurance carriers that led to a wave of failures and consolidation, constantly rising medical treatment costs for workers' comp claimants, and fear of rising numbers of claims prompted by the benefit increases.
While workers' comp costs are not as high as during the last crisis 10 years ago, they have been fast approaching those levels. Even before these new increases take effect, the average employer spent $4.05 for every $100 of payroll on workers' comp during the first quarter, up from $3.35 per $100 of payroll just a year earlier, according to the state Workers' Compensation Insurance Rating Bureau. In the early 1990s, workers' comp rates peaked at nearly $5 per $100 of payroll.
Unlike that crisis, where rampant workers' compensation fraud and huge numbers of claims drove many employers out of state, this crisis is being fueled primarily by an industry shakeout. Carriers like Superior National and California Compensation Insurance were driven into insolvency after years of underpricing their premiums. Others, like Fremont General Corp., sold off their workers' comp units.
As a result, employers flocked to the insurer of last resort, the State Compensation Insurance Fund. In the last three years, State Fund's market share has more than doubled, to 49.5 percent of all workers' comp policies, from 22 percent. State legislators and insurance regulators, concerned that State Fund wouldn't be able to handle claims resulting from the new business, pressured State Fund executives to raise rates, which the carrier did on July 1.
"They were under tremendous pressure to bring their prices in line with the huge volume of business they have taken on," said Nils Wright, editor of the California Workers' Comp Executive, an industry newsletter.
Meanwhile, state Insurance Commissioner Harry Low took the unusual step of recommending a mid-year 10 percent premium rate increase, on top of a 10.2 percent recommended increase on Jan. 1. (Under deregulation, the Insurance Commissioner no longer has the power to set rates; but his recommendations now serve as the base upon which insurance carriers add even steeper hikes.)
"That's 20 percent in six months almost unheard of," Mutter said.
Is increase enough?
Now, the workers' comp bureau is recommending that Low issue an additional 11.9 percent increase recommendation for next year. Explaining the increase, the bureau's chief actuary, David Bellusci, cites the financial precariousness of insurance carriers, rising medical costs and the legislated benefit increases that kick in on Jan. 1.
"Prices are now moving to a level much more in line with costs, but the payouts are continuing to increase, especially on the medical side," Bellusci said.
But even that 11.9 percent increase may prove insufficient, according to Wright.
"The WCIRB and the Insurance Commissioner have consistently underestimated the amount by which rates have to rise to meet costs," Wright said. "I'm not at all confident they will get it right this time, especially given the benefit increases."
It's the $3.5 billion in benefit increases that kick in over the next five years beginning this Jan. 1 that has employer groups most worried.
"It's not just the payouts, it's the frequency of claims," said Lori Kammerer, executive director of the California Coalition on Workers' Compensation, a coalition of major companies. "Injured workers claiming temporary disability will now earn more on TD than they were earning in their jobs. And it's tax-free. So of course many, many more workers will file workers' compensation claims.
"You combine more claims with higher costs per claim and that's a recipe for disaster," Kammerer said.
Not everyone believes a huge surge in claims is coming, though.
"If people are hurt on the job, they will file claims. The amount they get when they file is not the driving factor; getting hurt on the job is," said Gil Stein, a Santa Cruz attorney who is also president of the California Applicants Attorneys Association, which represents injured workers. "There's no reason to believe we're going to see an increase in people getting hurt on the job; if anything, higher premiums will force employers to make their workplaces even safer and reduce the number of injuries."
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