CDI Looks to Shore Up California’s Workers’ Comp Market
California Insurance Commissioner John Garamendi took center stage when he addressed the problems plaguing State Compensation Insurance Fund on the heels of his recent plans to reform California’s ailing workers’ compensation marketplace. Naturally, his announcement was met with controversy from the insurance industry. At the heart of the controversy is Garamendi’s statement proposing a reduction of broker commissions.
Garamendi’s speech was followed by the release of the findings of two advisory panels created to address the workers’ comp crisis, correlating with Garamendi’s address a week earlier announcing specific reforms for the comp marketplace. The panels—one comprised of industry executives, and the other comprised of non-industry members, were formed in early Dec. 2002 to identify the problems in the marketplace and make specific recommendations for the Commissioner’s review. Both panels released those recommendations to the public on March 3.
In the midst of all the hoopla, the underlying question remains—will California’s workers’ compensation marketplace ever stabilize? Will private carriers return to California, joining the handful of carriers still remaining? Will State Fund’s market share decrease until it reaches a manageable state?
This crisis has long since reached its boiling point. Commissioner Garamendi came into office filling the shoes of former Commissioner Harry Low, who left some unfinished business from Low’s two-year stint as interim commissioner. And who can blame him? Low was far too busy restoring the public’s faith in the Department of Insurance as he swept away the reminders of the Quackenbush administration. Perhaps it was amidst that controversy that the California Department of Insurance (CDI) lost its focus on workers’ comp.
Many in the industry believe that the removal of the minimum rate law started the downward spiral. With the soft market allowing carriers to offer coverage at cutthroat rates, the inevitable bankruptcies and insolvencies that followed paved the way for State Fund’s rise to the top as California’s largest workers’ comp insurer.
So without further ado…
Addressing the State Fund crisis
On March 3, Garamendi addressed members of the media and the insurance community, unveiling a seven-point business proposal for State Compensation Insurance Fund, which designated, among other suggestions, that State Fund further reduce broker commissions. Garamendi’s announcement follows short on the heels of his previous proclamation stating numerous reforms he will implement to restore the California workers’ compensation marketplace just a week earlier.
The business proposal, strangely enough, closely resembles the steps former Commissioner Low outlined in a letter to State Fund back in March 2002. And while State Fund took to the defense in response to Low’s letter, they have expressed agreement with Garamendi’s announcement ordering State Fund to implement the seven points in efforts to restore the carrier’s financial stability. “We think the seven proposals he unveiled at the press conference are the result of what State Fund would describe as an ongoing productive dialogue with the Commissioner’s office,” Jim Zelinski, spokesperson for State Fund, said. “We share his concerns over the marketplace and in improving the system for all the stakeholders.”
Interestingly enough, the seven proposals so strikingly similar to former Commissioner Low’s were actually proposed by State Fund itself. Confirmed by both Commissioner Garamendi and CDI spokesperson Norman Williams, the same concepts State Fund once balked at are now credited as their own, an allegation the State Fund has neither denied nor confirmed.
However, a March 3 memo addressed to brokers from State Fund stated, “The Commissioner also indicated that State Fund would be reducing commissions to its producers. No detail was given and no detail is available at the current time. State Fund is working cooperatively with the Commissioner on this issue…. Be assured that State Fund will provide 120 days notice to its producers, per the State Fund Broker Agreement, concerning any change to commission level.”
“State Fund has a financial problem,” Commissioner Garamendi told Insurance Journal. “It is their responsibility to figure out how they’re going to solve that problem. [These] were plans that the State Fund developed to deal with their problem. My role here is to make sure that their solution is sufficient and satisfactory, and to ensure they do it.
“Each one of the things that were laid out in my statement last week is unique unto itself,” Garamendi continued. “They all have a history. Commissioner Low’s work and the work of the department was certainly a starting point. The situation, as it’s changed between June of 2002 and March of 2003 was the major factor in the recommendations that I’ve made to State Fund and the change that’s occurred in the marketplace in the intervening three months. So the department and Commissioner’s Low letter was a starting point, and then things were added and changed over the intervening nine months.”
