The California Insurance Industry, like every other industry in the last few years, has clearly suffered the effects of the economic downturn. One major insurer has indicated that workers’ compensation insurance throughout the United States is a loss leader, which means that writing this type of insurance does not afford an insurance company much if any profit. In fact, often writing a workers’ compensation insurance policy costs more in the beginning than the price of the premium due to marketing, underwriting and other costs completely unrelated to loss data.
Many feel that the California Insurance Industry is likely to take a much longer time to recover from the economic downturn than other states. This is due to what is perceived to be a relatively liberal court system, a more liberal political climate and to workers’ compensation case law developments which have eaten away at insurance company and employer gains made through SB 899, a comprehensive legislative reform passed in April 2004.
Though the California Workers’ Compensation Insurance Industry may not post large 2011 gains or profits, raises in premiums may well be a development in all California employers’ futures. On August 18, 2010 the Workers’ Compensation Insurance Rating Bureau submitted a “pure premium” rate filing to the California Insurance Commissioner. This requested a 29.6 percent rate increase in workers’ compensation insurance premiums.
The California Workers’ Compensation Insurance Market remains a “free market” or “open rating” system. This means that an insurance company can set its own rates. However a request such as this from the “WCIRB” suggests that higher costs are anticipated which require higher premiums and reserves to properly cover future losses. In plain language, higher costs require money to pay them.
How does an insurance company ensure the ability to pay future losses which cost more? It can only do two basic things: cut costs and raise premiums. Cost cutting has recently been evidenced by State Compensation Insurance Fund, one of California’s most prominent workers’ compensation insurers. This is a good sign, one which evidences that all efforts are being undertaken to control costs, claims and premium rates.
However given such high potential exposures it is certainly reasonable to expect increases in workers’ compensation insurance premiums in 2011. Employers should plan and budget accordingly.