Rate Reductions; Placing the Cart Before the Horse?

Sunday, June 20, 2004 | 0

by James J Moore, AIC, MBA, ChFc

Senate Bill 899 was a "giant leap forward" for workers' compensation insurance in California. The recent recommendations for rate reductions by Insurance Commissioner Garamendi was also a great stride to reduce the workers' compensation burden on California employers. Some of the carriers did reduce their rates significantly. SCIF reduced its rates, but not as much as the other carriers that made the news.

These are all wonderful attempts to keep employers in the state of CA. The statistics to back up the rate reductions, however, CANNOT BE JUSTIFIED. We need to look at the economic models, as that is what drives the insurance market, not law changes.

I agree more with a recent California business group that said the rate reductions are temporary. What actuary would forecast a rate reduction even before the new laws are all in effect? Most rates are based on PAST performance for a certain classification code. Can we not agree that we need to look at three years of past data at a minimum to make insurance rate reductions? That is the appropriate statistical procedure

The medical rules are tantamount to what rate reductions will be incurred by California employers. The complete rules do not have to be published by the Administrative Director until 11/1/04. What will those rules say exactly?

The judges can remake the laws on any of the cases that they have before them. Does anyone of us know what decisions the court will make in the future?

The driving forces behind the insurance market, and especially work comp, center on the basic economic supply and demand model. Prices have risen greatly as the suppliers of the free-market workers' compensation coverages pulled out of California because they were losing too much money. As with gasoline, if the supply lowers and the demand stays the same (or increases) the price of that item increases dramatically. I will save you the dreadful task of looking supply and demand graphs. There is one more crucial economics point that must be covered.

Putting in an artificial price ceiling as Commissioner Garamendi has by heavily recommending an across the board rate reduction with no additional suppliers (insurance companies) coming back into the market may have quasi-disastrous results.

Remember when President Nixon instituted a price freeze on all goods and services? Incredible price inflation followed after the freeze was removed. The market was just catching back up to itself.

However, the suppliers were there - they may not be in the current California workers' compensation market. Would a carrier come back into the market knowing that they must reduce their rates when they pulled out years ago as they could not raise them fast enough to be profitable? I think not. Governmental interference with the marketplace on any goods or service usually does not end with the best of results.

The major carriers must have some type of profit incentive to return to California. A rate reduction will only delay or remove any chance of that condition occurring within the next few years.

What is my recommendation? Let the laws be as they are and let the marketplace come back to itself. Examining the historical evidence, not future forecasting is a much safer business practice when looking at rate levels. SB 899 was a great bill, but it was not an overnight cure for California's workers' compensation woes.

Article by James Moore, AIC, MBA, ChFc and President of J&L Risk Mgmt Consultants, Inc. James can be reached at jmoore@cutcompostcosts.com, at www.cutcompcosts.com, or at (800) 813-1386.

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