Incorporating all the filings received by the California Department of Insurance (CDI) as of July 12, 2004, the cumulative, average, premium weighted, overall rate reduction for all companies is -10.38 percent since the 2003/2004 reforms. If State Compensation Insurance Fund (SCIF) is excluded from the figures, the rate reduction would have been -11.17 percent. The difference of nearly 0.8 percent between the two figures represents approximately $115 million that would have stayed with California businesses.
"Workers' compensation rates are definitely on the down escalator, but the escalator needs to speed up," said Commissioner Garamendi. "Greater savings are possible, especially from the State Compensation Insurance Fund. Their -9.7 percent reduction is far less than the two national companies, Republic Indemnity and Liberty Mutual."
Among the top ten marketshare groups, the Republic Indemnity companies filed an average 20.48 percent rate reduction and the Liberty Mutual companies filed an average - 17.54 percent rate reduction.
"I commend these industry vanguards for expressing their belief in the 2003 and 2004 reforms by giving rate relief to businesses as soon as possible. They are helping California's economy now, rather than hedging their bets against it," added Garamendi. "At the end of the day, California must have a healthier, more responsive SCIF if we are to continue turning the corner on this issue."
Garamendi noted that SCIF commands 53.03 percent of the workers' compensation marketplace. By comparison, Republic Indemnity and Liberty Mutual companies represent a combined 4.04 percent of the market.
Further reductions needed by SCIF
The commissioner recently released a statutorily mandated report on the SCIF's potential to reduce workers' comp rates based on his review of its financial condition, underwriting practices and rate structure.
The report, prepared by CDI, found that SCIF could realize additional rate reductions of 5.9 percent for all policy- holders by implementing recommendations made by IBM Business Consulting Services (IBM), redirecting its investment portfolio, and reducing maximum commission rates. Any potential rate decreases would be in addition to the 9.7 percent in reductions SCIF filed during 2004.
"Our exam of SCIF, to the extent it was possible, shows much room for operational improvement as we balance the twin goals of lowering rates and preserving the fund's solvency," said Gara-mendi. "I am firmly committed to working with the new board of directors to meet those goals and insure savings are passed through to California's business community."
Employers not paying lowest premiums
CDI determined that SCIF's underwriting practices, in at least two significant areas, hinder its ability to ensure that each eligible employer is paying the lowest premium possible or that there is not disparate treatment of policyholders in terms of the premiums and deposits paid. Additional findings from CDI's review include:
•SCIF's current underwriting procedures do not allow the Company to maximize employer participation in the Kaiser Alliance and Preferred Provider Network (PPN) programs and safety group programs. State Fund's failure to communicate the availability of these programs to all policyholders and its failure to collect information to determine who is eligible for participation result in the application of rates that are unfairly discriminatory.
•SCIF has not adhered to the implementation timeline IBM identified for realizing savings from the recommended reforms and, therefore, will not realize the $294 million of annual savings IBM estimated by 2005. This potential savings translates to a potential rate reduction of approximately 4%.
•SCIF has adopted different procedures for handling direct written accounts with less than $25,000 in annual premiums. This has resulted in small accounts not receiving the same level of disclosure regarding the future costs of their workers' compensation coverage and having these future charges calculated on the basis of less accurate information than is used for all other, larger accounts.
•In reviewing SCIF's rate structure, CDI found that SCIF should, among other things, adhere to its filed rating plan by providing credit to directly written accounts.
"As important as underwriting practices and rate structures are, true rate relief is impacted more significantly by loss reserves and claims handling," added Garamendi. "That is why my department will supplement this report within the next 45 days with its findings on the adequacy of SCIF's current loss reserves. I also recommend the Legislature and Governor order an operational review of SCIF that includes claims handling."
Evaluating reserves is complicated
Reserves, an insurer's largest liability, are the dollars that an insurer expects to pay over time for claims that have already occurred. Determining the financial condition of SCIF, and therefore the extent of its ability to pass through the reform savings, is a highly complex process because workers' compensation benefits are often paid out over many years and reserves must be adequate to pay those claims.
Projections of needed reserves are difficult even in a static system, but the unprecedented scope and impact of the 2003 and 2004 reforms - and the divergent points of view experts have taken with respect to the impacts - have made the task very difficult. Further study of SCIF's loss reserves is integral to carefully, prudently and thoroughly evaluating this issue.
In addition, IBM concluded even prior to workers' compensation reforms that SCIF used an operating model which impaired its ability to address high cost claims in a timely manner.
SCIF has evolved from an insurer primarily for small employers to the largest provider of workers' compensation in the United States, as measured by premiums written. Its premiums went from approximately $1 billion in1995, the first year of open rating, to $7.8 billion for 2003 - a five-year increase of 550 percent.
Garamendi offers support
"I remain committed to working with the newly appointed, reform-minded board of directors to lower SCIF's rates while preserving its solvency," promised Garamendi.
CDI expects to issue a report this month on SCIF's loss reserves. Reserves, an insurer's largest liability, are the dollars that an insurer expects to pay over time for claims that have already occurred. CDI also recommended the California Legislature and Governor order an operational review of SCIF that includes claims handling.