Report: Workers’ Comp Crisis Not Over

Recent drops in workers’ compensation rates in California may not signal an end to the statewide crisis, according to a recent report released by the Public Policy Institute of California. But one Valley company reports that it has been able to reduce its rates by 23 percent in the past year thanks to recent reforms. The PPIC report details the rise in workers’ compensation premiums from 1999 to 2003, when costs nearly tripled to account for an average of over six percent of payroll costs. The rising rates have been attributed to a variety of sources, including rising benefits enacted by the legislature, escalating medical costs and disability claims, the deregulation of the workers’ compensation market in 1995, and declining investment returns for insurance companies. Whatever the cause of the crisis, the resulting exodus of workers’ compensation companies from California placed enormous pressure on the state workers’ compensation fund. Jim Little, chief executive officer of Thousand Oaks-based Employers Direct Insurance Company, said a lack of competition drove rates even higher. Additionally, he said, as remaining companies realized the market had been severely under-priced, they were forced to try to recoup losses by further increasing rates. Little founded Employers Direct in early 2003 with Ronald Groden to serve what Little described as a “market that was underserved.” In September of 2003, the Legislature passed SB 228, which made it easier for employers and insurers to challenge medical opinions. Then, in April of 2004, SB 899 allowed employers to establish networks of occupational and non-occupational doctors without outside intervention. Last May, Insurance Commissioner Garamendi announced that he was lowering the advisory pure premium rate for workers’ compensation insurance by 20.9 percent. Insurers are not bound to follow the rate. Premiums for most employers in the state have dropped about 16 percent. Little said that because Employers Direct entered the California market without the years of debt its competitors had incurred, the company has been able to drop its rates faster than most. “We’re not in a position where we have to use some portion of our revenues to support losses from prior periods,” Little said. Still, the PPIC report concludes that it is premature to assume the crisis is over. While the reforms of the past two years seem to have addressed the causes of the crisis, until the annual rate of growth slows, any short term cost reductions will be overrun quickly.