Regulator: California Workers’ Comp Insurance Rating Bureau Needs to Address Challenges

The California Department of Insurance has released an audit report of the state’s Workers’ Compensation Insurance Rating Bureau.

Among the recommendations are that WCIRB should:

• Begin to collect the detailed, transaction-level data needed to perform refined analyses of the potential impact of legislative, regulatory and judicial actions, and of why specific components of claim costs are rising or falling.
• Require all insurers to submit their aggregate financial data call reports electronically and require insurers to resolve all data validation errors prior to submitting the information to the WCIRB.
• Take remedial action with respect to any insurer group that is required to obtain an independent auditor’s report attesting to the insurer group’s annual aggregate data report but is unable to obtain a “clean” opinion regarding such data report. Additionally, WCIRB’s existing remedial action procedures should be supplemented by having the WCIRB Governing Committee authorize its staff, or independent persons, to perform an on-site audit of insurers that are unable to obtain a “clean” independent audit report.
• Implement a program applicable to the largest insurers whereby the senior management and the controllers attest to the effectiveness of the insurers’ statistical and financial reporting systems.
• Work closely with the State Compensation Insurance Fund to assure that SCIF’s data collection and reporting system is functioning effectively.
• Consider multiple projection methods when making pure premium rate determinations.
• Provide a range of reasonable pure premium rate level indications to the Actuarial Committee and the Governing Committee.
• Prepare and provide to the CDI a chart or side-by-side comparison showing projected on-level pure premium loss ratios by accident year using each method considered by the WCIRB. It would be helpful to explain why WCIRB believes certain methods are more reasonable than others for particular accident years. WCIRB should describe the key assumptions underlying each method, the extent to which those assumptions are valid, and alternate scenario projections for key assumptions. WCIRB also should explain its rationale behind the selected loss ratios by accident year.

WCIRB said a number of the recommendations had already been identified and are being addressed — prior to being published in the audit report.

“As a general observation, we believe the examination was thorough and fair, and that the recommendations are constructive and reasonable. The WCIRB has already made progress to address many of the recommendations and we look forward to working with the CDI to address all remaining issues,” said Robert G. Mike, WCIRB president.

“An accurate and credible rate application by the WCIRB is vital to a functioning workers’ compensation system in California. This audit shows that there are many shortcomings that make this task difficult,” Commissioner Steve Poizner said. He noted WCIRB has committed to providing a detailed action plan within 30 days to fix the faults.

In particular, the audit report recommended that steps be taken to allow more time for pure premium rate recommendations to be reviewed before the mid-year filings are submitted to CDI. “We do not have a specific recommendation on who this should be accomplished, but options that could be considered include not submitting a mid-year filing, moving the proposed effective date of the mid-year filing to a date other than July 1, and basing the primary analysis pertaining to the mid-year filings on data submitted as of an earlier date so that there is sufficient time for data review and analysis,” the report states.

Recently, the WCIRB has been criticized by Commissioner Poizner for recommending rate increases, especially during a time of economic crisis.

“Especially in a time when the Rating Bureau is requesting unprecedented rate hikes, we must carefully scrutinize all the data involved in making this decision to ensure that any change in the benchmark is warranted. Every additional dollar spent on workers’ compensation insurance is a dollar that an employer cannot use to save or create a job. In this economy, when many small businesses are barely staying afloat, an unnecessary rate hike can mean the difference between survival and going out of business. WCIRB must take swift action to correct these issues,” the Commissioner said.

To view the audit report, visit www.insurance.ca.gov. To view WCIRB’s response to the report, visit wcirbonline.org.