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Worker's Compensation Insurance
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The California Worker's Compensation system is in a cycle of soaring costs which is placing a staggering burden on employers, workers, and the economy. Some critics are predicting a meltdown. Ten years after the passage of landmark legislation meant to fix California's then-troubled workers' compensation system, the $15 billion industry is in turmoil.
The system is so broken that the state finds itself in a perverse predicament: Employers in California pay more for workers' compensation coverage than any other state, yet their injured employees receive some of the skimpiest benefits in the nation.
Cutthroat competition and soaring medical costs have sent nearly two dozen workers' compensation carriers into insolvency, while the state-run insurance program of last resort is facing financial troubles of its own. With ailing insurers jacking up their rates to recoup losses, total workers' compensation premiums paid by California were 69% higher last year than in 2000. This year there is no let up in the aggressive premium increases either.
The hefty increases in workers' compensation premiums are coming after years of artificially low insurance prices The industry as a whole paid out $1.61 in claims and expenses for every $1.00 taken in 1998 and 1999. In 2000 the industry paid out $1.40 in claims and expenses and in 2002 the industry still paid out $1.23 for every $1.00 received in premium. 2002 marked the eighth straight year that the payout has exceeded premium revenue. One has to look no further than these numbers to understand the two dozen insolvencies and the dramatic increases in premiums required to restore the insurers to financial health.
What happened to create these losses? The 1993 legislation effectively deregulated the market by creating "open rating." This created aggressive price competition in the market. Insurers sought to buy market share with artificially low prices. This aggressive campaign for market share came back to haunt the insurers in two ways.
First, since the mid-1990's, the average medical costs on California's workers' compensation claims have risen four times faster than the rate of general medical inflation, according to the Worker's Compensation Rating Bureau of California. Injured workers take longer to return to work in California than in most other states. Some attribute this to cheating and others to bureaucratic delays. In addition, California workers are much more likely to use a lawyer to help them navigate the system. In 2002, the average projected medical cost for claims involving some time off of work reached $31,120, more than double what it was five years ago. So, costs rose much faster than anticipated.
On top of that, many insurers suffered setbacks in the financial markets along with other investors the last three years. The underwriting losses of the mid-to-late '90's were at least being partially offset by the higher than normal returns in the stock and bond markets. With that prop now kicked out, insurers have to make an underwriting profit to stay viable. As aggressive as the premium increases have been, the underwriting profit has remained elusive.
The end result is that California's workers' compensation system is saddled with most of the same problems it faced 10 years, but now with less competition, higher rates and a flimsier safety net for injured workers. In short, the financial chickens have come home to roost.
What can employer's do about it? First, employers have to do a good job of controlling their own claims experience. Employers must make sure that they have safety programs in place and that any equipment is well maintained and replaced on a timely basis. This is traditional workers' compensation management practice.
Beyond that, savvy employers are placing greater emphasis on hiring practices and increasingly looking to boost morale and create culture changes within their organizations that result in higher employee satisfaction. Some experts believe a high number of workers' compensation claims are the result of disgruntled employees. These are the kinds of things employers can control.
If you are managing well and keeping your experience mod in the neighborhood of 100 or below, you may want to look at different plan designs. You may want to look at retro plans, higher risk retention (higher deductibles) or even in some extreme cases, self-insuring. We can help you examine all of your options in the area of plan design.
Two final thoughts. First, prudent budgeting suggests that you continue to plan for still higher premiums in the next few years. Second, put pressure on your California legislature to come up with reforms that address the core cost drivers, the soaring medical expenses.
Health care premiums have gone up aggressively in tandem with worker's compensation premiums. But there is no reason for workers' compensation costs to rise four times faster than general medical costs. Together, these two items are placing huge burdens on California employers. Let us help you manage this to the best of your ability. While there are no silver bullets, prudent managers need to use every tool at their disposal to fight these rapidly rising costs.
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