Whatever the case may be, the fact remains that former Commissioner Low should be credited with the concepts. Five out of the seven points are Low’s previous suggestions, and for the most part, have already been implemented by State Fund. Among them—and most importantly for brokers—is the reduction of broker commissions, which were cut from 12 to 8 percent in January. And now it looks like another round is on the way. However, the threat of another broker fee reduction will simply make matters more difficult—brokers will be forced to raise consulting fees paid by the insured.
Another point in the proposal is the exploration of reinsurance arrangements. This too, has already been done. In Sept. 2002, State Fund completed a $1.45 billion reinsurance transfer with Aon Re Worldwide. Among the other points elaborated on from Commissioner Low’s letter: an anticipated July 1, 2003 rate increase on all new and renewal policies; an order for State Fund to review its accounts and surcharge unprofitable accounts upon renewal, and the premise for State Fund to practice the “Insurer of Last Resort” philosophy, a moniker State Fund vehemently despises.
“They have undertaken a number of programs over the last year,” Garamendi added. “Some of them are similar to things that they’re going to do in the future. Some of those things that they did in the past, they may be doing again. There are some things they had not done at all in the past and they will do in the future.”
Brokers react
Of course, the brokers—and even some other members of the industry will challenge any mention of a reduction in commissions. Topping the list of their concerns is the view that Commissioner Garamendi doesn’t understand the services brokers provide.
“I am not happy with the proposal to reduce broker fees to the entire agent and broker community,” Brad Wilson, president of Wilson Insurance Agency Inc., said. “We work very diligently and I think competently on behalf of our insurance customers and their costs and I believe that we earn that.
“I don’t believe [Garamendi] gets to the root of the problem of solving the disastrous workers’ comp market in California,” Wilson added.
Bill White, president of Alliance Insurance Services, offered his opinion on the proposal for State Fund to reduce broker commissions. “It is very clear to me that the Commissioner simply does not understand the role of the agent or broker and the value we bring to our relationship with State Fund and the California employer.”
“It’s all a matter of being compensated for services that we provide for our clients and the clients ultimately decide and agree to proposed fees,” Ron Bloom, president of Sander A. Kessler, said. “So it is very possible and highly likely [that] if commissions were reduced, brokers would need to pursue charging fees to be compensated for their services provided to their clients. I don’t think that reducing broker commissions would improve the State Fund’s financial condition,” Bloom added.
Steve Young, legal counsel for IBA West, concurs. “The real concern that I have personally with the effort on behalf of the Commissioner or State Fund to drastically reduce these commissions is that what will happen is that risk management and prevention services that the brokers are providing won’t be provided and therefore the loss ratios will get worse, the employees’ injuries will get worse and the employers premiums will go up even more than they already are.
“We recognize given the tremendous premium in State Fund and the absence of meaningful competition right now in the marketplace, that of course it’s appropriate for [the Commissioner] to look very carefully at State Fund to ensure its solvency,” Young continued. “However our feeling is that the commission structure that State Fund is using is part of the solution to the problem its not the problem in and of itself. We believe that we have provided documentation to the Commissioner to support our belief that commissions that brokers are paid are really intended not to compensate the producer for the placement of business, but more importantly for the services that they are providing to the California employers that result in fewer claims costs and better results not only for the State Fund but for California employers.”
“Since State Fund substantially reduced commissions effective July 1, and even stopped paying brokers for some types of business, Garamendi’s order that State Fund cut commissions further does nothing to increase the availability and lower the costs of workers’ compensation insurance for California employers,” White added.
Task force recommendations
On Feb. 26, Garamendi addressed the industry with his plan for immediate action in seven areas to restructure California’s workers’ comp system. While the latter announcement regarding State Fund’s business proposal appears to be unrelated, the reforms Garamendi suggested resonated deep within the industry. The basis for Garamendi’s reforms lie within the two workers’ comp task forces Garamendi himself appointed shortly before he formally took office in Jan. 2003.
