Another Deregulation Bug

Deregulation bugs have infected another California industry, worker’s compensation insurance. Fortunately the issue does not have energy deregulation’s potential for catastrophe, but the situation is bad enough that the Legislature needs to correct it soon.

The state-controlled worker’s compensation system was overhauled in the early 1990s following complaints that it was far too expensive to employers while it also failed to pay adequate benefits to ill and injured workers. Then-Gov. Pete Wilson and others claimed that the insurance was so expensive it was driving companies from the state. That was a questionable statement, but it added impetus to the reform drive, which included elimination of a state-mandated minimum price for such insurance.

The result was a competitive new market in which rates dropped dramatically. In fact, they sometimes dropped too far. In the frenzy to sign up customers, some firms cut rates so low they lost money on the policies and are now insolvent or nearly so. Part of the problem is that former state Insurance Commissioner Chuck Quackenbush, driven from office by scandal last year, took no action to prevent firms from going broke. Such action might have ranged from a public warning about poor business practices to outright seizure of insolvent firms.

At the time of the overhaul, a reform commission proposed that the state retain the right to set a floor on rates, but this provision was left out of the reform package. State Senate President Pro Tem John Burton (D-San Francisco) and Assemblyman Thomas Calderon (D-Montebello), chairman of the Assembly Insurance Committee, are sponsoring legislation that would increase some benefits but also allow the insurance commissioner to disapprove policy rates that are below cost.

Another measure would increase the surcharge on worker’s compensation insurance premiums to 2% from 1% to shore up the state-established California Insurance Guarantee Assn. Its funds are used to pay the claims of injured workers whose own worker’s comp insurance companies went bankrupt. Both measures seem to be appropriate responses to the problem.

Dennis Aigner, who was chairman of the rate study commission that proposed the 1990s reforms, argues the system would have been fine if Quackenbush had acted on evidence that some companies were in trouble. It’s unfortunate it’s necessary to make new laws to require public officials to do their jobs, but if the alternative is leaving injured workers in the lurch, the Legislature should act.