Citing Rampant Fraud, Insurers Quit Southland : Insurance: Private workers’ compensation firms are abandoning businesses to the state fund.
Citing Los Angeles as the state’s insurance fraud capital, several workers’ compensation insurers are quietly retreating from the area, making it harder for some employers to get affordable private insurance.
That is adding to the insurance cost spiral that is raising the cost of doing business in Southern California and driving some employers out of the area.
Many employers abandoned by such private insurers as Aetna, Citation Insurance and others are turning in record numbers to the State Compensation Insurance Fund, a quasi-public agency that cannot turn anyone away.
The trend, ignited by the withdrawal of Industrial Indemnity 15 months ago, is a concern because as the market becomes less competitive, premiums tend to rise.
Thomas Hagerman, co-founder of the Independent Business Coalition Against Workers’ Compensation Fraud, said that employers who lose their coverage must often pay premiums to new insurers that are twice what they used to pay.
The trend is also a concern to the state fund because it must cover employers in risky industries--construction, for example--that no private insurer wants.
A surge in claims from these risky clients could weaken the state fund, setting it on a downward spiral in which it can only attract poor risks. That could ultimately threaten its financial stability, although the fund--supported by fees charged to insurers--said it is in no immediate danger of insolvency.
The exodus from Los Angeles is yet another sign of problems in the state’s $11-billion system for compensating workers hurt on the job. It has come under harsh criticism because it is among the most costly systems in the nation, yet it delivers below-average benefits to workers.
The state Legislature is considering several reform measures, including one Gov. Pete Wilson made earlier this week, that could help stem the exodus of insurers from Los Angeles. The proposals are tied up in partisan bickering, however.
In the meantime, insurers are asking the state Department of Insurance for a staggering 23% increase in premiums to help cover their losses, but approval isn’t likely.
Insurers said that if the increase is rejected, the outflow of insurers from Los Angeles could increase.
The insurers say that high medical costs and a disproportionate number of fraudulent claims are driving them from the Los Angeles region.
According to the California Workers’ Compensation Institute, an industry-funded research group, medical bills in Los Angeles are 4% higher than in San Francisco, 8% higher than in San Diego and 11% higher than in San Bernardino--areas where insurers are shifting more of their business.
But insurers say that the biggest problem in Los Angeles is fraudulent claims, often made by workers making claims for fake or ineligible injuries.
Such fraud accounts for an estimated 20% of claims statewide. Transamerica, the state’s 13th-largest workers compensation insurer, said fraudulent claims in the Los Angeles region are double the amount elsewhere in the state.
While not withdrawing from the region, Transamerica is now reducing its business in Los Angeles by one-third to focus on Northern California.
“It is like there are two states,” Transamerica Senior Vice President Jay Chase said, reflecting on the differences between the northern and southern regions.
Besides Transamerica, other firms taking steps to limit their exposure in the Los Angeles area are:
* Industrial Indemnity, a San Francisco-based unit of Crum & Foster and the state’s fourth-largest provider of workers compensation. It said it lost money on the business, paying out $1.19 in claims for every $1 in premiums it took in.
* Aetna Casualty & Surety. It stopped writing workers’ compensation insurance in Los Angeles County, as well as Ventura and Santa Barbara counties, six months ago. The firm cited a “history of losses.”
* CII, the Burbank-based parent of California Indemnity Insurance. It is moving its headquarters to San Ramon near Oakland in July as part of an effort to refocus its business on Northern California.
* Citation Insurance Group, a San Jose-based insurer that did one-quarter of its business in the Los Angeles area. It decided to pull out last June after a huge jump in costly disability claims.
* Travelers Insurance, the state’s 12th-largest insurer. It is pruning small businesses while continuing to pursue less-risky Fortune 500 companies.
Insurers said that, with 200 workers’ compensation firms doing business in California, there is no insurance shortage in the Los Angeles area despite the cutbacks.
Transamerica, in fact, is taking pains to let policyholders down gently and is carrying for an extra year those who can’t find new coverage.
But employers and insurance brokers said it has become increasingly difficult for small business owners to get insurance at an affordable price.
Though the state sets insurance rates, insurers are permitted to tack on surcharges based on a company’s past claims.
“There is definitely an availability problem,” Ted Huntington, executive director of the Professional Insurance Agents Assn., said. “If your company is small, or what is called hard to place, like clerical work or construction, your only choice is the state fund.”
Premiums paid to the State Fund in the Los Angeles Basin--an area that includes Los Angeles County and portions of Orange and Ventura counties--shot up 5% in the first three months of this year, while declining 1.2% in the rest of the state.
Premium growth in Los Angeles for 1991 also outpaced the rest of the state.
Because much of the increase comes from business that private insurers don’t want, the state fund is “concerned that it will skew our business and we will end up with an unusually high percentage of accounts with poor histories,” spokesman George Vignolo said.
Workers’ Comp Insurers
Top 10 workers’ compensation companies in California, ranked by direct premiums written in 1991
Company (millions) : Premiums
State Compensation Insurance Fund: $1,892.5
Republic Indemnity Co. of America: $356.0
Liberty Mutual: $335.8
Industrial Indemnity: $308.4
National Union: $276.5
Fremont Compensation Insurance: $260.1
California Compensation Insurance: $247.7
Zenith Insurance Co.: $216.9
Hartford Underwriters Insurance: $191.9
Transportation Insurance Co.: $151.3
Source: Underwriters Report
