I said yesterday that California Insurance Department commissioner David Jones was not a betting man, reversing roles with the Workers' Compensation Insurance Rating Bureau (WCIRB) by setting a pure premium advisory rate that exceeded the WCIRB's Governing Committee's proposed rate.
The WCIRB's rate was issued by a divided committee against actuarial recommendations.
The WCIRB's Governing Committee recommended the commissioner set the 2013 advisory rate at $2.38, the same as the average insurer filed rate as of July 1, 2013.
WCIRB actuaries, on the other hand, said an advisory rate of $2.61 was appropriate because savings from Senate Bill 863 offset only part of the increasing costs observed throughout 2012. Additionally, the Rating Bureau said without estimated savings of $1.11 billion from the reform bill, the indicated rate would have been $2.73.
Dave Bellusci, chief actuary for the Rating Bureau, said in a public hearing on the 2013 advisory rate that the $2.61 rate was the “best estimate,” but $2.38 would fall within the range of reasonable rates.
Insurance Department staff said in the rate order that it is important to emphasize that future costs are uncertain and can’t be predicted with any precision. At the same time, efforts should be made to try to quantify the range of uncertainty.
Some people question the utility of the California Department of Insurance's advisory pure premium rate issuance.
Mark Gerlach, a consultant to the California Applicants’ Attorneys Association, told WorkCompCentral, “Setting the pure premium rate doesn’t seem to have much, if any, impact on what the rates are. It seems that if anything, insurance companies, when rates are going down are ignoring them, and when they’re going up, use it as an excuse to raise rates. I don’t know what the process yields.”
Likewise, on the employer side, Jerry Azevedo, a spokesman for the Workers’ Compensation Action Network, said the commissioner's rate order sends a message that everyone needs to be realistic in their expectations for savings from SB 863.
The commissioner’s order expressly states that “there is no sound actuarial basis for the Governing Committee’s decision.”
Azevedo told WorkCompCentral in October following the WCIRB's recommendation that, “It’s clear from the bureau’s announcement that the recommended pure premium rate should have been an increase based on actuarial science alone. But, the Governing Committee made a decision that was reflective of the high degree of uncertainty surrounding the reforms. It’s a scenario in which it really is going to be a carrier to carrier decision about how they feel about that uncertainty.”
It was noted in the story that in three of the past four recent years, the commissioner has announced the Jan. 1 rate before the end of the first week in November.
The department by law has until Nov. 30 to schedule a hearing and 30 days from the close of the record to issue a decision.
Rate changes have to be on file for 30 days before they can take effect. Therefore, carriers who plan to change their rates at the start of the year have to submit a filing by Dec. 1.
Many carriers wait for the order before setting their rates in a competitive comparison setting - the advisory rate helps carriers determine whether they are seeing all of the elements of claim expenses.
This uncertainty didn't slow down State Fund from announcing its rates - but the State Fund's rates were already very high compared to the rest of the carriers so its 7% reduction in current rates isn't really relevant to the rest of the industry except for setting up a competitive comparison.
With SB 863 there is more uncertainty than in any previous reform legislation - the changes are so vast, so untested, so completely different, that there is no actuarial experience with the processes that will ultimately impact claims administration and costs.
In the meantime, where are the actuaries that predicted all of the cost savings in SB 863?
If you recall, even while SB 863 was still undergoing massive changes as proponents sought support from Business and Labor, the rallying cry was that the landmark bill would generate hundreds of millions of dollars in savings while increasing indemnity to injured workers.
Christine Baker, director of the Department of Industrial Relations, not only said the administration supports the proposal when it was announced because it “is good for workers and employers and good for California,” the Department took the unprecedented move of going political with a latter recommendation to the legislature in support of the bill.
Baker had said the bill would reduce frictional costs, treatment delays, lack of oversight of medical networks and other inefficiencies while also increasing permanent disability benefits by more than $700 million.
The estimates were all over the map.
State Fund said the net benefit of SB 863 would be $110 million.
The WCIRB in September projected that the benefit increase in SB 863, phased-in over two years, would increase costs by $510 million in 2013 and $590 million in 2014. At the same time, reform provisions, including independent medical review, lien filing fees and reduced reimbursement for ambulatory surgery centers, would offset the benefit increase and generate net savings of $1.2 billion in 2013 and annual savings of $610 million beginning in 2014.
International brokerage firm, AON, said everyone was full of it, and predicted that the permanent disability benefit increase in SB 863 will drive costs up by $982 million in 2014. At the same time, Aon said cost-cutting provisions will produce net savings of only $631 million, increasing system costs by a net of $351 million a year beginning in 2014.
I said yesterday, after hearing speakers on Saturday take apart the language of SB 863, that there were more holes in the bill than previously anticipated and its my impression that this swiss cheese of a law won't hold any water. Now that I've inspected the bill with more circumspection, it seems to me that savings from SB 863 are more a phantasm than anything else.
If SB 863 produces any net savings and results in lower rates, then I will gladly eat my words, and issue a public apology for doubting the skills and fortitude of the bill's supporters.
But what about the commissioner's pure premium advisory rate? What relevance does that have? It is not binding. It is generally too late for carriers to rely upon in setting their rates.
In my opinion, what's most important about Jones' rate order is that Jones and his staff simply don't believe in SB 863. They aren't buying into the political bovine excrement.
The insurance commissioner post has been used to launch runs for governor since the office became an elected position with John Garamendi years ago. Jones may simply be stating that he is a politician that isn't going to buy into the rhetoric, and that he is going to chart his own course; that he is willing to stand up to the pressure of optimists when the facts don't support it.
I don't know if Jones will run for governor. If he does, his likely campaign will be that he was the only politician that was honest about workers' compensation, so the people can trust that he will also be honest about the rest of California.
It's a smart political move. The insurance commissioner is to regulate the insurance industry. What better way to say to the people of this state that he won't succumb to special interest groups or big money than to tell these people that he can see through the nonsense?
Jones the Realist - campaign 2014. What do you think?