California’s Weakening Workers Compensation Market
Colin D. Baird
Sullivan Curtis Monroe
On April 14, 2010 the Workers Compensation Insurance Rating Bureau (WCIRB) released the summary of insurer experience as of December 31st, 2010. While not tremendously surprising, it should cause great alarm to those parties responsible for their businesses bottom line. The study showed some consistently startling statistics. But let’s digress first.
California established legislation in 2004 which was touted as a significant improvement for long term claim cost reductions. Reduced claim costs drives the ultimate costs for employer’s workers compensation insurance down. This legislation led to significantly lower average work comp rates for employers doing business in California. The average rate per 100 in 2005 was $5.23. The average rate in 2009 was $2.36. This led some employers to grow complacent in managing their own individual safety and risk management programs because the cost of insurance had declined so rapidly. Because of this reduction, employer’s felt comfortable that the system was on its way to getting fixed.
Indemnity Claims And Their Impact From 2004-2009
Most businesses know that failing to control one’s own controllable costs can lead to wild variations in profit margins down the road, and workers compensation insurers are no different. Let’s look at the insurer’s actual loss development from 2004 to 2009. While the average rate was declining by nearly 60%, the insurer’s actual average claim was increasing. In 2004, the average indemnity claim (those are the claims where disability is paid out by the insurer to a claimant), was 15,679, but by
2009 that figure had risen to 18,729. This represents a 20% increase in the average cost of an indemnity claim from 2004 to 2009.
Medical Claims And Their Impract From 2004-2009
Now let’s study what the development of medical claims has done from 2004 through 2009. Medical claims are claims that are paid to physician’s hospitals, etc.. In 2004 the average medical claim was 24,414, in 2001 it was just 22,749, but in 2009 it skyrocketed to 39,083. This represents a 62.5% increase in the cost of an average medical claim from 2004 to 2009!
Likely Continuing Rate Trends
With insurers cost of both medical and indemnity claims increasing well beyond inflationary rates, it’s likely that those costs will continue to be passed on to employer’s. The 2009 rate recommendations by the WCIRB called for an approximate 22% increase, but the insurance commissioner did not agree with the WCIRB’s recommended rate increase. This put many insurers in the dubious position of either raising their own rates against the wishes of the commissioner, or continue to lose money on their book of business. It’s unlikely the insurers will continue to ignore their own data for much longer and the overall rate trend will be upward.
Rate Declines and Rate Increases Impact on Experience Mods
When rates were declining, the expected loss rate portion of the experience mod decreased. Since the denominator in the ex mod formulation is a function of expected losses, a decrease in rates reduces the denominator in the ex mod formula.. This drives experience mods upward.
When rates are increasing, the inverse is true. Expected loss rates are headed upward, but experience mods trend downward. While rates were decreasing, many employers benefited from direct reductions in their base rates, but the offsetting increase in their experience modification most likely took some of those credits away.
What Can You Do To Control Your Costs
Since insurer’s establish the rates that employers pay for their workers compensation insurance and the employer can not control this process, it’s important that an employer understands what they can control. The employer’s destiny begins by controlling those costs that directly impact their own individual experience mod. The process starts with reducing the # of claims (frequency), and cost of claims (severity) for injuries that occur on the job.
Additionally, employers should be evaluating all of their claims that make up their current experience mod to reduce the reserves on open claims. Reducing the reserves, and settling open claims through the Compromise and Release process will get the claims off the books for good with little likelihood of reopening the claim. Reducing claims and their affiliated costs will drive the rate you pay for workers compensation down and increase your bottom line during these lean times,