Calif. Lawmakers Continue to Debate Merits of Workers’ Comp Rate Regulation

Despite reductions in workers’ comp insurance premiums, California lawmakers will continue to debate the merits of rate regulation.

A rate regulation bill, ABX4 No. 16, after passage in the Assembly on a party-line vote, was supposed to be heard by the Senate Labor and Indust-rial Relations Committee on June 23. That hearing was postponed and as of June 25, the bill had not been rescheduled. But an industry spokesman said that rate regulation will continue to be debated by lawmakers in the near future.

“I don’t think we’ve seen the last of this issue for this legislative session, which ends at the end of August,” said Sam Sorich, president of the Association of California Insurance Companies (ACIC). “I would imagine that before this session ends, there will be another push or two to pass legislation to change our current regulatory system for rates.”

The bill, sponsored by Assemblyman Lloyd E. Levine (D-Van Nuys), would allow the insurance commissioner to disapprove rates set by carriers if he feels that the rates are inadequate.

Another rate regulation bill is still alive as well. Sen. Richard Alarcon (D-Sun Valley) is the sponsor of a bill that would create a commission to set carrier rates and hear appeals. That bill awaits a hearing in the Senate Appropriations Committee.

After years of double-digit rate increases, many companies have filed with the California Department of Insurance (CDI) to lower their rates on July 1.

Many lawmakers, however, feel that the rate decreases resulting from the recent workers’ comp reforms are too small, falling short of Governor Schwarzenegger’s prediction that rates would drop as much as 20 to 30 percent. Calling for rate regulation, the California Applicant Attorneys Association staged protests outside of workers’ compensation appeals boards statewide on June 23, according to the American Insurance Association (AIA).

“The attorneys who are protesting claim to be trying to protect the interests of injured workers, but in reality they are only interested in protecting their pocketbooks,” said Ken Gibson, AIA vice president, western region, in a press release. “Just as there is a glimmer of hope in California’s workers’ compensation market, the applicant attorneys want to sabotage implementation of the cost-saving reforms.”

Insurance Commissioner John Garamendi, who is opposed to rate regulation, recommended that workers’ comp insurers lower their premiums by 20.9 percent on July 1. CDI spokesman Norman Williams said that the commissioner’s recommendation meant lowering rates 20.9 percent from where they were a year ago.

“His recommendation of 20.9 percent would apply to policies that renewed on July 1, 2003, so that would be the cumulative reduction from both sets of reforms,” he said. “Some people have interpreted [the recommendation] as the last reform, but it’s actually both sets of reforms.”

As of June 21, 70 companies, or roughly one-third of the market, had filed for rate reductions with CDI. Of those 70 companies, eight of them met Garamendi’s recommendation and lowered rates by about 20 percent, while 16 insurers lowered rates between 15 and 20 percent. Many companies lowered rates by 10 to 15 percent (27), and 19 companies filed for rate reductions under 10 percent.

State Compensation Insurance Fund, which controls more than 50 percent of the workers’ comp market, filed to lower its rates by a modest 9.7 percent.

“It’s one of the good things about the market that there is a variety of rates out there and to expect every company to do positively the same thing would be unrealistic,” Sorich said. “I think that some companies granted are probably less convinced that the reforms are going to take effect in an expeditious manner. Some companies are a little more conservative and they want to see how the regulatory process will implement this year’s reforms before going forward with more significant rate reductions. But I don’t think it’s correct to say that companies have not responded to the reforms that were enacted last year and the reforms that were enacted this year.”

Although the rate reductions may not be as dramatic as many expected, insurance companies said that the rate decreases signal that competition is returning to the market. Indeed, CompWest Insurance Company will be a new competitor in the California workers’ comp market come July 1.

“California is finally starting to show signs of a competitive insurance marketplace,” Gibson said. “Insurers are showing their faith in the market by actively reducing rates before the reforms are fully implemented with the cost savings in place.”

Sorich said that rate regulation is not the appropriate solution for the workers’ comp crisis. “I think it’s pretty clear that the problems in the workers’ comp system have come from the costs of the system,” Sorich said, citing medical and litigation costs. He also said that there are inherent uncertainties, duplication and waste in the system as well.

“The reform law is intended to encourage companies to come into the California market and compete for business,” Sorich added. “That competition will make sure that the rates are appropriate. If at this point we impose strict rate regulation, it’s going to deter insurance companies from staying in this market and coming into this market. That is going to hurt the level of competition that the governor wants to encourage. The problem is cost, it’s not how insurance companies are regulated. If given the chance, companies will come in here, will compete for business and then competition will keep rates where they should be.”