Good To Be a CA Carrier

Life's not too bad right now if you're an insurance company writing workers' compensation in California, at least on the aggregate according to the most recent report issued by the Workers' Compensation Insurance Rating Bureau.

With a preliminary accident year combined ratio for 2013 of 113, this is the lowest since a 96 was reported in 2007 and about 20% lower than the period between 2009 and 2011 when they averaged about 141%.

The combined ratio is no doubt helped by the biggest premium intake increase in years, with the WCIRB projecting gross industry premiums of $14.8 billion, up 18.4% from last year's $12.5 billion (net written premium, which excludes credits, dividends and other deferrals was up 12% from $9.2 billion in 2012 to $10.9 billion in 2013).

The loss ratio of 70 for 2013 is also the lowest since 2007.

Total ultimate losses and allocated loss-adjustment expenses of $12.5 billion for the accident year 2013 resulted in an ultimate accident year loss and ALAE ratio of 86.5% for accident year 2013, lower than it’s been in each of the past four accident years.

What's going on here? I thought that the California workers' compensation market was moribund into the annals of financial disaster.

The number crunchers at the WCIRB will have some more educated guesses than me, but there are a couple of factors that likely are at play.

For one thing we are still in an economic recovery, and because California's economy is so big it takes a bit more time to spool up and get spinning at normal RPM. Some of this premium increase can be therefore attributed to increased payrolls since work comp premium is directly related to the size of payroll: the more people working, the bigger the payroll, the more workers' compensation premium paid.

But what about those expenses? Aren't the increases antithetical lower loss and combined ratios?

Actually, the numbers seem perfectly logical. The more people working, the more people get hurt and seek workers' compensation benefits.

What is not accounted for is the geographic distribution of those claims.

While the WCIRB says that the projected claim frequency for accident year 2013 is 4.7% higher than 2012 and 6.6% above 2011, it disclaims that it is, "largely attributed ... to increases in cumulative injury claims, permanent disability claims, claims involving injuries to multiple body parts, and claims from the Los Angeles/L.A. Basin regions."

California never recovered from the odd spike in frequency that occurred in 2010 - this increase was experienced nationally according to the National Council on Compensation Insurance.

The difference is that, for the rest of the country that spike was isolated to one year, and then frequency returned to below baseline.

California's experience remained above that baseline.

Still, "the 2013 frequency remains approximately 30% below the indemnity claim frequency experienced prior to the 2002 through 2004 reforms."

As I noted in yesterday's post, the anticipated cost savings from SB 863, principally from Independent Medical Review, were not realized. I postulated that the expectations were incorrect because the assumptions made (that there were approximately 5,000 medical treatment disputes per year) was incorrect.

And the failure to realize those savings results, according to the WCIRB report, in about a 3% growth in allocated loss adjustment expenses, which is a whopping 88% higher than in 2005 (and this excludes medical cost containment program costs, which were not tracked separately until 2011).

Still, when you put all the numbers together, the insurance industry in California can't complain.

Well, there's room for improvement because the investment environment could be better - but there are lots of smart people with top degrees from leading financial institutions that steer conservative money around.

The flip side is that employers may not be happy paying almost 19% more for insurance coverage than they did last year. The question is when will they start complaining ... again.

The WCIRB report on December 2013 Insurer Experience is here:

http://www.wcirb.com/sites/default/files/documents/report_on_12-31-13_insurer_exp_-_complete_0.pdf.