These advisory panels—devised of stakeholders both within the industry and outside of the industry, summarized their findings and made recommendations that were then presented to Garamendi. According to Garamendi, the appointments were based upon “people that were knowledgeable and interested in the subject matter.
“We had a very diverse group between the two task forces,” he said. “Just about every interest group was represented. The goal of the task force was to give me a road map of the issues in workers’ compensation that should be addressed. The road maps are very useful. The information is certainly not complete, but they certainly pointed to a variety of problems that exist in workers’ compensation. That’s what I wanted from them, and that’s what they did. They’ve completed their task, they’ve fulfilled what I’ve asked them to do, and I’m very grateful that they helped.”
Garamendi took those recommendations and came up with seven areas he felt needed immediate action. Among the proposals was improved financial oversight of the comp marketplace, medical cost containment, the creation of a 24-hour medical care system merging health insurance and workers’ comp medical care, aggressive fraud elimination, uniformity in determining the level of permanent disability, and improved communication with state agencies regulating the system.
“It is my understanding that our committee along with a parallel committee of insurance industry representatives were supposed to bring to the Insurance Commissioner a list of the problems that we felt existed with the California workers’ compensation insurance market and the California Workers’ Compensation Appeals Board and its practice and procedures,” attorney Barry Pearlman said. Pearlman served on the Non-industry advisory panel.
“Our committee met on two occasions in Sacramento,” Pearlman continued. “We also had numerous telephonic meetings in subcommittee and sent many e-mails back and forth during the three or four month process.
“Our analysis included discussion of the various Rand Institute Studies, including the issues of the lack of uniformity on permanent disability ratings; the subjective nature of the workers’ comp system and the need to amend the scheduled ratings of permanent disabilities. Our committee spent a limited amount of time on these issues but rather focused on the shrinking workers’ compensation market and ways to perhaps bring carriers back to California workers’ compensation through predictability in the California workers’ compensation market,” Pearlman added.
While many in the industry praised Garamendi’s efforts, others still questioned the logistics of the reforms. The issue that concerns the industry most is the proposal for a 24-hour medical care system combining both health insurance and comp care.
“It’s a long-term program with some partial immediate or short-term opportunities that exist,” Garamendi explained. “There are some partial steps towards 24-hour care that do exist in the marketplace today. I believe that those should be expanded and made available to other employers and employees. These are called ‘carve outs.’ State Fund and Kaiser have a partial 24-hour care system. True 24-hour care, I believe, must be coupled with universal healthcare. And that is not yet in place.”
What about…
While the proposals Garamendi recommended for both State Fund and the workers’ comp marketplace as a whole have good and bad points, many in the industry have pointed out that there are significant issues Garamendi has yet to address. The most important is the active litigation involving workers’ comp claims. Approximately 10-15 percent of claims payments go to attorneys, who actively seek out workers’ comp participants for potential litigation. The Industry advisory panel made several recommendations regarding decreasing litigation, however, Garamendi did not propose any reforms concerning this issue.
“Garamendi has opted for political expediency by targeting agents and brokers who handle the needs of California employers,” White said. “He has focused on several general points while ignoring the specific corrective actions needed to fix our broken workers’ comp system.
“Workers’ compensation was designed to be a non-litigious system, which it is not,” White added. “…the legislature and the Department of Insurance should focus… on reducing overall system costs that drive up the cost of this coverage. For example, policymakers could fix rates paid to attorneys to a level that would reduce incentives to litigate claims. This would have an immediate impact on the medical providers, working hand in glove with attorneys, who are at the heart of the continuing fraud problem. A reduction in the attorney fee, which is not a contingency fee, but a fixed fee between 12 and 15 percent and therefore a virtual guarantee, should be reduced to a level which would provide some disincentive.”
