WCIRB Survey Indicates California Workers’ Comp Reform is Working

State workers’ compensation claims and disability costs have dropped significantly since California’s workers’ compensation system was overhauled in 2003 and 2004, according to the Workers’ Compensation Insurance Rating Bureau of California. WCIRB recently completed its initial review of workers’ compensation insurer experience report as of June 30, 2005.

In the report, WCIRB noted that California-written premium (gross of deductible credits) reported for the first half of 2005 is $11.4 billion. That figure is approximately 9 percent below the written premium reported for the first half of 2004.

The average statewide insurer rate (final insurer rates reflecting all rating plan adjustments except deductible credits, retrospective rating plan adjustments and policyholder dividends) per $100 of payroll for policies written in the first half of 2005 is $5.26. That is 19 percent below the average rate charged for the second six months of 2003, the report stated.

After reflecting the estimated impact of workers’ comp reform legislation-Assembly Bill 227 and Senate Bills 228 and 899-on unpaid losses, the ultimate accident year losses for 2004 were projected by the WCIRB to be $8.9 billion. That represents a decrease in estimated losses of approximately 21 percent from the ultimate losses projected for accident year 2003, and 30 percent from the ultimate losses projected for accident year 2002.

After reflecting the estimated impact of AB 227, SB 228 and SB 899 on unpaid losses, WCIRB projected ultimate accident year loss ratios of 139 percent for 1999; 124 percent for 2000; 108 percent for 2001; 86 percent for 2002; 55 percent for 2003; and 39 percent for 2004 accident years.

The ultimate accident year 2004 combined loss and expense ratio estimated by WCIRB was 62 percent, after reflecting the estimated impact of the legislation on unpaid losses. That estimate reflects a continuing sharp decline in accident year combined ratios from the 1999 peak value of 184 percent, the report stated.

The calendar period loss ratio reported for the first half of 2005 is 54 percent, the study indicated. That ratio is 10 percent below the six-month loss ratio reported for 2004. The calendar year combined ratio for 2004 was 85 percent.

Indemnity claim frequency for the first six months of 2005 was estimated to be 14 percent lower than that for 2004. Currently, 2005 indemnity claim frequency is estimated at less than one-half of its all-time high in 1991.

After reflecting the estimated impact of reform legislation on unpaid losses, the WCIRB projected the average cost of a 2004 indemnity claim would be approximately $46,000, 5 percent less than the average cost of a 2003 indemnity claim and 8 percent less than the average cost of a 2002 claim. However, the 2004 estimate is still more than twice the average cost of a 1994 indemnity claim. In particular, medical severities have shown significant declines over the past two years, according to the study.

After reflecting the estimated impact of reform legislation on unpaid losses, the WCIRB’s estimate of ultimate losses on all injuries that occurred on or before Dec. 31, 2004, exceeded the amount reported by insurers for those injuries by $2 billion.

That represents a significant decrease from the differences currently estimated for the preceding years. The WCIRB’s current estimates of ultimate losses on accident years 2003 and 2004 are less than those reported by insurers.

The data for the summary was reported to WCIRB by insurers who wrote in excess of 99 percent of California’s statewide market, based on 2004 premium levels. Some of the provisions of AB 227, SB 228 and SB 899 affected the cost of claims incurred prior to the effective date of legislation.