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Friday, Mar 29, 2024

Insurance Rate Hikes Hurt Valley

After declining for nine years, workers’ compensation insurance rates are rising again, fueled by a combination of factors including rapidly rising medical costs. The hikes are hitting Valley companies just as they are trying to emerge from the worst recession in 60 years, making recovery that much harder. For Santa Clarita-based Blue Cross Laboratories Inc. — a company that lives on razor-thin margins supplying California’s 99 Cent Only Stores with shampoo and glass cleaner — a 10 percent increase in rates this year came as a blow. “It’s a significant expense when you’re working small margins,” CEO Darrell Mahler said. “It means I won’t be hiring more people…I may just have to automate everything I can.” In the San Fernando Valley, companies with a bad experience rating are seeing rates double or triple. Even those with few or no accidents have seen across-the-board hikes of 10 percent. “The market is radically changing, driven by rising medical costs that have not until now been passed on to the consumer,” said Scott Firestone, area president of Arthur J. Gallagher & Co., an insurance brokerage in Glendale. Rates are still significantly below their 2003 peak, when the legislature and Gov. Arnold Schwarzenegger put in place reforms to curb California’s soaring workers’ compensation costs. But insurance brokers and companies fear that another cycle of spiraling increases may be at hand, one that could last years. “It is still early and employers have not really seen the impact of rate increases,” said Martin Flannery, who heads up the workman’s compensation practice at Poms & Associates in Woodland Hills. Some carriers are not renewing high-risk accounts while in other cases they are raising their rates substantially, Flannery said. “Some low-price leaders are telling the accounts on which they are losing money that they won’t renew,” he said. “We’ll see many more of those in the years to come.” A new wave of increases may come as soon as July 1, when a 9.1 percent increase in pure premium rates — the portion of a premium that goes to claims — takes effect. The Workers’ Compensation Insurance Rating Bureau recommended the move in April. Insurance carriers don’t have to follow the independent nonprofit’s recommendation, but many have begun to raise rates in recent months and more are expected to follow the board’s advice. If adopted, the average pure premium rate will go from $2.39 per $100 in payroll to $2.51. Although it’s a significant increase, it’s still well below the 2003 pure premium rate of $6.29 per $100 in payroll. Rising rates There are numerous explanations for why rates are rising after falling for nine years. One reason is that carriers absorbed rising medical costs for years because they wanted to capture new business or keep the business they had in a shrinking economy, said Benjamin Stern, vice president of Heffernan Insurance Brokers. “There was a lot of competition for a finite amount — and in fact, a shrinking amount of business — in the wake of the financial meltdown. The companies were undercutting each other to gain market share.” The result was declining rates. Between 2003 and 2008, rates per $100 of payroll declined to $2.15 from a high of $6.29, according to the Workers’ Compensation Insurance Rating Bureau. Since 2008, the numbers have begun to edge up and in 2011, stood at $2.39. In the face of rising costs, such a strategy was not sustainable, Stern said. The average insurance carrier is now losing 23 cents on every $1.00 in premium they take in, he said. “The carriers saw this was unsustainable,” he said. Some companies — Zenith Insurance Co., for example — didn’t lower their prices as much as others, and as a result, they are not raising their rates as sharply now, Flannery said. Other carriers came into the market and aggressively underpriced the competition. As a result, they are now raising rates sharply, or in some cases, not renewing at all, brokers said. Flannery said one company he knows recently raised rates an average of 35.6 percent. Soaring medical costs, especially pharmaceutical costs, is another reason for the current spike. According to the California Workers Compensation Institute, there has been a sharp increase in medical payments per claim as a result of growing visits per claim and rising procedures per visit. The average cost of medical care for an injured worker with time off work rose 73 percent between 2005 and 2009 to $9,469, said Alex Swedlow, the institute’s executive vice president of research. “The primary reasons for the medical inflation are more expensive medical interventions, more visits per claim, more procedures per visit, and the rising influence of pain management pharmaceuticals,” Swedlow said. Firestone argues that this is the real reason rates are now climbing, not the competition in the marketplace. He said carriers used sophisticated strategies to hold down medical costs, including relying on a medical provider network similar to HMOs. “They thought they could manage the delivery,” Firestone said. “In truth, they were unable to do it. It snuck up on everyone.” Painful losses As a result of the big increase in medical costs, insurance carriers have been losing money in recent years. The so-called combined ratio, or the break-even point between profits and loss is now well above 100 at many companies. A number above 100 means the carrier is losing money; a number below 100 means they are making money on the business they write. Brokers said the Travelers Indemnity Co. recently told its agents that its combined ratio in 2011 stood at 117 percent, the highest since 2001. That means the company is losing 17 cents on every dollar of workman’s compensation insurance it writes. Because of those losses, Travelers recently told brokers it’s changing some of its policies. For example, it will no longer write just workers’ compensation insurance alone, Flannery said. The increases come at a bad time for many companies. For Art Flaster, CEO of HRN Services Inc., a $30 million nurse staffing company in Glendale, workman’s compensation rates went up 20 percent earlier this year. With 1,500 to 1,800 per diem nurses on his payroll, the rate hike amounts to a substantial increase in his cost of doing business. Flaster said he can’t pass the increase on to clients. “The business was hard hit by the recession,” he said. “We can’t pass it on just yet.” Eating the cost will mean he won’t be expanding as much as he had hoped. In fact, he recently cut back on space and moved to a less expensive location to save money. “There were good curbs put in place, but they are being picked apart,” he said. Flaster said he recently had one nurse file a wrongful termination suit after she claimed she was injured. The case, he said, eventually cost $40,000. Insurance brokers say businesses should prepare now for more increases to come and put in place policies that will help them keep rates at reasonable levels. “The days of rates going down 5 to 15 percent a year are over,” said Gregg Inboden, assistant vice president at Momentous Insurance Brokerage in Van Nuys. It’s time for companies to find ways to proactively manage safety. For example, he said, companies should put safety committees in place and implement safety incentives, such as rewards for going six months to a year without a workplace accident. “When prices are going down, no one cares,” Inboden said. “But as prices start to go up, companies should think about how to make themselves a better risk to an insurance company.”

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