Monday, November 19, 2012

CA Rate Hearings: The Truth Will Sink In

Even the Insurance Commissioner of California can't believe the numbers coming out of SB 863.

“What strikes me is the dramatic difference between what the WCIRB [Workers' Compensation Insurance Rating Bureau] Actuarial Committee recommended as the actuarially indicated pure premium rate considering all the consequences of SB 863, and what the Governing Committee adopted,” Commissioner David Jones said during a four-hour-long rate hearing on Friday.

Here's the numbers:

The Rating Bureau’s Governing Committee on Sept. 26 voted 6-5 to propose no increase to the $2.38 average insurer filed rate as of July 1, 2012.

An updated Insurance Department analysis projects the average filed rate as of Jan. 1, 2013, will be $2.57.

The WCIRB Actuarial Committee said an advisory pure premium rate of $2.61 per $100 of payroll was appropriate because savings from SB 863 offset only part of increasing loss costs observed throughout 2012.

WCIRB chief actuary Dave Bellusci ultimately said that whether an advisory rate of $2.61 or $2.38 is more appropriate depends on a number of factors that just aren't known yet.

“I think there’s a particularly wide range of reasonableness when you have system change of this magnitude,” Bellusci said. “In my mind, $2.38 probably falls within that range of reasonableness. There’s some likelihood that it could be achieved, but again, I think there is also some likelihood that even the savings we’ve estimated don’t materialize.”

But Bellusci acknowledged that the WCIRB actuaries have been wrong, by a large amount, in the past with SB 899's projections.

The WCIRB estimated about $5 billion in savings from SB 899 but the actual savings were closer to $14 billion, according to Bellusci.

In my mind, while the WCIRB made an initial underestimate of the net savings from SB 899, as time has proven, ultimately over the long term, their estimates were more acccurate as various regulatory impacts and court decisions mollified the instant savings after the industry recovered from its post traumatic syndrome disorder.

According to the WorkCompCentral report on the hearing, Jones said he was not persuaded by references to reform measures passed between 2002 and 2004. Those bills were much larger in scope than SB 863, he said, and he didn't think it is appropriate to assume that the projections for SB 863 will also underestimate savings.

Jones may be correct regarding the estimation of savings, but comparing the scope of the two reform situations is not appropriate as they were the subject of completely different market climates.

2004 was a recovery from Unicover Partners inspired poisoned Kool-Aid that led many carriers to a Jim Jones style mass suicide. 2012 is all about a Democratic Governor using all available political resources to push his agenda for "fixing" California and getting support from Big Business and Big Labor to do it.

The 2004 reforms, in my opinion, weren't really necessary. This is evidenced by the fact that rates were already trending downward by that time as the market was recapitalizing and the State Fund was shedding the excess risk it had absorbed when policy holders of bankrupt carriers had no other market to go to.

My argument is further supported by the fact that the average combined ratio was close to fifty cents on the dollar, meaning that the average underwriting profit of the industry at that time was close to 50%, which is, of course, nearly unheard of.

True, the ombined ratio rose progressively after several years that to its present $1.20+, but the point I'm making is that SB 899 simply accelerated and intensified what the market was already experiencing.

2012 is different. There is no impeding "crisis" of carriers going out of business. In contrast, the whole state, it seems, is going out of business with its increased taxes, flagrant spending, and deflated assets. Can the state claim that something is different, that something positive is happening, that our politicians can realign this state and actually get it moving in the right direction?

2004 dealt with an industry. 2012 is dealing with an entire state.

That's what SB 863 is all about - it's part of an overall marketing campaign by government to keep business (and those employed) in California, to demonstrate that our leadership is dealing with the big picture by implementing reform along with unprecedented tax burdens on everyone, and seeking sacrifice from everyone, including those who have pillaged the People of California for so long.

So, whose estimate is more accurate? Does it really matter? This is, after all, simply "advisory" and carriers can charge what they want.

What really matters is the political message that comes out of an elected official's office that will provide the leadership for the rest of the state, and Jones said it:

“If we don’t get it right, that could have very significant consequences for the solvency and viability of workers’ compensation insurance carriers, and in turn, the availability of product in the market and in turn the pricing of product in the market which has potentially significant consequences for employers and their ability to hire employees.”

"[The] ability to hire employees." That's the message of this government. Unemployment in the state is still over 10% according to the US Bureau of Labor Statistics. That's millions of people that aren't paying taxes, and using state services that cost the rest of the population billions of dollars. That's not an acceptable political position.

Politics is all about the message. Reality is what the population perceives. The message has to create that reality.

Former President Bush, in a talk at the Athena Performing Arts Center at Greece Athena Middle and High School Tuesday, May 24, 2005 in Rochester, NY said it best: "See in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda."

The pure premium advisory rate is a message to shape public perception and create the reality that the businesses in this state, and ergo the people in this state, are going in the right direction.

Keep repeating that there are savings, keep repeating that premiums will go down, keep repeating that everyone will be better off.

The truth will sink in.

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