“Although there was a small amount of discussion on the costs of litigation it appears to be uniformly felt that the great problem with the system involves the substantial rising costs of medical expenses under LC 4600,” Pearlman added. “It was estimated that 38 percent of the workers’ compensation dollar is now spent on medical care and treatment. Medical expenses are on the rise even though claims may not be. We discussed clear abuses in the medical field including the comparison of $24,000 for three epidural injections in comp where as a group medical carrier might be obligated only to pay $2,400 for the same three injections.
“We also discussed the fact that the new workers’ compensation bill (AB 749) which was intended to be a revamp of the comp system really is not a benefit increase bill only since all of the cost savings provisions of the bill are ineffective because of budget reductions by the Governor,” he added.
Another concern for brokers is the suggestion for State Fund to review its accounts and enforce surcharges and reduce merit rating credits for unprofitable accounts. Additionally, State Fund will take steps to reduce business by accepting only those accounts that are able to prove they are unable to secure coverage elsewhere. To brokers, this spells trouble.
“To me, [this] is a non-solution,” Marc Kaplan, owner of Aspen Insurance Brokers, countered. “The most blaring contradiction that I see in the whole thing is that [Garamendi] would like to fix the company that he says is in dire financial straights by making sure that they are only allowed to write the business that nobody else wants, which to me is the less desirable business. I don’t know how you fix the company that’s in dire straights by giving them the worst business that is on the street.
“There aren’t that many companies that are still writing business anyway,” Kaplan added. “But there are also a number of good, clean, profitable accounts that the State Fund could write—so you’re going to chase those away? ”
Kaplan also expressed discontent with the proposed premium rate increase on accounts effective July 1. “I think you’re already coming real close to putting people out of business, and with the rate increase I just know it’s not going to pretty. Any increase will have a dramatic impact on business owners.”
“Should the Commissioner’s order be implemented as announced, my concern is that the employers in this state who already face skyrocketing workers’ compensation costs might find themselves paying even more, or in some cases, even being unable to find coverage,” added Bloom.
Anxiously awaiting details
For now, the most anyone can do is wait for Commissioner Garamendi to unveil specifics about the proposals—when they will be implemented, how, etc. And brokers, for one, are sitting on the edge of their seats, anticipating the distressing news.
While neither Garamendi nor State Fund could reveal when the specifics will be announced, Garamendi did hint that the details were in the works to be released to the public. “I’m not prepared today to tell you what the timing is,” he said. “There are specific timetables. Those are going to be rolled out in the future days.”
“I think the devil will be in the details,” Young added. “We applaud and whole-heartedly support the Commissioner’s announcement last week recognizing some of the major cost drivers in workers’ comp system that must to be addressed—most significantly medical cost control. We were heartened and encouraged to see the Commissioner say last week that he understands that the system itself—a system that has some of the lowest benefits in the country and some of the highest costs, has to be improved. We are committed to work with the Commissioner to accomplish that.
Above all, it is Garamendi’s role as Insurance Commissioner to protect the consumers. And without a doubt, the workers’ comp crisis has trickled down and infiltrated the consumer market considerably, presenting the most difficult challenge of all: keeping companies in California.
“It’s an incredibly dynamic issue right now,” Wilson said. “Agents and brokers have to deliver to our clients on a daily basis the bad news about their expenses, about decreased competition and increased premiums for their workers’ comp. The consumers are not happy. When you talk with consumers they understand a lot of business aspects of the workers’ comp system. They also understand what a doubling of their expense does to their business and there are a lot of businesses that are forced to make very serious choices as a result of their workers’ comp skyrocketing.”
White summed up the concerns of brokers and the possible resulting consequences if State Fund once again reduces commissions to brokers. “Who will handle the urgent needs of California employers when agents and brokers are taken out of the picture?” White asked. “No businessman will work without a profit, and agents and brokers will not service clients with little or no commission.”
To comment on this story, e-mail cbeisiegel@insurancejournal.com.