A Company has office locations in both New York City and San Francisco. In New York City, the company is being charged $0.59 per $100 of payroll for their clerical employees. In San Francisco, this same company is being charged $2.23 per $100 of payroll. Does something look wrong here? How can there be that much disparity in rates when the people are performing the same job function in an office environment? Welcome to California workers’ compensation.

As of 1/21/04, the National Association of Insurance Commissioners (NAIC) reported that insurance companies selling workers’ compensation insurance in California suffered their 7th straight year of losses. Workers’ compensation was one of the most talked-about issues in the recent gubernatorial Recall election because it was having a major impact on the California economy. One of Arnold Schwarzenegger’s campaign promises was a complete overhaul of the current program. Because of the current state of affairs in the California workers’ compensation market, many middle market companies are seriously considering closing their doors or relocating because they are unable to pay the premiums. Another result of this crisis is a significant increase in employer fraud where either: (1) they drastically under-report payroll, (2) mis-classify job descriptions, or (3) simply don’t purchase the coverage. An employer found guilty of any of these crimes is subject to severe fines and jail. It appears that many are willing to take the risk, as fraud claims are at their highest point ever.

How did California get to this point? There are a number of issues that have led us to where we are today.

1. # In 1995, the California Legislature enabled insurers to set their own rates. This deregulation led to a price war between insurers. At the time, this was great for California employers as rates decreased each year from 1995 to around 2000. In some cases, insurers were offering clients a workers’ compensation premium that was less than the estimated losses! We all took advantage.
2. During this same time frame, California was experiencing the largest economic-boom in its history. Therefore, these poor underwriting decisions were being offset by significant investment income gains. Just like the rest of California, those investment gains evaporated with the bursting of the "bubble" in 2000.
3. Prior to the terrorist attacks of 9/11/01, California was starting to see the effects of their price war. A number of insurers had come under "regulatory supervision" or simply shut their doors – CE Heath, Reliance, Home, Superior National, and Industrial Indemnity. More recently, Kemper has gone into bankruptcy, Royal & Sun Alliance has stopped writing business in the US, Atlantic Mutual has seen their financial rating slip, and the CA State Fund has been under increased scrutiny to increase their loss reserves by more than $1 billion.
4. These insurance company issues were a direct result of an average loss ratio for workers’ compensation for all carriers for the period 1998 to 2001 of 125%, 134%, 122%, and 103%.
5. In addition to the dramatic rate decreases, the California Legislature enacted a number of laws that increased the amount of benefits payable to injured workers.

That is what got us here. Workers’ compensation costs have increased from $9 billion in 1995 to more than $29 billion in 2002. Something had to be done in order to stop the flow of businesses moving outside of California. It appears things are starting to change for the better. On October 1st, Governor Gray Davis signed Bill AB 227 and Bill SB 228 into law. The bills will accomplish the following:

• According to the politicians, these new reforms will eliminate over $5 billion annually from the current system in the first full year they are in effect, and $4.8 billion to $5.4 billion annually in the following years. The California Workers’ Compensation Insurance Rating Bureau (WCIRB) is the state licensed rating organization and they have yet to confirm these figures.
• Adopt a fee schedule for outpatient and surgical centers. Prior to this, there were no limits on the fees that could be charged by the various centers. Now, each center will be paid 120% of the current Medicare reimbursement rate for those facilities.
• Adopt a fee schedule for prescribed medications. Again, there was no schedule and therefore, employers were paying whatever the pharmacy wanted to charge for drugs for their injured employees. Now, payments made to the pharmacies for prescription drugs will be set based upon the schedule established by Medi-Cal.
• Reimbursement costs to hospitals and physicians will be cut 5% -- unless they are already below the current Medicare rates.
• The number of visits to chiropractors is capped at 24. Currently there have been no caps and the average California injured employee visits the chiropractor 37 times compared to the national average of 15.
• Lastly, a new system for reviewing medical treatment for injured workers will be introduced.

