The Gathering Storm in Calif. Workers' Compensation

Monday, February 27, 2012 | 0

Since March 28, 1948, when U.S. Air Force forecasters Ernest C. Fawbush and Robert C. Miller issued the first tornado forecasts from Tinker Air Force Base in Oklahoma, our ability to predict severe storms has increased exponentially. Our ability to predict storms in the workers’ compensation system is not nearly as well developed, but a careful look at some key data points does provide some clues. In this post, I’ll share the reasons we believe a storm is brewing for workers’ comp in California, and suggest three key reforms that would help mitigate the severity of it. In subsequent posts I’ll discuss the gathering storm and these reform proposals in more depth.

Why are we predicting a storm? Because the industry numbers do not add up.

Insurers make money from underwriting and investment income. When one of these engines of profit slows, stops or turns negative the other must make up the difference. Typically in a line like Work Comp underwriting results do turn and remain negative for long periods of time. When this happens investment income must make up the difference to achieve an acceptable total return.

Global economic factors have reduced investment income for companies across the country. In California, this is exacerbated by the recession, which has hit our state especially hard. For insurers, this means that available premium dollars are down because payroll is down, and prices have not kept pace with loss cost inflations for quite some time. In effect the underwriting engine is creating more loss than the investment engine can adequately offset.

So far, insurers are covering the gap by releasing reserves, which built up in the years immediately following the 2004 reform, but those reserves will run out. And when they do, something’s gotta give. What will it be? It won’t be investment income – the Fed seems wedded to keeping interest rates low indefinitely. That leaves loss costs and prices: either costs will have to come down, prices will have to go up, or some combination of the two.

We see the storm clearly in the distance, and it is headed our way! We believe a pure price lead solution would be devastating to California’s employers and to the state’s fragile economy. While unrealistically low pricing is part of the problem, there are substantial improvements to our system that, if acted upon, could also remove significant costs from the system mitigating in whole or part the need for a price based solution.

The three key reforms that would mitigate the severity of the coming storm are:

Implement a multi-faceted strategy to speed payment of appropriate medical care and resolve provider lien claims.
Improve the Medical Delivery system to remove costs, reduce delays and improve outcomes for injured employees.
Do 1 and 2 right and we can revise the Permanent Disability Rating Schedule (PDRS) to provide injured employees increased compensation in the event of permanent disability, and at the same time amend the Labor Code to remove the Almaraz/Guzman and Ogilvie’s rulings.

These reforms could reduce system costs by more than $1 billion and at the same time help stabilize pricing by providing a more consistent and predictable permanent disability evaluation process.

Thomas E. Rowe is chief executive officer of State Compensation Insurance Fund. This column was reprinted with his permission from his blog.