Wash. L&I Announces 40.5 Percent Boost in WC Rates in 2003

The Washington Department of Labor and Industries has proposed increasing industrial insurance premiums by 40.5 percent in 2003. It is the agency’s first general rate increase in eight years.

If adopted, the proposal will bring in an additional $371 million next year. L&I Director Gary Moore said the money is needed to bring rates more in line with the benefits, and to keep the contingency reserve at an acceptable level.

The increased premiums will offset rising medical costs, a recent upsurge in claims frequency and court-ordered increases in worker benefits. In addition to those costs, L&I’s earnings on investment this past year has fallen $380 million below what had been expected.

The proposed rate increase reverses a recent trend. In past years, earnings have done so well that L&I intentionally reduced rates and paid out dividends to draw down the contingency reserve. In 1999, and 2000, the agency sent dividend checks to employers totaling $400 million. In all, over an eight-year period, employers and workers received benefits of $1.8 billion in the form of dividends, deferred rates and actual rate reductions.

“Keeping rates low and drawing down the excess contingency reserve was a good strategy as long as we were making money in the financial markets,” said Moore. “We can’t do that anymore.”

Because of recent losses in the financial markets and continued low rates in 2002, the contingency reserve is expected to fall below $300 million by the end of this year.

Historically, Washington’s workers’ comp rates have ranked among the lowest in the nation. Over the last three years, only 12 states had rates lower than Washington’s, according to surveys done by Oregon’s industrial insurance system. Even with this increase, Washington’s rates will rank somewhere in the middle third of all states. As a percentage of payroll, industrial insurance premiums in Washington rank far below the national average.

While Washington’s rates have remained low, its benefits rank in the top 25 percent. In recent years, those benefits have been enhanced by two state Supreme Court decisions that increased the amount of money L&I pays out in time-loss benefits. Annual cost-of-living increases, mandated by state law, also drove up costs.

Labor and Industries manages Washington’s workers’ compensation system. It provides coverage for about 163,000 employers and more than 1.9 million workers. Companies that are self-insured employ another 400,000 workers, representing 30 percent of the state’s workforce.

Washington’s workers’ compensation system is divided into three funds. The Accident Fund is the largest and pays partial wage (time-loss) benefits when a worker is injured on the job and can’t work. The Medical Aid Fund pays for the treatment of job-related injuries and illnesses, and for vocational rehabilitation. The Supplemental Pension Fund is the source of cost-of-living increases for workers receiving long-term disability payments.

The average rate for the Accident Fund, which employers pay into, will go from just under 20 cents an hour to 25.8 cents an hour. The rate for the Medical Aid Fund, which is supported by contributions from employers and workers, will go from about 10 cents an hour to 19.3 cents. The rate for the Supplemental Pension Fund will actually decrease by 5 percent.

The increases will be passed on to both employers and employees. About $124 million of the $371 million will be borne by workers. Employers will pay about $247 million. Based on the average rate of 51.9 cents an hour, employers will pay 38.8 cents and employees will contribute 13.1 cents.

Since 1994, rates either have not changed or have gone down. In 1994, the Medical Aid Fund rate was just over 18 cents an hour. The rate was reduced to its present level of 10 cents an hour in 1998 to draw down the excess contingency reserve.

The economic forces affecting Washington’s workers’ compensation fund are being felt elsewhere, too. California has raised workers’ comp rates three times since January 2001. The rate increases totaled over 30 percent and it’s likely the state will raise them again in January 2003. Even with those higher rates, private insurers in California aren’t making money on workers’ comp and are getting out of the business. In the past year, nine insurers have stopped writing coverage.

The higher rates also are being driven by an increase in claims frequency and the length of time a worker stays on disability. Though it’s not certain why that is happening, a downturn in the economy and higher unemployment seems to have resulted in more and longer time-loss claims.