What is the outlook for 2004? More of the same, but with a light at the end of the tunnel.

Towards the end of 2003, John Garamendi, the California Insurance Commissioner, requested a 14.9% pure premium rate decrease from all insurance companies selling workers’ compensation insurance in California. The Commissioner does not have the ability to set rates – he can only make requests. This is in comparison to the WCIRB’s recommendation to reduce rates on 1/1/04 between 2.9 and 5.3 percent.

The California State Compensation Insurance Fund (State Fund), which is the largest writer of workers’ compensation coverage in the state, filed to lower their rates on 1/1/04 by a mere 2.9%. Not exactly what Mr. Garamendi wanted but it may be a positive sign for things to come.

There are ways to reduce your overall workers’ compensation costs:

1. Implement safety programs. These programs will not show immediate premium savings but have substantial long-term benefits. Employee training programs, regular management meetings, incentive programs, and work-area cleanliness, are all important parts of a well-run safety program. Even more important is upper management’s input and interest. If management takes safety seriously, employees will take safety seriously.
2. Return to work programs. The most expensive part of a workers’ compensation claim is the indemnity portion – the time that the injured employee is not working. The sooner you can get that employee back to work the better. Therefore, having a detailed return-to-work program is very beneficial. Jobs that entail light to minimal labor will not only reduce costs but will provide the worker with a sense of pride to be back at work.
3. Set up formal claims review processes and meetings. The longer a claim stays open, the more expensive it becomes. The frequency of claim reviews will be a direct result of the company’s claim activity. These claim meetings should include the broker, the insurance company claim representative, a member of senior management, and the person/people overseeing workers’ compensation for the company. By getting together, each "file" is discussed, insight is provided, and procedures for closure are put in place. This is a great way of keeping the insurance company in check.
   
   If you are not satisfied with the way an insurance company is handling/closing claims, engaging a Third Party Administrator is a great way to get a specialist involved. Even though there is an up-front charge for a TPA, many times, the long-term benefits greatly outweigh the short-term costs.
4. Examine alternative programs. Many insureds utilize the standard "guarantee cost" program for workers’ compensation. This entails no risk on the part of the insured. However, in many instances, an insurance company will provide premium credits of 50%-85% for taking some risk. The following are 2 examples of "loss-sensitive" program options:
   • Large Deductible. An insurance company will not consider any kind of deductible program lower than $100,000. This means that the insured is responsible for the first $100,000 of each and every claim. Any claim that is more than the deductible amount will be covered by insurance until closed. In order to further protect the insured, an aggregate-deductible or "stop-loss" can be put into place.
     
     Equity Risk Partners is a California-based company with payroll of approximately $75M that receives an 85% premium credit for this type of program. Not all companies will receive such a premium credit. The ultimate cost of the program is a direct result of individual loss history.
   • Retrospectively-rated. Similar to a deductible program, an insurance company will typically not provide this type of program for an insured until they reach a certain size. That can be either based upon estimated standard premium ($1,000,000) or estimated losses ($1,000,000).
     
     This type of program usually has a lower pay-in premium than either a deductible or guarantee cost option. However, 6 months after the end of the policy period, the premium will be adjusted based upon: audited payroll and losses. The pay-in premium will be based upon an assumption of both. Depending upon those assumptions, an additional or return premium will be generated. A big part of the retro program is that this adjustment takes place every year thereafter until all claims are closed. Therefore, making sure that the company has adequate reserves set aside to pay for retro adjustments is necessary. Just like the deductible program, the ultimate cost of the program is a direct result of the loss experience. The lower the losses, the cheaper the program ultimately.

The biggest part of taking control of your workers’ compensation costs is making sure you start the process of renewing your coverage as early as possible, and working with a broker that knows your company and the marketplace. Equity Risk Partners is fully committed to provide our client’s access to all qualified insurance companies and starting the marketing process no later than 60 days prior to the renewal date. The more information and interaction with the insurance company, the better the program options and pricing will be. Every little bit helps.