California’s Workers’ Comp System: On the Verge of Collapse

At the beginning of 2000, the Insurance Journal described the California workers’ compensation market as “crazy,” “turbulent” and “chaotic.” Now, at the end of the year, a more fitting description would be “downright scary.”

According to Dave Bellusci, chief actuary of the Workers’ Comp Insurance Rating Bureau (WCIRB), data is continuing to show combined ratios at record highs. “Our estimate, based on June data, shows a combined ratio of 153 for 1999 accident year and 149 for ’98, and losses continue, if anything, to appear to be developing worse and those estimates could well go up. We’re in the process of looking at September data, and it could go up somewhat based on that.”

California has been following a system of open rating since 1995, and for the past several years, has seen a significant downward deviation from the pure premium rate. The most obvious sign of approaching disaster is the slippage of a string of companies that write mainly California workers’ comp. The seizure of Superior National Insurance Companies by the California Department of Insurance on March 3 got the year off to an ominous start.

In the biggest takeover since Golden Eagle in 1997, the CDI revealed that Calabasas-based Superior National was in “hazardous financial condition” and “severely under-reserved.” Although Superior National has received some help with its rehabilitation plan from Kemper Insurance Companies, the company’s trek to liquidation is adding a heavy burden to the struggling market.

“You already have Superior National with fairly significant insolvencies in the hundreds of millions that are going to have to be funded through the guaranty fund [California Insurance Guarantee Association],” Bellusci said. “There’s an assessment–currently I think it’s max of one percent per year–that will be assigned to each policy for some time to fund it.”

In September, Lawrence Mulryan, executive director of CIGA, estimated that there were approximately 46,000 claims with a net liability to CIGA of roughly $400 million. “The dollar amount that CIGA will pay depends to what degree these [claims] are offset by assets recovered by the estate,” Mulryan said. Next comes the scary part: what happens if other companies require liquidation as well?

Fremont General Corp. and related entities are currently under increased regulatory oversight by the CDI, and the company plans to close 16 of its 24 production and claim servicing offices and eliminate 465 jobs as part of continuing efforts to cut costs. It has already cut its workforce by 50 percent since June 30.

In November, Fremont made an agreement with the CDI to “file by Jan. 1, 2001, a detailed business plan that sets forth forecasted premium writings, losses and expenses for 2001…Furthermore, forecasted new and renewal premium writings shall not exceed $400 million.”

There are murmurs in the industry that the only reason Fremont hasn’t been fully taken over is a lack of funds on the part of the state. An order for Fremont to be liquidated would raise serious questions as to where the money would come from. “That’s a real concern,” Bellusci said. “A 1-percent per year guaranty fund assessment wouldn’t do it-whether it was Fremont or anybody else-if there was a second major insolvency of that magnitude.” Players in the workers’ comp arena are scrambling to keep their heads above water.

HIH American Insurance Group recently stopped writing new business in the U.S. and is selling the renewal rights of its Southwest, Midwest and Hawaii regions to Argonaut Insurance Company. Alaska National Insurance Company is buying the renewal rights and other tangible assets associated with HIH’s large account California workers’ comp business.

Western Growers Insurance Co. of Irvine, Calif., which writes workers’ comp for members of the Western Growers Association, is currently in run-off mode and recently sold the renewal rights of its book of business to competitor PAULA Insurance Co. PAULA, a Pasadena, Calif.-based insurer specializing in workers’ comp for agribusinesses, was downgraded by A.M. Best in March from “B++” to “B.”

In May 2000, Standard & Poor’s placed California’s largest workers’ comp carrier, State Compensation Insurance Fund (SCIF); and several others, including Zenith Insurance; on CreditWatch, citing a WCIRB study which had indicated a gross loss reserve deficiency of $4.7 billion for the state workers’ comp market. However, several months later, S&P removed State Fund and Zenith from CreditWatch and reaffirmed their “A” financial strength ratings.

Are there any solutions in sight for a market on the verge of collapse?

On Oct. 20, Insurance Commissioner Harry Low approved the WCIRB’s proposed 10.1 percent average increase in pure premium rates effective Jan. 1, 2001, citing in large part “worsening severity in medical costs.” “I believe that open rating will work in the long run only if insurers act responsibly and charge rates that reflect their actual costs,” Low said. His approval of the rate increase was praised as a necessary measure.

“This year prices are up in the market almost 20 percent, so that’s obviously a positive thing,” Bellusci said. “It should move rates up a little bit, but it takes a while for those higher rates to work through into income, earned income and so forth. And loss costs are also escalating, so that’s going to eat up part of that, but clearly it’s a step in the right direction in terms of returning to some semblance of results closer to a historical norm.”