Advisory California workers’ comp rates are set to decline effective July 1, 2018 per a recent decision by Insurance Commissioner Dave Jones. Jones has adopted a May 29 recommendation by DOI Attorney Patricia Hein for a “pure premium” rate of $1.74 per $100 of payroll.
In making this decision, Jones rejected a WCIRB request for $1.80 per $100 rate and a Bickmore recommendation of $1.70.
The rate recommendation (see link at the bottom of this post) is advisory only, and does not control what insured employers are actually charged by insurers, since average actual charged rates are significantly higher and since actual pricing involves experience rating, discounts and other factors. They also don’t reflect regional differences in workers’ comp costs. But pure premium (PP) rates have become a touchstone marker for California workers’ comp costs in general.
In 2003, the PP was $4.27 per $100 of payroll. After two major rounds of workers’ comp reforms (and various intervening legislative tinkering as well as regulatory actions), PP was at $2.19 in early 2017, then declining to $2.02 in mid 2017 and $1.94 as of January 2018. And as noted above, as of mid 2018 it is set at $1.74.
But “average pure premium” is higher ($2.22 as of January 2018) and average charged rates even higher, though they have declined. In early 2015 average charged rates were $3.05 per $100 or payroll, declining to $2.74 in 2016 and $2.46 in 2017.
Many employers are likely happy as a clam over these trends. And some politicians and labor officials undoubtedly are breathing a sigh of relief. While there are always interstate comparisons that can be argued, these sorts of numbers from the DOI and WCIRB likely take off the table an argument that current California workers’ comp trends show an unfriendly business climate.
Whether workers and their advocates will be able to convince a new governor that it is time to give back some more of the savings to injured workers in unknown. At the moment there is nary a peep about workers comp in the gubernatorial races. That’s not surprising, because frankly it’s not a winning issue from a politicians’ standpoint.
Much of the rate decision focuses on actuarial technicalities involving different projections depending on what measurement methodology is used. The decision marks a sea change in how the DOI evaluates matters, now giving some weight to “incurred” methodology in addition to the “paid” methodology.
But here are some items that caught my eye as I read the decision (I’ve referenced chart table numbers from the DOI findings):
-Medical losses have continued to come in under projections (see Table 4).The report identifies a number of likely causes: the IMR system, RBRVS reform, lien reforms under SB 1160 and AB 1244, and increased settlement of claims by C&Rs.
-Indemnity is basically flat (see Table 5).
-Claim frequency after 2014 returned to a “long term trend of small annual declines”, with data on 2017 still tentative (see Table 8).
-On the effect of cumulative trauma claims the DOI notes: “The WCIRB attributes the frequency increases since 2011 to cumulative injury claims, where claims are made with multiple body parts and can include a psychiatric component, and claims in the Los Angeles basin area. The WCIRB will be performing an in-depth study of the cumulative injury claim patterns later this year in its continued efforts to analyze the driver(s) of the frequency pattern.”
-Loss adjustment expenses continue to be a big problem. Allocated loss expenses (ALAE) increased 19% since SB 863, and in 2017 increased the most since 2009 (see Table 10). Unallocated loss expense (ULAE) has also risen significantly (see Table 12 and Table 13). Looking at the ratio of loss expenses (ALAE, ULAE and MCC/medical cost containment expenses) to overall losses, the DOI finds that:
“The projected LAE as a percentage of losses considered in the Department’s analysis is 35.4% compared to the WCIRB’s selection of 33.9%.”
So we have a comp system in which over one-third of the cost goes to some sort of administrative expense or frictional cost. Those are not great numbers.
-Cost savings from the 2012 SB 863 reforms vastly exceeded expectations ($200 million in expected savings versus $1.3 billion as of 2016)(see Table 12).
-Liens filings are reduced by 40% (see Table 13).
-California workers’ comp remains a very profitable business for insurers and is even more so after the Trump tax reforms (see discussion at pages 21 and 22 of the DOI findings)
Here is the DOI determination which was adopted by Insurance Commissioner Jones:
A May 29 press release from the DOI notes that:
“With an average filed pure premium rate of $2.22 per $100 of payroll as of January 1, 2018, insurers are on average applying pure premium rates that are 27.6 percent more than the indicated pure premium rate approved by the Commissioner today. Even after considering the industry’s extensive use of rating plan credits, industry profitability appears to be substantial as a percentage of premium.
“It is time insurers do the right thing and pass along more cost savings to California employers who deserve to share in the benefits cost reductions have brought to the workers’ compensation system,” said Insurance Commissioner Dave Jones. “In addition to the cost reductions that have led to higher profits, insurers are also benefiting from the federal income tax break, which should result on average in about another five percent decrease in premiums.”