3 Firms Rise Above Workers’ Compensation Quagmire : Insurance: Although many carriers lose money on the policies, Pac Rim, CII Financial and Zenith National are posting solid results.

California business agrees there’s a crisis in the state’s $10.4-billion workers’ compensation program. Soaring litigation, medical costs and fraudulent claims are costing employers and insurers big money, and are prompting calls for reform to keep the system in check.

But for three workers’ comp insurers based in the San Fernando Valley--Pac Rim Holding Corp. in Encino, Zenith National Insurance Corp. in Woodland Hills and CII Financial Inc. in Burbank--the systemwide mess hasn’t slowed their stride.

While many carriers lose money on workers’ comp (not to mention other property-casualty lines) and rely on investment income to turn a profit, Pac Rim and CII actually turn a profit from underwriting insurance.

A recent report by the investment firm Salomon Bros. showed that in the first six months of 1991, Pac Rim, CII and Zenith accounted for three of the four workers’ comp insurers that had the lowest combined ratios--which measures their payments on insurance claims plus operating expenses--in the state.

CII was the lowest at 92%, meaning that for each dollar of premium income it made 8 cents from insurance alone. Many other carriers have ratios over 100%--they lose money on insurance.

The larger and better known Zenith--it had revenue of $521 million last year, with workers’ comp accounting for 55% of its total business--has broken even only lately on its workers’ comp insurance, relying mostly on investment gains for its $37.6-million profit in the first nine months of 1991. But even that’s a better showing than most insurers.

By law, employers must provide insurance for workers injured on the job. The system is supposed to be no-fault, but workers’ comp litigation still has grown rapidly in recent years, along with medical costs and abuse.

California employers now pay more for workers’ comp--roughly 3% of their payroll on average--than those in most states. The $8.4 billion they will pay for insurers’ coverage this year is more than double the $3.4 billion paid only eight years ago. (Many other employers are self-insured, which represents about another $2 billion of coverage.)

Those problems, combined with some insurers’ ill-advised rebates to customers and other missteps aimed at protecting their market share, mean “most of the carriers in this industry are losing money” in California, said Dale Debber, who markets a Van Nuys-based insurance database called Compline.

Not so Pac Rim, the parent of Pacific Rim Assurance Co., and CII, which owns California Indemnity Insurance Co., which provide only workers’ comp coverage and only in California. Pac Rim and CII last year had revenue--insurance premium income plus their earnings from investments--of $74.1 million and $87.3 million, respectively, making them relatively small players among the 300 or so workers’ comp insurers in the state.

Nonetheless, through Sept. 30, Pac Rim’s profit had jumped 68% from a year earlier, to $5.2 million, and CII’s profit for the period doubled from a year earlier, to $9.0 million.

How do they do it?

They are choosy about the customers they underwrite. They prefer employers with a history of few worker injuries, that are inherently less risky--construction companies might not be accepted, for instance--and that aggressively try to keep injuries to a minimum.

“We write probably one out of every four” employers that come to Pac Rim for coverage, said Stanley Braun, founder and president. Nearly 60% of Pac Rim’s clients are service companies such as nursing homes, parking lot operators and trash collectors.

Not welcome at Pac Rim are firms of lawyers, doctors, stockbrokers and accountants because “they have a very heavy incidence of stress claims,” Braun said.

Indeed, all three insurers are fighting back against the rapidly growing rate of workers’ “stress and strain” claims. Insurers and employers argue that such claims are too often fraudulent--and they gripe that widely advertised legal and medical workers’ comp “mills” are growing contributors to the system’s cost explosion.

“We have probably yet to see a legitimate stress claim,” Braun asserted.

Pac Rim a year ago set up a fraud bureau to scrutinize stress claims and set up a 24-hour 800-number hot line to receive anonymous tips about claim fraud. CII recently formed a similar division, as have others such as Transamerica Insurance Group, the Woodland Hills-based property-casualty insurance unit of Transamerica Corp.

“I’ve gone and hired ex-FBI people to help us investigate these cases,” Zenith Chairman Stanley R. Zax said.

Pac Rim and CII also work to keep their overhead costs well below the industry average. “We have no middle management, no regional offices, no large corporate staffs,” Braun said. As a result, Pac Rim’s combined ratio is about 95%.

There are some major differences between the three companies, of course.

Pac Rim extends coverage only to middle- and large-sized businesses, that is, employers paying an average of $76,000 a year in workers’ comp premiums. CII focuses on small businesses--those paying $50,000 or less in annual premiums--which it believes are often ignored by the big insurers. CII’s founder and chairman, Joseph G. Havlick, declined requests for an interview.

Zenith, a workers’ comp provider for 40 years, focuses on an employer’s claims experience, not its size or industry. “We would not arbitrarily include anybody or throw out anybody” from coverage, Zax said.

Zax also doesn’t have the lowest overhead, preferring to spend money on investigations, employer-counseling sessions and other services that keep claims losses down. “In the face of adversity, the proper strategy is to increase your overhead” to cut down on claims, he said.

Despite their success, CII, Zenith and Pac Rim still face problems.

It’s unclear whether their efforts to combat rising stress claims will work. Havlick issued a statement earlier this month saying that if CII’s new unit doesn’t curb the stress claims problem, CII might be forced to boost its loss reserves. That would damage CII’s earnings, of course, and Wall Street responded by knocking CII’s stock sharply lower.

Then there’s the issue of price. Minimum rates for workers’ comp insurance are in effect set by the state Department of Insurance, and most carriers keep the face price of their coverage near the minimum.

(Insurance Commissioner John Garamendi will soon decide whether to approve a proposed 11.9% increase in those minimum rates, which vary by job category. The industry wants the rate hike to cover the rising costs of workers’ comp, but analysts predict Garamendi might approve an increase of only 6% or so.)

In practice, however, the insurers effectively charge different rates because they offer rebates, known as policyholder dividends, to their customers once a year. The amount depends on how well the employers kept their safety records high and their claims low. Pac Rim, for instance, pays back about 4% of its premium income in such dividends.

But Garamendi recently questioned whether the industry should change the dividend practice to encourage more competition based mostly on the initial price paid for coverage. Insurers complain that such a change would wipe out employers’ incentive to keep their claims low, thereby further raising their--and the insurers’--costs.

“The dividend policy is one of the only effective tools we have” to encourage fewer claims, Braun said.

Workers’ Compensation Winners Many insurance companies are losing money underwriting workers’ compensation insurance in California, due largely to rising legal and medical costs as well as growing fraud. Two relatively new carriers enjoying growing profits, however, are CII Financial Inc. in Burbank and Pac Rim Holding Corp. in Encino. Source: Company reports