Garamendi Recommends 2.2% Reduction in WC Pure Premium Rates

California Insurance Comm-issioner John Garamendi called for a 2.2 percent reduction in pure premium rates for workers’ compensation insurance in a Nov. 17 conference call to the media.

“My current advice to the industry is that the cost of claims for the last six months for policies beginning or re-newing in January 2005 is a 2.2 percent decrease,” he said.

“Overall, from July 1, 2003 through Jan. 1, 2005, the cost of claims should dec-line 22.6 percent. That is a very significant change from where we were going.”

The commissioner said that previous workers’ comp reform legislation passed under former Governor Gray Davis, AB 227 and SB 228, is a major contributor to the current cost savings.

“The reforms are clearly working and they’ve had a fundamental impact on workers’ compensation costs in the state of California,” he said. “Clearly to date the big savings come from the first two sets of reforms that dealt with 60 percent of the workers’ comp costs, medical. There is no doubt now that the reforms are successful and that there are significant savings, $4.5 billion. I would expect to see additional savings. I would expect at the end of the day those to continue to be the greatest because they dealt with the biggest piece of the total cost.”

He said that the latest round of reform legislation signed by Governor Schwarzenegger in April has not been totally successful.

“SB 899 has not achieved its promise and will not any time soon unless the ambiguities, the errors and some of the omissions in it are dealt with,” Garamendi said. “The full promise of the reform cannot be achieved without the Legis-lature or the courts clarifying what 899 means in several key areas.”

The commissioner also said that legislation relies heavily on complex regulations, and the full effect of SB 899 could not be realized until those regulations are written and implemented. “We do not know what the overall cost reductions will be from those regulations until they are in effect and we have the chance to study not only the effect of them but the effectiveness of them,” he said.

When asked how the commissioner used the Workers’ Comp-ensation Insurance Rating Bureau’s (WCIRB recommendation to raise pure premium rates by 3.5 percent in his calculations, Garamendi said, “That increase did not take effect. That was the bureau’s recommendation.

“Their job is to give to me their recommendation. My analysis is that 3.5 was just half of the story. It didn’t take into account potential decreases; it only took into account potential increases. We went ahead and used the information that was presented to us and we came to the conclusion indeed that there was a 3.5 percent increase but it was offset by a decrease that resulted in a net of 2.2 percent decline in costs. The bureau looked at the upside and not the downside.”

Garamendi spent a significant amount of time discussing his recommendations for State Compensation Insurance Fund. He said that other insurance companies would follow suit if market leader State Fund reduces it premiums.

“The insurance industry thus far has not passed the full potential of the savings on to their customers,” he said. “Costs have gone down and should be passed on commensurate with the financial situation of the individual company. Generally the insurance companies have reduced their rates somewhere on the average of 10.4 percent. State Fund has been profitable now for the last two quarters. State Fund remains the principal focus of our attention, and I hope the attention of the governor.”

Garamendi recently submitted a report to the Legislature about the financial condition of State Fund. He believes that there is potential for State Fund to significantly lower its rates when it is operating in a “sound and efficient manner.”

“State Fund’s profitability has significantly improved in the last 18 months largely caused by State Fund doubling its premium rates with four successive rate increases effective at six month intervals, beginning with an increase effective January 1, 2002, and finishing with one effective on July 1, 2003,” read the report.

“The Department recommends that the State Fund focus significant resources on improving its operational efficiency and be diligent in its efforts to implement the reform measures to the greatest extent possible in order to pass on the savings in the form of lower premium rates.” Garamendi said that State Fund should develop a four or five-year plan for continuing improvement of its financials and reducing rates.

Garamendi said that trial lawyers and labor unions are going to continue to call for insurance rate regulation unless insurers such as State Fund and others reduce premiums.

“There is a mounting call for the enactment of rate regulation to pass on the savings fully,” he said in a statement. “While I do not support such a proposal, it is clear that unless the savings are given to employers soon, something will be done to require insurers to do so.”