Friday, October 7, 2011

The State Fund's Unfortunate Move is the Right Decision

The California State Compensation Insurance Fund yesterday announced it plans to lay off 25% of its workforce next year -- between 1,500 and 1,800 workers. A business move that can not be unexpected due to both the workers' compensation insurance market in the state and the general economy.

At the height of the workers' compensation insurance "crisis" the State Fund saw its market share grow to a high of 53% in 2005. The latest numbers available from the California Department of Insurance has the State Fund at 16% of the market.

In addition to recovered capacity in the California market, the shrinking economy withdrew a large portion of the State Fund's premium base.

According to data published on Sept. 20 by the Workers' Compensation Insurance Rating Bureau written premium in California dropped 58% to $9.8 billion in 2010 from $23.5 billion in 2004.

State Fund's loss expense ratio last year was 166.2%, according to the carrier's 2010 annual report. State Fund reported loss adjustment expenses of $1.888 billion and earned premiums of $1.136 billion last year. 

In 2009, the company had a loss expense ratio of 151.4%, with $1.889 billion in loss-adjustment expenses and earned premiums of $1.248 billion.

Nicole Mahrt, a spokeswoman for the Association of California Insurance Companies, told WorkCompCentral that in 2010 the combined ratio for private insurers in California was 128%, of which about 46% was loss-adjustment expenses.

The State Fund has a disproportionate influence on the statistics reflecting the California workers' compensation market and when the numbers are presented by national rating or industry analysis organizations, such as NCCI or WCRI, the State Fund is routinely asterisked with associated precautionary notes concerning its impact on the numbers.

Indeed, though only operating in one state, the State Fund at $1.136 billion in premium is still one of the largest workers' compensation insurance companies in the nation, and certainly by far the largest state fund.

But while the State Fund is a creature of statute, it receives no funding from the state and it must compete against private insurance, so it must make prudent business decisions and with its loss and expense ratios so high failure to trim expenses would otherwise threaten the entire workers' compensation market.

While it is a shame the State Fund's business move will contribute to the stubborn unemployment rate in California, it is a move that will otherwise benefit the State of California's businesses - at least until the next "crisis".

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