Bad News for Workers’ Comp

The biggest insurer for workplace injuries in California is on the verge of closing its doors to new business, making it highly likely that employers will pay more for coverage whose cost has already soared in recent years, the Assembly Insurance Committee was told Wednesday.

The State Compensation Insurance Fund, a state-run nonprofit that insures half of the businesses in California for workers hurt on the job, must stop writing new policies soon, said its president, Dianne Oki.

“We’re like the sponge that is over-saturated and cannot absorb more,” she said. “We’ve tried to accommodate the new business coming in the door, but that is rapidly coming to an end.”

A halt to policy-writing by the state fund would put California employers -- as well as hundreds of local governments and school districts -- in a squeeze. By law, they must buy workers’ compensation insurance, but such policies are increasingly costly and scarce.

“If they stop writing, California is really in trouble,” said Enita Elphick, founder of a 70-employee company in Yuba City that makes fences, decks and other wooden products. “It’s the law: You have to have workers’ comp.”

Troubles with the state fund come as workers’ compensation insurance premiums in general have risen sharply in California since 2000. Elphick, who did not attend the hearing, said she expects to pay $440,000 this year in premiums, compared with about $50,000 in 2001, even though her company has not hired more workers or seen a significant change in the number of injuries.

Business groups call the situation a crisis that puts a drag on the state’s entire economy.

“Employers will have to have fewer employees, and employees are going to have less benefits,” Elphick said.

Insurance Commissioner John Garamendi, whose department oversees the state fund and private insurers, told lawmakers that unrestrained medical and legal costs are pushing up premiums.

Neither he nor Oki had easy answers for business owners who might struggle to find insurance as the state fund retracts its coverage. Although the fund was created 89 years ago as an insurer of last resort, its president can legally refuse to insure a business or agency.

“We’ve been reluctant to pull that trigger because we know what chaos there could be in a marketplace where availability is already an issue,” Oki said. “But we’re at that point now where we’ll be forced to pull that trigger, because it won’t do the economy any good to have the state fund get into such a financial mess.”

Since 2000, at least 18 private insurance companies have stopped writing new workers’ compensation policies in California, and the state fund has picked up much of the slack. It collected $1.8 billion in premiums in 2000 and $5.4 billion in 2002.

The state fund’s reserves of nearly $9 billion are big enough to cover foreseeable costs, Oki said. But its rainy-day surplus of an additional $1.4 billion is only half as big as state law requires, she said, and the fund should not be writing new policies.

Oki and Garamendi are working to find a way to curtail the state fund’s business and boost its surplus.

Garamendi suggested cutting the amount that brokers and agents earn from writing state fund insurance policies as a way to discourage them. Or, he said, they could be required to try to place business with private insurers before turning to the state fund.

Somehow, Garamendi said, private companies must be enticed back to California. The industry’s turmoil began in the mid-1990s when deregulation set off competition. Some private insurers began charging premiums too low to cover potential losses. By 2000, several large companies had become insolvent, the state fund was expanding rapidly and premiums had begun rising.

Experts at the hearing said no end to the crisis is in sight.

Overall, workers’ compensation insurance rates probably will jump 9% in July, an additional 9% in January and 9% again in January 2005, said Jim Neary, executive vice president of the state fund.

He sits on a key committee of the state panel that suggests how much workers’ comp insurers should charge in premiums.

Nicole C. Mahrt, a spokeswoman for the American Insurance Assn., said California must stabilize the medical costs of its workers’ comp system before private insurers will expand their business.

In particular, she said, lawmakers must restrain the costs charged by outpatient medical centers and the companies that supply drugs, crutches, wheelchairs and other medical goods.