California Conundrum Part 2

Friday was the first part of this series about the California Conundrum, the theme of the Annual Workers' Compensation Insurance Rating Bureau meeting held in San Francisco last Thursday.

This second part is about the state of the workers' compensation insurance industry in California.

Note readers - this is about the INSURANCE industry! Not the state of the system. Not self insureds. Not employers, workers, other vendors... Simply how the insurance industry sees itself performing in the biggest workers' compensation market, by far, in the United States.

The information was presented by Chief Actuary of the WCIRB, Dave Bellusci.

Here's the bottom line, if you don't wish to read the statistical information further: California is the biggest, most competitive, most costly, workers' compensation insurance market in the US.

Did I say costly?

So what else is new?

2015 marked the 6th consecutive year of $1B growth in insurance premium. Bellusci's forecast for 2016 is a $17.9B gross premium, and 13.24B net of credits.

But Bellusci thinks 2016 will be the end of premium growth as lower rates trim the cash inflow. The earlier premium growth was driven by higher rates early on, and thereafter was economically (i.e. payroll) driven. It seems, according to Bellusci's interpretation of the data, that the industry is at end of a premium growth period.

Though California has 12% of the nation's total population, it represents 29% of countrywide premium. In 2009 California was 19% of the entire country. The premium growth in California, post recession, was much quicker than rest of the country. Part of this was rate increases, payroll expansion, and now the carriers are facing rate decreases.

Also, Bellusci noted, that even though many carriers have been consolidating (buying each other and/or merging subsidiary operations) the state still is the most competitive and diverse market in the country.

70% of the state is written by national carriers, 21% are California specific only, and 9% written by State Fund.

You folks already know what I think of this situation - in my mind, while a bit better than in the past with California specific carriers climbing out of the decimation to the market created by "open rating", I see this as still a very anti-competitive market.

Domination by big money national firms with broad portfolios seeking to take advantage of the work comp market to sell other lines - to me there is nothing healthy about work comp being a "loss leader" to other lines and such behavior negatively affects the quality of claims handling.

Despite "open rating" and the illusion of competition, California rates remain considerably higher than the rest of the nation (see my argument above).

Bellusci points to 3 principal factors negatively affecting California rates: frequency, severity and the cost of benefit delivery.

Injury reports went from 1 in 5 workers in 1962 to 1 in 25 in 2012 - 83% decline. That is a fantastic safety record that mirrors the rest of the nation and is consistent with what Berkeley research Frank Neuhauser's opinion that it is more dangerous living outside the work place than in it!

But, of course, the Los Angeles area pulls California out of the national average. From a statistical standpoint the anomaly is due to the high rates of permanent partial disability claims (which drives litigation, ergo expenses) and continuous trauma claims (which are largely absent in the rest of the nation).

Indemnity loss in 2015 was nearly a $30,000 per claim average. In 2005 that number was $19,000. If there is any good news for carriers (at the expense of the medical community) medical cost severity bucks the national trend; California medical costs have been deflationary since SB 863 while the rest of the nation has see inflation.

But it's not medical severity that really drives these costs in California - it is late reporting and more importantly late treatment authorization. The late tail in medical care (i.e. delays, denials, and overall bureaucratic wedge-points) creates a super heated medical cost driver, such that the average California indemnity claim medical cost is $42,000 - second highest in the nation, and unfortunately also by a long shot...

And to the chagrin of reformers, the unintended consequence of SB 863 has been an increase in benefit delivery friction costs by 24%, making California the most expensive in loss allocated expenses, by far.

So what's the take away?

I think Mark Walls, a panelist on a separate presentation at the meeting (Conundrum Part 3), put it best: "California is performing exactly as it was designed ... this is what we signed up for in California."