Workers’ Comp Costs Questioned

Workers’ compensation insurers saw their costs from paying claims drop dramatically last year, but they haven’t passed most of those savings on to hard-pressed California employers, state Insurance Commissioner John Garamendi said Monday.

For every dollar they received in premiums last year, workers’ comp insurers paid out 45 cents in medical treatments and disability benefits for injured workers, Garamendi said. That was down from loss ratios of 60 cents in 2003 and 89 cents in 2002.

The insurance commissioner said he was disturbed that insurance companies might be making large profits by possibly withholding benefits from employees hurt on the job.

“This is a sign that the margin between the cost of claims and premium levels are out of whack,” Garamendi said after taking public testimony at a hearing in San Francisco on Monday.

The contrast is fueling frustration with two years’ worth of changes to California’s $23-billion-a-year system for providing medical treatment and disability payments to victims of workplace accidents.

That face-lift includes two laws passed at the tail end of former Gov. Gray Davis’ tenure, as well as the single biggest overhaul in the system’s history, which was signed into law a year ago by Gov. Arnold Schwarzenegger.

Labor unions and activists for injured workers are trying to undo large parts of last year’s law. They want to block the confirmation of Andrea Hoch as the state’s top workers’ compensation program administrator. She will be appearing before the Senate Rules Committee on Wednesday.

Labor officials accuse insurers of making excessive profits. At the same time, critics charge Hoch and the Schwarzenegger administration with issuing new regulations that would slash permanent disability benefits by more than 50%.

“It’s outrageous that while we have injured workers every day getting their permanent disability benefits slashed, companies are refusing to lower their rates,” said Liz Doyle of the California Federation of Labor.

Unions are pushing for passage of a bill now moving through the state Senate that would re-regulate workers’ comp carriers by slapping price caps on policies.

Premium caps are anathema to the insurance industry, which contends that it is not making excessive profits from writing workers’ comp policies.

However, the industry’s own California Workers’ Compensation Rating Bureau, which issues nonbinding guidance on pricing for insurers, calculates that premiums paid by the state’s employers are falling slowly.

In its latest recommendation, the bureau advised a 10.4% cut in premiums on policies written or renewed after July 1. Including that reduction, the bureau calculates that premiums should be down 31% since late 2003.

However, according to the rating bureau and the state Department of Insurance, actual average comp rates have dropped by 14% to 16% from late 2003. And whether they go down by an additional 10.4% or more after July 1 remains to be seen, they said.

An industry trade group said progress was being made in cutting premiums.

“With competition coming into the marketplace, rates will be where they should be,” said Sam Sorich, president of the Assn. of California Insurance Companies.

He stressed, however, that insurers needed to be cautious.

“We’re in a period of adjustment,” Sorich said. “The insurance industry is quickly adjusting to better information out there and making appropriate decreases.”

Indeed, the downward trend in loss ratios for 2004 and 2003 contrasts with heavy losses reported by the industry for the three previous years, when dozens of workers’ comp carriers went out of business. During the same period, surviving insurers hiked rates paid by employers by as much as 300%.

And the loss ratio calculations released by Garamendi on Monday don’t take into account the potential for further premium cuts after July 1, which could make the ratio less favorable for insurance companies.

Insurers, despite their conservative nature, will become more aggressive about lowering rates if the latest cost estimates hold firm, predicted Peter Barth, a retired economics professor at the University of Connecticut and a nationally known workers’ compensation expert.

“It would not surprise me if premiums do fall fairly quickly and very substantially,” he said.

Small employers, who are beginning to receive slightly lower comp bills, for now are being patient about waiting for further savings, said Michael Shaw, assistant state director for California of the National Federation of Independent Business.

A 10% reduction in July “is certainly not the number our members would like to see,” he said. “We anticipate seeing much bigger savings.”