Stage Is Set for Higher Workers’ Comp Rates

California business owners could see their workers’ compensation premiums jump dramatically following a recommendation by state Insurance Commissioner Chuck Quackenbush that insurers hike the price of that coverage by 18.4%.

Quackenbush’s recommendation on Tuesday comes amid rising concern among state insurance officials that fierce competition has driven down the cost of premiums so sharply in recent years that many carriers are currently selling the coverage at a loss.

That has been good news for California employers, who have seen premiums drop by an average of 45% since 1995, when a sweeping overhaul of the workers’ compensation system took effect. But officials are concerned that the deep price cuts could hurt some carriers that have delayed passing along the true cost of claims in a bid to win market share.

Quackenbush’s recommendation, which is nonbinding but is likely to influence many insurers, puts the commissioner in the awkward position of recommending a steep price hike for an insurance product whose stiff premiums caused a near revolt among California businesses in the early ‘90s. But an agency spokesman said Tuesday that the premium increases are necessary to protect workers’ interests and the long-term health of the system.

“[Premium cuts] can’t last at this artificial level without some carriers becoming insolvent,” said Tim Taylor, legislative analyst for the Department of Insurance. “Consumers are the big losers if that happens. . . . That’s what we’re trying to prevent.”

Small-business activists expressed surprise at the size of the commissioner’s recommended rate hike, which was suggested to the department by the Workers’ Compensation Insurance Rating Bureau of California, a nonprofit, nonpartisan agency that analyzes statewide workers’ comp data and makes annual rate recommendations. In recent years, the Insurance Department has recommended smaller rate hikes. Many insurers have elected not to raise premiums at all, while others have continued to cut rates.

Still, most employers knew the premium declines could not continue indefinitely, said Scott Hauge, chairman of the California Small Business Assn. He figures many insurers will view Quackenbush’s recommendation as a green light to pass along double-digit increases.

“The real surprise is that it has taken so long” to see premiums head back up, Hauge said.

California employers last year paid more than $6 billion in premiums into the workers’ comp system, where more than 250 carriers now compete for business. Insurance companies are free to set their own rates, based on the size of the firm seeking insurance, the nature of the work and the firm’s accident record, among other things.

Before 1995, the Insurance Department dictated the minimum rate that companies could charge. The result was employer premiums topping $9.4 billion, leading to pressure to reform the system and let the free market reign.

Heated competition and tumbling premiums have placated employers, but experts say it’s inevitable that rates must rise to cover the increasing cost of claims. While the actual number of workers’ comp claims has declined sharply in recent years, due in part to aggressive injury-prevention efforts by employers, the average cost per claim has risen about 50% to $27,000 because of medical inflation, high litigation costs and other factors, according to Ed Woodward, president of the California Workers’ Compensation Institute.

He estimates the state’s insurance companies last year paid out 40% more in claims and expenses than they collected in premiums.

“Quackenbush is sending a strong message that there is a problem with the pricing mechanism,” Woodward said.

The commissioner’s recommendation comes at a critical time, since all California insurers must submit their rate schedules to the Insurance Department for approval before the end of the year.

Observers predict that many insurers will begin raising their premiums within a few months. But some business advocates are less concerned with the free market than with what could happen in the Legislature, where Sen. Hilda Solis (D-El Monte) recently led a charge to expand workers’ comp benefits to a maximum of $651 a week from the current cap of $490. Gov. Gray Davis vetoed that measure in September, but many expect the issue to resurface next year.

Julianne Broyles, spokeswoman for the California Chamber of Commerce, fears that any boost in benefits on top of Quackenbush’s recommended rate hike would send premiums skyrocketing.

“We don’t want a repeat of the early ‘90s,” Broyles said. “We’re already looking at a huge bite.”