Revised Workers’ Comp Estimates Misconstrued by Senator, Commissioner

California Senator Richard Alarcón (D-San Fernando Valley) came down on the insurance industry March 10, demanding that workers’ compensation insurers cut their premium rates immediately to reflect revised industry figures revealing a $7 billion savings from reforms passed in 2003.

Alarcón was responding to an e-mail he received from Dave Bellusci, senior vice president & chief actuary of the Workers’ Compensation Insurance Rating Bureau (WCIRB), in which Bellusci revealed a revised preliminary estimate of the cost impact of Senate Bill No.3 (SBX4 3).

The WCIRB’s original estimate of $24.9 billion made in early 2003 reflected medical and indemnity benefit costs for accident-year 2004 as well as the WCIRB’s July 2002 estimate of the impact of AB 749, but did not reflect any savings from AB 227 and SB 228, which were enacted in September 2003.

“Now, a year later, we are updating our estimate of the cost of medical and indemnity benefits for accident-year 2004 injuries to reflect a number of things that have changed since the beginning of 2003,” said Jack Hannan, director of Marketing & Communications for WCIRB.

The revised estimate at $17.9 billion reflects the effect of AB 227 and SB 228, changes in the size of the self-insured market which was previously estimated at 30 percent, down now to 20 percent, and changes to a number of other minor economic variables, Hannan said.

Newspaper reports initially stated that the WCIRB had made an error in calculating the impact of workers’ comp legislation passed last year, when in fact there was no miscalculation, but simply that Senator Alarcón and others misconstrued the information released in Bellusci’s e-mail.

“The bureau did not make a mistake in putting out information showing its ongoing analysis of data,” said Sam Sorich, president of the Association of California Insurance Companies (ACIC). “The mistake that was made was made by those who incorrectly characterized what the bureau said. Contrary to what was said by some, the bureau’s information does not show that the bureau incorrectly calculated the impact of last year’s reforms by $7 billion. In fact, the bureau’s information shows that the 2003 reforms have had a significant impact on workers compensation costs. And insurers’ current rates reflect that cost saving.”

The only “error” the WCIRB made was a nonsubstantive error released in a previous e-mail from Bellusci to Alarcón, Hannan said. The WCIRB constantly re-evaluates their estimates throughout the year, however, a formal estimation for legislative evaluation purposes is only released once a year. The e-mail to Alarcón was not intended to replace the WCIRB’s initial estimate.

Insurance Commissioner John Garamendi said in a statement, “These new figures represent the same savings that I and the other architects of last year’s reform legislation have predicted. It is very good news for California employers and the entire California economy. This projection from the Workers’ Compensation Insurance Rating Bureau indicates that the reforms signed last year are real, and that they will provide substantial savings to help fix this broken, $29 billion system. Just as importantly, it strongly reinforces that good legislation, and not a ballot initiative, is the best way to solve the workers’ compensation crisis.”

Garamendi continued to push for the passage of legislation addressing change in the permanent disability rating system in lieu of the proposed ballot initiative backed by the governor. “If new laws are signed by March 31, employers can realize savings as early as four months from now. But if this issue goes to a ballot initiative the savings won’t materialize until a full year later—or not at all if the initiative doesn’t win voter support.

“I strongly believe that insurers must now do their part and pass on the savings to employers. I am currently working on a system to identify those who are not willing to do so. Employers can’t afford to wait any longer for premium relief, and our economy can’t afford to wait for an initiative,” Garamendi said.
In addition to demanding that insurers cut their rates, Alarcón, who also serves as chairman of the Senate Labor and Industrial Relations Committee, suggested the WCIRB’s new projections also warranted refunds to customers. But industry leaders defended the insurers, saying that there is no reason for them to cut rates.

“There is no evidence to warrant a mandated rate reduction,” Sorich added. “Costs have been reduced. The reductions have been recognized in current rates. That said, more should be done by the Legislature to cut additional costs so that workers compensation premiums go down for California employers.”

“Calls for strict regulation are ill-advised,” Sorich continued. “Commissioner Garamendi has rejected proposals for prior approval of workers’ compensation rate changes. Insurers have been existing from the California workers’ compensation insurance market. We should be encouraging carriers to come back into the market. Strict rate regulation sends the wrong message to insurers. We need to make the market more competitive, not less competitive.”