The Workers’ Compensation Insurance Rating Bureau of California is recommending a major pure premium rate hike starting next year due to rising medical and indemnity costs following a steady trend of rate decline. The bureau, which is a California nonprofit association that is comprised of all companies in the state licensed to issue workers’ compensation, is submitting a filing to the California Department of Insurance this month that recommends a 27.7-percent increase in pure premium rates, or “claims cost benchmarks.” The pure premium rates consider medical and indemnity costs, as well as some related benefits. The bureau makes recommendations based on the costs for insurance companies of paying out claims. Insurers then have the option to use the advisory rates or to develop their own rates. The bureau’s proposal comes after years of steady decline in rates started in 2004, after the rates skyrocketed in 2003. The decline started occurring after a series of workers’ compensation insurance reforms by the state took effect in 2003 and 2004, allowing for lower medical costs and limitations on services being provided through policies. Rising costs However, as medical costs started to increase over the past couple of years, the costs started to outweigh the rates, said Jack Hannan, spokesman for the Workers’ Compensation Insurance Rating Bureau. “We’ve particularly seen large increases in medical costs in the last 2008 and 2009 period,” Hannan said. The trend of claims cases staying open longer have also contributed to higher costs, he added. Hannan attributed the longer-lasting cases to more legal holdups and more aggressive efforts by Medicare to make sure it receives its portion of payback for costs, which draws out the process. A study by the bureau comparing the second quarter costs and rates of all workers’ compensation providers shows that the cost-to-payout ratio has increased. For the industry as a whole, the combined loss and expense ratio in the 2009 ultimate accident year is estimated to be 124 percent, meaning that for every $1 that is being brought in through premiums, $1.24 is being paid out. That ratio is 14 percentage points higher than the ratio in 2008 and 70 percentage points higher than the ratio in 2005. Meanwhile, rates have generally been declining. For policies written in 2010, the average statewide insurer rate was $2.47 per $100 of payroll. While that is 5 percent higher than the average rate charged for 2009, it is about 62 percent lower than the average rate charged in the second six months of 2003, the bureau said in its report. Lower increases expected A 27.7 percent recommended increase in the rates does not necessarily equate to an equivalent increase in what customers will be paying, even if the bureaus’ proposal is approved, Hannan said. He added that some insurers might choose to disregard the recommendation, or they might increase rates by a lower percentage. Dan Pondella, CEO of Sherman Oaks-based Arroyo Insurance Services, agreed. “Everybody will have an increase, but very few will have a maximum increase, and the reason for that is the marketplace is still very competitive,” he said. “The other thing that’s important is the rates are (for) individual-by-individual policy holders.” Pondella said that those customers with the best loss control programs and experience will still be eligible for more discounts and will get the best rates. Either way, businesses will feel the effect, he said. “It’s dramatic for the business person,” Pondella said. “They can’t afford it. They’re not price competitive.” Jeff Ramirez, business insurance manager at Burbank insurance brokerage agency United Agencies in Burbank, said he also believes the competition will lead to lower increases. “It seems like they have been reluctant to be the first ones to significantly increase rates,” he said. The California Department of Insurance will hold a public hearing of the bureau’s filing on Oct. 12 in San Francisco and then later decide whether to accept the filing.
