Going Up? Sifting Through California Workers’ Comp Rates

Sifting Workers Comp cropThere are serious rumblings coming from the great state of California workers comp rate-making body that costs are escalating at a rapid clip, with the agency signaling that it will likely ask the state insurance commissioner to increase benchmark rates substantially for next year.

The Workers Compensation Insurance Rating Bureau’s actuarial committee had actually recommended that benchmark rates, which are used by insurers as a guidepost to price their policies, be increased nearly 40% in July this year. But the Rating Bureau’s governing committee opted instead to submit a politically safer “informational filing,” which spells out the reasons why the benchmark rate is so inadequate and the rate at which claims costs are increasing.

But don’t’ let this eye-popping figure scare you. Most insurers are already charging substantially more than the benchmark rate, and any rate increases you may experience going forward should not be drastic as long as you can manage to keep a lid on workplace injuries. That’s because insurers are not required to follow the benchmark.

The astounding figure is partly due to the fact that the former insurance commissioner, Steve Poizner, routinely rejected the bureau’s rate hike recommendations despite evidence that costs are quickly climbing. As a result, the benchmark rates, which are supposed to accurately reflect the true cost of claims, are inadequate and no longer a useful tool. As much as 27.7 percentage points of the 39.8% rate inadequacy is actually carry-over from prior filings that were rejected by Poizner during his four years in office.

The governing committee, which consists largely of insurance company executives, opted for an informational filing that a labor representative who sits on the panel proposed. It was supported by employer representative Bruce Wick, who told the committee that such a filing would allow insurance companies and the state Legislature to use the data to address the underlying cost drivers without scaring employers, according to a report by the Workers’ Comp Executive trade publication. There were also concerns that the steep request would be interpreted by employers that all workers’ comp rates would increase 40%, which would not be the case.

You should note that the rates you are currently being charged are likely close to adequate. The average rate being charged in 2010 by insurance companies for workers’ comp policies was $2.39 per $100 of payroll, compared to the advisory benchmark rate of $1.74, according to Mark Priven of Bickmore Risk Services, who serves as an actuary for the public members of the governing committee. He notes that rates that insurers are currently charging employers are inadequate by about 3.5%. If the actuarial committee’s 39.8% increase were to be fully implemented, the advisory pure premium rate would be $2.43 – a tad more than rates currently being charged.

The benchmark rates cover all of the occupational classes in California and are essentially supposed to reflect the cost of claims and the cost of handling those claims. The rates do not include other forms of overhead and do not take into account profits. Insurance companies are supposed to use the rates as a starting point for pricing their policies.

There are a number of reasons that claims costs are increasing, including more medical liens being filed, pharmaceutical dispensing practices, additional body parts being added to claims despite evidence to the contrary, claiming new disabilities once a claim has been accepted and higher costs of defending against employees who pursue litigation to press their injury claims. There have also been some court rulings adverse to employers which have changed the way claims awards are calculated.

In all, these developments have pushed workers’ comp medical expenses to the levels they were at before reforms in 2003 and 2004 that cut overall workers’ comp costs by nearly 60%. The reforms arrested workers’ comp medical expenses for a time, but about three years ago they started climbing again.

As your broker, we will continue to work to find the best workers’ comp policy for your company at the lowest price possible.

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