High Rates Entice New Workers’ Comp Carriers to Jump Into California Market
By LAURENCE DARMIENTO
Staff Reporter
A handful of workers’ compensation insurers are bucking an exodus of dozens of carriers who left the state or went bust after major losses.
Four companies have been approved to do business in the state since last year, while a few existing carriers, such as Everest National Insurance, have ramped up underwriting.
A brutal price war that started after the market was deregulated in 1995 led to billions of dollars in losses by 2000 and wiped out some of the biggest names in the business, including Superior National Insurance Group and Legion Insurance Co. Instead of gaining market share, the survivors were forced to trim their underwriting and hike prices.
But with higher rates, California is again considered a market where money can be made.
“A lot of insurance companies are waiting on the sidelines to see what will happen over the next few years, but there are some carriers who are starting to make it work here,” said J. Nils Wright, editor of California Workers & #353; Comp Executive, an industry newsletter.
Employers Direct Insurance Co. was formed last year after co-founder Jim Little said he convinced investors that entering the market would be a smart move. Before securing funding, his investment banker was greeted with skepticism by 40 venture capital firms.
“Twenty-five came back and said they had no interest, and those that we talked to said, ‘You want to do what where?'” said Little, now chief executive of the Glendale-based company.
Other companies approved by the state to do business in California are Brotherhood Mutual Insurance Co. and Travelers Indemnity Co. Meanwhile, Everest National Insurance and Preferred Employers Insurance Co., which already were in the market, have been increasing market share, Wright said.
Little said he saw an opportunity for a new company modeled after specialty workers’ comp carriers prior to deregulation. Claims would be handled by in-house adjusters, fraud would be investigated and safety engineers would work with companies to lower their incidence of claims, he said.
These business practices went out the window in the late 1990s as carriers cut rates for market share and took on more business than they could handle. That led to rising claims costs that were temporarily offset by handsome stock market returns.
Employers Direct, which started underwriting in January with $50 million in capital, now has 22 customers with an average policy size of $400,000. It has been hit with 11 claims but is outperforming its business plan, Little said.
Another company recently approved to enter the market is Employers Insurance Co. of Nevada, which bought Fremont General Corp.’s book of business last year.
Chief Executive Douglas Dirks agreed that rising prices are enticing for companies not saddled by old claims incurred when prices were at rock bottom. “We do believe that the rates are adequate for us today,” Dirks said. “We don’t have to charge an excess premium to fund deficiencies from the past.”
Employers Insurance Co. reported a loss of $13.4 million for 2002 on $185.5 million in net premiums. However, Dirks said the figures are misleading, given several one-time charges, some related to the acquisition. The company plans to underwrite at least $250 million in policies this year as it grows its California business.
Meanwhile, most big national players are sitting out the market, waiting to see if pricing is adequate and the current spate of proposed reforms play out, Wright said.
There are also big concerns that the State Compensation Insurance Fund, the state-run market of last resort that controls just over half the market, may need a bailout resulting in a surcharge on existing carriers, he said.
