Tuesday, May 17, 2011

Brown Budget Reflects DWC Reality

Yesterday I chastised the California Republican budget proposal for messing with employer money by cutting funding for the Division of Workers' Compensation (DWC) even though DWC is completely "user funded" and takes no part of General Fund money.

CA Governor, Jerry Brown, released his budget yesterday and at least his office recognizes that the DWC's money is not the state's money, and that cutting DWC off would in fact be a detriment to the California economy.

Brown budgeted $164.006 million for the DWC during the fiscal year that starts July 1, which is funded by employer assessments. That's up from $160.328 million in the current year.

The budget is here.

 In other California news, we reported this morning that Fitch ratings came out with a report that the combined ratio for carriers in the state is outpacing the rest of the nation by a healthy margin, which of course raises concerns.

But this should not be surprising. California will always be an outlier because its economy and its population are so huge. Since the combined ratio is a very simple gauge of industry health, comprised of incoming premium versus expenses and losses, it is not a truly accurate picture of the health of the industry, but it does raise alarms and is subject to misinterpretation.

The combined ratio is necessarily reflective of a current economy divided by cumulative past claims. It really is a measure of industry cash flow. Since employment is down, premiums are down, but expenses pile up because claims take some time to mature and get through the system.

What is not reflected in the Fitch report is the status of surplus, or cash available after losses and expenses and sitting in investment accounts - throw that number in and you have a different picture. At the NCCI Annual Issues Symposium a few weeks ago, status of surplus in the industry was healthy, meaning that there was sufficient cash available to pay losses and expenses over and above incoming premium.

Nevertheless, combined ratio is a barometer, and what you don't want to see is too many successive years of high combined ratios, especially in an anemic investment environment. I don't have much faith that the employment environment is going to improve any time soon - the California economy is indelibly linked to housing and construction and until the housing market finds its bottom the state will continue to limp along.

Smart carriers have been gradually increasing rates and being disciplined in their underwriting. Short sighted carriers competing solely on pricing will suffer price spikes that will alienate their customers, or worse, may lead to either exiting the state or going under,

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