Monday, December 3, 2012

SB 863 And Rates: Jones Not A Betting Man

What does David Jones, California's elected Insurance Commissioner, know about SB 863 that even the Workers' Compensation Insurance Rating Bureau (WCIRB) doesn't know?

Honestly, I don't know. But Jones on Friday recommended a pure premium rate of $2.56 per $100 of payroll, compared to the $2.38 rate recommended by the WCIRB's Governing Committee.

"This is a case where the math matters and actuarial science is the critical component in determining a rate that will maintain insurers’ ability to pay claims," Jones said in a press release. "We cannot afford to set the pure premium rate based on over estimates of the potential reform savings that Senate Bill 863 will bring when insurers are already paying out more in claims than they are collecting in premiums.

"Today, companies are paying out 116% more in claims than they are collecting in premium. It’s a recipe for history to repeat itself with a significant number of insurers becoming insolvent just a few years ago. The actuarial science is clear on this matter, and while I don’t have the authority to set the rates, I will advise insurers to use pure premium rates that are sufficient."

What Jones is really saying, it seems to me, is that he doesn't know how SB 863 is going to affect the costs and benefits in the system any more than anyone else at this point in time.

And in an unusual reversal of roles, Jones essentially alleges the WCIRB in engaging in politics instead of sound actuarial discipline. Citing the work of Insurance Department Chief Actuary Ron Dahlquist and Senior Casualty Actuary Giovannie Muzzarelli, Jones determined that the WCIRB's recommended rate is insufficient to cover workers' compensation insurers' rising loss costs:

"The WCIRB has failed to adhere to its own actuarial analysis and failed to provide any additional support or analysis based upon the factors under which insurer rates would be reviewed and determined to be reasonable and actuarially sound."

According to news of the event, Jones' pure premium rate order is simply a realistic reflection of what is going on with the REAL market in California's workers' compensation system - the market that is the majority of employers in the state but which have the least say in the formulation of its laws: small employers.

Betsey Brewer, senior vice president of Pasadena insurance broker The Rule Co., told WorkCompCentral she is seeing workers’ compensation prices going up for small businesses with rate increases or between 10% and 15%, and some as high as 20%.

Brewer said carriers who had been absorbing increased claims costs are starting to tighten up. Some large companies have dramatically tightened up their underwriting standards in California, and Brewer said she routinely cautions clients that they might be forced to purchase coverage from a different carrier in a year or two, depending on appetite.

This means that small employers may have to go with the State Fund, which had filed pure premium rate is $4.37 per $100 of payroll. Even if the State Fund lowers its rate 7% as approved by its board of directors in October, that would still put its pure premium rate at $4.06, 37% higher than market rates.

Other experts interviewed by WorkCompCentral News essentially all said the market in California is hardening and carriers aren't buying into the politics of the advisory pure premium rate.

Carriers have good reason to be pessimistic.

At the WorkCompCentral Education Holiday Party this past Saturday, speaker after speaker uncovered little elements of SB 863 that are at the very least vague, but to me more alarming; huge holes that large trucks of indemnity will flow through.

While much of the current wisdom is that we won't know how SB 863 rolls out until regulations are issued, one thing I have determined that is absolutely demonstrable already - SB 863 is introducing a huge new level of complexity, and complexity ALWAYS drives costs up.


The Division of Workers' Compensation is busy creating new rules, and new forms; dozens of new forms it seems (and DWC is hardly through the rule making process). The new rules are complex, because the underlying concepts are complex. The procedural tools that SB 863 introduced require new tooling in claims departments, new programming, new procedures.

All of these changes require expenditures of time and mostly money. This expense has to paid somehow.

As I listened to the speakers and over and over again I couldn't help but think how much work attorneys are going to have with endless triable issues arising over things such as what is a "catastrophic" injury and conflicts with statutory presumptions of 100% disability versus AMA Guide definitions (Does "paralysis" include partial paralysis due to a stroke? Does "amputation" mean an entire limb, or just a digit?).

As I see SB 863 develop into "the law" I have to agree with Jones and his actuaries. The SB 863 panacea that was sold is not going to be realized, at least for some time. There will be a big change in how medical treatment and payment for treatment is handled, but whether or not that actually produces savings won't be understood for a couple of years.

Until then, from what I heard and am now understanding, the motivation behind litigating claims remains very, very high: that is the prospect of larger indemnity awards for comparatively minor disabilities.

We'll see how carriers react now that Jones has issued his rate recommendation. In September, 25 carriers filed for pure premium rate increases that averaged 14.3%. In October, two carriers filed for no rate change, while American Alternative Insurance Corp. filed for a 10.7% increase.

As of Friday evening, no carrier had filed a pure premium rate with the department since Oct. 16. Some feel that the allure of California's volume creates good competition between carriers depending upon various business models.

While some carriers will reduce their exposure on new policies, other insurers are going to sell comp policies only as part of a package that includes another line of coverage. And as much as carriers want and need to improve profitability, they can’t significantly increase premiums if they want to keep writing in California.

Time will tell. Workers' compensation is a political animal. There are always winners and losers, and the roster of winners and losers rotates with every "reform." What Jones is saying is that he's not a betting man. Or that least the odds-makers aren't providing any clear directions on the bet.

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