California Workers’ Compensation Costs Will Climb Dramatically in 2001

In a property and casualty insurance marketplace that continues to harden, escalating Workers Compensation Insurance costs have emerged as a notable "sore spot." In California, in particular, workers' compensation pricing is soaring in the wake of the "deregulation euphoria" that dominated the market following abolition of the state’s Minimum Rate Law in 1994. Last year’s 18.4% average increase in California’s advisory rates, the collapse of important reinsurance markets in late 1999, as well as Insurance Company failures and withdrawals from the market are harbingers of what is yet to come. All California employers should expect and prepare for dramatic workers’ compensation premium increases in 2001.

HISTORY, BRIEFLY REVISITED

Rates and premiums for virtually all California employers decreased significantly in the wake of "Open Rating", created as part of a comprehensive workers’ compensation legislative reform package. For roughly five years after enactment of the new law, intense competition for market share dominated the deregulated California workers’ compensation scene. Golden State employers reaped the benefits of lower premiums that, in many instances, simply couldn’t be justified based on sound actuarial practices and good underwriting judgement.

For most insurance companies operating in California’s newly competitive workers’ compensation marketplace, maintaining a share of that market was a much greater and more immediate priority than producing sound underwriting results. Anyone who wanted to continue writing Worker’s Compensation Insurance in the world’s 7^th largest economy had to play the low pricing game.

THE BUBBLE FINALLY BURSTS

After 5 years of "bargain basement" deals, rates and premium began increasing last year. Key factors initially predicting and contributing to this market correction included:

Advisory "pure premium rates" published by the California Workers’ Compensation Insurance Rating Bureau (WCIRB) and used by insurance companies to develop their own individual rating plans, increased an average of 18.4% for the Year 2000.

Many insurance companies followed the WCIRB’s lead, sending statutorily required notices advising clients that "base rates" (initial rate, before modification by experience or schedule credits / debits) would increase by 25% or more on renewal. Base rates did, in fact, increase in virtually all insurance company rate filings last year.

Workers’ Compensation is a heavily reinsured coverage and ceding (in other words, passing the liability for) excess losses to their reinsurance carriers initially helped California underwriters maintain some stability while competition was at its fiercest. During 1999, though, several major reinsurance pools experienced financial difficulty and ceased operations. Reduced reinsurance capacity forced primary underwriters into a much more conservative pricing posture.

Natural selection accelerated. A number of California specialty carriers withdrew from the market. Some large national carriers also called it quits and retreated to safer ground. And finally, there were several major carrier insolvencies led by Superior National – at it’s peak one of the state’s largest writers of Workers’ Compensation Insurance. Significantly reduced market capacity followed deteriorating underwriting results and shrinking reinsurance availability as "strike three" – and the "Open Rating rally" ended.

At ABD, we advised our clients early on not to be lulled into a sense of false security by a "soft market" -- to use the time and relative financial benefits, instead, to strengthen workers’ compensation risk management programs and practices in anticipation of the inevitable turn in the market.

Over time, the real opportunities presented by California Open Rating will belong to those organizations who continue to developed and implement strong, effective risk control and claims management programs. Premiums will likely increase for at least the next several years, but the extent of these increases is something that can still be managed and controlled. It’s never too late to start.

ABD WILL CONTINUE TO LEAD THE WAY

Here’s what you need to know about our ability to continue offering the most effective representation and advocacy as the workers’ compensation insurance marketplace evolves:

As one of the nation’s largest retail brokers (and the largest independently owned and operated broker in the West) we have strong relationships with every major underwriter of workers’ compensation coverage. If it’s available (in California or elsewhere), we can offer it.

Beyond this, we understand the market better than most, having served California-based business and industry as workers’ compensation experts for more than 50 years. We know where to go for the right combination of coverage and value. Further, we are close to the underwriting community and know how to best present and position the clients we represent.

Workers’ compensation isn’t an "after thought" at ABD. We have developed it into an area of specialty and strength, building teams of Risk Control and Claims Management professionals throughout our offices to support our brokers, their service teams and the clients for whom we all ultimately work. No one develops programs that manage and control Worker’s Compensation costs more effectively than ABD.

We’ll tell it to you straight. Whether good news or bad news, we believe it’s our obligation to keep you advised on insurance market trends, emerging areas of risk, new products, etc. No one likes surprises and we will do everything possible to make certain you understand what’s coming and are able to strategically and tactically plan for change.

So now that you know what lies ahead, what should you do? Just continue to rely on us.

It’s as easy as ABD.