For all the savings touted by lawmakers who recently approved the biggest-ever overhaul of the state's workers' compensation system, new filings by insurers show that many California businesses won't see decreases in their premiums next year. In fact, they may be lucky to stay even.
Mandatory rate filings for workers' comp policies to be renewed after Jan. 1 are starting to roll into the Department of Insurance, and the news doesn't bode well for the state's employers, which have been scorched by skyrocketing premiums.
Of 32 carriers whose filings were available as of late Friday, only four very small players had indicated that they would match the 14.9% average decrease that Insurance Commissioner John Garamendi called for this month. Half of those reporting said they would leave their rates unchanged or even raise them, some by as much as 25.7%.
More than 200 companies are licensed to write workers' comp coverage in California, so the sample is fairly small. Still, the list includes several major private-sector carriers, which provide coverage for tens of thousands of employers. And none of them plans to extend the full rate cut that Garamendi recommended.
The early trend -- and its potential to influence carriers that have not yet filed -- is a troubling sign for businesses in the state. Workers' comp premiums in California are more than twice the national average. Although employers had been skeptical about seeing a sharp reduction in their insurance costs, others had hoped for major relief after the Legislature passed historic reforms in September.
State lawmakers clearly were alarmed by the direction of the rate filings. On Friday, they grilled insurance executives at a hearing in Sacramento, demanding to know why the hard-fought reforms won't be translating into lower premiums. Witnesses before the Senate Labor and Industrial Relations Committee were required to testify under oath, a procedure rarely used in informational hearings but one that served to remind insurance executives that they could face perjury charges if caught lying.
"The insurance companies must explain themselves," said Garamendi, who has no direct authority to mandate workers' compensation rates. "They must answer the question: 'Why are you not passing the savings on?' ... How concerned am I? Very concerned."
The growing angst underscores the high-stakes battle raging in Sacramento over what to do next with the state's ailing workers' comp system. This week, Gov. Arnold Schwarzenegger called for changes to the $29-billion system that would reduce costs by $11 billion -- on top of the estimated $5 billion to $6 billion that would be saved under reforms lawmakers approved two months ago.
Republican lawmakers at the time had complained that the legislation wasn't enough to deliver significantly lower rates to businesses, a prediction borne out by the filings to date.
But some Democrats suspect that insurers are simply pocketing the September reform savings in a bid to pressure legislators into making further changes in the system. A number of workers' comp carriers have posted healthy earnings in 2003 after a string of losses.
"The underlying assumption is that if we lower the costs, they lower the premiums," said Senate Majority Whip Richard Alarcon (D-Sun Valley), who chaired the hearing. "They haven't demonstrated a willingness to do that yet."
Alarcon said Friday that he planned to introduce legislation that would cap rate increases allowed by workers' compensation carriers. Other lawmakers have talked about returning to the government rate regulation that existed until the mid-1990s.
Garamendi opposes that strategy because of concerns that it would spook new players from coming into the market at a time when California needs more firms writing policies to take the burden off the financially troubled State Compensation Insurance Fund, the nonprofit insurer of last resort.
Fueling lawmakers' frustration is that fact that, other than through public humiliation, they have virtually no power to force insurers to lower their premiums. Under California's deregulated system, carriers are free to charge almost any rate they wish.
Language in the September legislation directs insurers to pass the projected savings from those reforms to policyholders, but even Garamendi acknowledges that he has little leverage beyond the bully pulpit.
"It's a matter of shining a very bright light on these companies and beating them up in public," Garamendi said.
Based on the initial crop of filings, many insurers don't appear too concerned about their images, and some are openly defiant of any government attempts to shame them into making cuts they say their actuaries can't justify.
Zenith National Insurance Corp., the state's fifth-largest for-profit workers' compensation carrier, is planning to offer no rate relief to its customers despite the company's profit rising more than 150% through the first nine months of 2003. Its rate filing says the carrier will stand pat on policies renewed after Jan. 1.
"I will not apologize for the fact that I had a good year," said Chairman Stanley Zax, who did not testify at the hearing. Zax noted that his Woodland Hills company lost tens of millions of dollars writing workers' compensation coverage in California in recent years as medical and other costs exploded. He said his company did not ignore the September reforms when calculating its 2004 rates. On the contrary, Zax said, if not for the legislation, Zenith would have had to increase its rates 20%.
"My rate filing is my rate filing. And if they want to litigate it, it's fine with me," he said of Department of Insurance officials. "I'm not going to go broke like 25 other companies did.... To stay in business, I have to make a profit."
Indeed, so many carriers have gone belly up or stopped writing policies in the chaotic California market that employers have swarmed to the publicly owned State Fund for coverage. The market is so lopsided that State Fund now writes coverage for more than half the market.
State Fund officials have not filed their rate proposals for next year. But the fund's rapid growth in recent years has strained the carrier's capital to the point that the Department of Insurance has questioned its viability as a going concern.
As a result, the State Fund finds itself in a terrible bind. On one hand, it needs to set aside hundreds of millions of dollars to shore up its balance sheet. On the other, Garamendi is pressuring the insurer to deeply slash its premiums, singling it out as the make-or-break entity in his attempt to deliver rate relief to the state's employers.
"They are the heart and soul of the market," Garamendi said of State Fund. "The burden falls to them."
State Fund officials testifying at the hearing Friday said that they were still evaluating the September reform legislation and that they would make their rate filing by the end of the month.
Employers statewide will be watching anxiously. But some say responsibility for California's dysfunctional workers' comp system can't be laid at the feet of a single company or industry.
"The politicians may try to paint the insurance industry as the bad guy, but there is plenty of blame to go around," said Martyn Hopper, state director of the National Federation of Independent Business, which has about 37,000 members in California. "The insurance industry is merely a reflection of the state of the system. And there is definitely something rotten in the system."