Sizable Savings Seen in Overhaul

The recent overhaul of California’s workers’ compensation insurance system could produce significant savings for businesses this year, according to estimates expected to be sent to state Insurance Commissioner John Garamendi this week.

The Workers’ Compensation Insurance Rating Bureau projected Tuesday that the law, signed April 16 by Gov. Arnold Schwarzenegger, would cut short-term workers’ comp costs by 13.9%. The total savings for employers could amount to $3 billion in reductions in insurance premiums and other costs over a 12-month period, said the bureau, a research group backed by insurers.

But it’s anyone’s guess how much premiums actually will decrease -- a crucial issue for businesses that have seen their workers’ comp costs double or triple over the last few years.

Garamendi will use the rating-bureau data, which he is scheduled to receive at a hearing Thursday in San Francisco, as the basis for his recommendation on what workers’ comp insurers should charge for policies started or renewed between July 1 and Dec. 31. He must issue the premium guidelines by the end of the month.

Schwarzenegger is encouraged by the savings identified by the bureau and fully expects that “California’s employers will see rate reductions on an ongoing basis in both the short and the long term,” spokesman Vince Sollitto said Tuesday.

There is nothing in the workers’ comp law that requires insurers to lower their premiums, and insurers aren’t required to follow Garamendi’s rate recommendations.

Last November the commissioner recommended a 14.9% rollback in rates after an earlier round of changes in the state’s system for helping injured workers. But insurance companies cut their premiums by an average of only 3.6%.

And that could happen again this year.

Some insurance companies may lower rates by an average of only 2.6%, based on the rating bureau’s latest findings, said Nicole Mahrt, a spokeswoman for the American Insurance Assn. in Sacramento. That’s in part because insurers may not have seen the cost of their workers’ comp claims fall as much as Garamendi predicted during the first few months of 2004.

That would be sure to disappoint businesses looking forward to bigger immediate financial benefits from the recent overhaul.

“Our members are expecting to see a reduction in their rates,” said Michael Shaw, assistant state director for the National Federation of Independent Businesses. He said small and medium-sized companies, after being pounded for years with hefty annual premium hikes, would welcome savings along the lines of the 13.9% outlined by the rating bureau.

Labor union officials, who unsuccessfully pushed to include government regulation of insurance rates in the new law, said they wouldn’t be surprised if insurers didn’t pass most savings on to employers. Rates should be cut by about 25% to account for savings from the bill signed by Schwarzenegger and two workers’ comp bills signed last fall by former Gov. Gray Davis, said Thomas Rankin, president of the California Labor Federation.

“There’s nothing to force insurers to do anything,” he said. Garamendi “needs to be able to regulate them. That’s the real solution for stability in the market.”

It’s now up to the governor and lawmakers to keep the pressure on insurance companies to lower rates during the second half of the year, Rankin said.

No matter what happens in the short run, analysts are predicting that much greater savings should materialize after the start of next year. That’s when changes in permanent disability benefits included in the new workers’ comp law are set to be implemented by state regulators. Those changes include limits on the time an injured worker can receive partial disability payments and new calculations for awarding benefits to injured workers.

The regulations on permanent disability, scheduled to kick in Jan. 1, should knock an additional 7% or 8% off the total cost of the workers’ comp system, said Frank Neuhauser, a workers’ comp specialist at UC Berkeley’s Survey Research Center. At that point, he said, insurance companies should be able to charge premiums that are as much as 25% lower than last year’s and still make a profit.

Neuhauser predicted that rates would drop even more if the government-backed State Compensation Insurance Fund set a competitive standard by following the governor’s suggestion and cutting its rates by 30% from current levels.

“I think there is going to be a great deal of pressure” on insurers to lower rates, Neuhauser said.