The State Of The Market

By Craig S. Pynes

Many of California’s employers wonder, “when will the costs of obtaining workers’ compensation cease to be such a burden on my ability to do business?” The answer appears to be, “not yet, but soon.”

A slew of regulatory and statutory reforms aimed at curbing costs and relieving some of the pressure on the California employer community are beginning to have an impact on the way insurers do business.

For the best example, one need look no further than what’s happening to the State Compensation Insurance Fund (SCIF), which is seeing its market share begin to slip from a 2003 high when it wrote over half the market. Better risks are being rewarded with the privilege of not having to depend on the “insurer of last resort.”

“One phenomenon that has begun to appear is overreserving
until after a Unit Statistical Report filing.”

During the crisis period—when SCIF was forced to bolster its reserves at the behest of the Department of Insurance—it did so by steeply increasing rates and cutting broker commissions from 8 percent to 5.5 percent. At the beginning of 2005, SCIF reported that it had seen an 18-20 percent drop in its average market rate, meaning that as the costs associated with claims begin to decrease, so would amounts payable as premiums. In fact, SCIF has been losing so much of the “good business,” that it has dropped the infamous requirement that a risk be rejected three times by three other carriers before it would write coverage.

At the same time, new carriers are attempting to enter the California market to cash in on reforms aimed at curbing the costs associated with claims. Currently, ten carriers have applied with the Department of Insurance to enter the market, with six having been approved thus far. Familiar names such as Safeco and Argonaut are back after a period of absence; the California Insurance Company has emerged, and even Berkshire/Hathaway, driven by Warren Buffett himself, is seeking to enter the fray and write in California.

The American Insurance Group (AIG) has experienced the most premium growth behind SCIF. However, faced with investigations into questionable practices and the loss of its CEO, it is advisable that California employers with policies written by carriers under the AIG “umbrella” monitor their claims closely for signs of irregularity.

Finally, one phenomenon that has begun to appear is over-reserving until after a Unit Statistical Report filing. Carriers see that with payments on claims dropping, loss ratios and experience modification factors are sure to follow. Thus, by setting high reserves this last time around, they can benefit into the near future on premiums for employers with high mods and loss ratios during the crisis period when claim costs were spiraling upward. If you sense this happening to your business, speak to your broker or contact us.

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