Insurers Are Edging Back to Comp

Insurance companies are tiptoeing into California’s workers’ compensation market, betting that the overhaul of the system for aiding victims of on-the-job injuries is creating profit opportunities.

This year, about a dozen new companies have sought Department of Insurance approval to sell workers’ comp coverage in the state. That’s more than the number that applied in the previous two years combined.

Most of the recent activity has involved relatively small players and modest investments. One big insurer, a subsidiary of Berkshire Hathaway Inc., appears committed to expanding its book of business in California by several hundred million dollars. Omaha-based Berkshire’s chief executive, legendary investor Warren E. Buffett, is a close friend of Gov. Arnold Schwarzenegger, who made fixing workers’ comp his top priority in 2004.

“The economics in the market are ripe for a company to be able to make a decent profit and write a good product for their insured,” said Mike Briare, the vice president of Tevis Insurance Co. of Los Angeles, a start-up that applied last month to do business in California.

Tevis and another newcomer, San Francisco-based CompWest Insurance Co., set up shop after putting together at least the minimum state-required capital of $50 million, most of it from private equity investors. A third new player, SeaBright Insurance Co., which specializes in maritime and construction worker coverage, also tapped private equity financing and is planning an initial public stock offering.

Other insurers showing heightened interest in the California market include Safeco Corp., Firemen’s Fund Insurance Co., ACE INA Holdings Inc. and American International Group Inc., said John Michael Nolan, president of the California Workers’ Compensation Institute, an insurer-backed research group.

Although a relative trickle, the increasing flow of investment dollars to new and existing workers’ comp insurers could be a harbinger of greater competition and, ultimately, lower premiums for hard-pressed employers. A more robust market also would lessen the dominance of the State Compensation Insurance Fund, the government-backed carrier that writes 53% of all workers’ comp premiums in California. And that could put further downward pressure on prices.

When Schwarzenegger signed the workers’ comp law in April, he predicted premiums -- which had soared as much as 300% over the previous four years -- would quickly drop by about 30%.

So far, rates have fallen only about 10% on average, and California employers still pay the nation’s highest premiums. Moreover, state Insurance Commissioner John Garamendi has recommended a meager 2.2% rate cut for policies that start or renew in the first half of 2005.

The conservative rate cuts reflect insurers’ nervousness about the California market. The renewed interest in the state could be short-lived, insurance company officials warn, if legislators, regulators or judges start fiddling with crucial elements of the workers’ compensation law.

The law is expected to sharply reduce the amount insurers have to pay out for medical treatment, vocational rehabilitation and disability benefits. Any meddling with those savings, or with the premiums insurers can charge, would be a deal-breaker for many insurers, analysts said.

And insurers remember the ruinous price competition in the late 1990s that made employers happy but drove dozens of California workers’ compensation insurers out of business.

“Companies are interested in doing business here, but they are cautious about the uncertainty,” said Nolan of the workers’ comp institute.

Bill Mudge, chief executive of CompWest, said insurers would wait for a few years’ worth of evidence that costs were staying down before significantly cutting rates -- or dramatically increasing their investments in the California market.

“You’re not going to see capital bet on the come,” he said.

Key parts of the law are already under attack, Nolan noted. Attorneys, who represent injured workers, are threatening to sue the state to block new regulations needed to implement key parts of the overhaul. The lawyers grouse that the rules would drastically slash payments to permanently disabled workers -- which they claim wasn’t what lawmakers intended.

The regulations, which take effect Jan. 1 on an emergency basis, change the way payments to injured workers are calculated. The new system uses American Medical Assn. guidelines and estimates of lost future earnings to fix benefits. The old method was based on physical impairment and a worker’s ability to perform his or her old job.

The Schwarzenegger administration calls the new method more objective. But labor unions and attorneys call it Draconian and say it would reduce workers’ comp payouts to levels not seen since the early 1980s. Labor’s allies in the Legislature, including Assembly Speaker Fabian Nunez (D-Los Angeles) and Senate President Pro Tem Don Perata (D-Oakland), recently wrote Schwarzenegger asking him to reconsider the regulations. Meanwhile, other Democrats may push bills capping insurance company premiums.

Keeping companies interested in California, said Mudge, chiefly depends on the governor, the Legislature and the insurance commissioner having “the will to see that the reforms that were written stick.”