Will California Rank No. 1 in Nation for Highest Workers’ Comp Premium Rates?

Two years ago California ranked third in the nation in terms of the highest workers’ comp premium rates. In a webinar on April 10, 2014, WCIRB observed that, given the rate activity in the state from 2012 to 2013 and most likely continuing into 2014, California could have the highest—or close to the highest—workers’ comp premium rates in the nation when the 2014 Oregon workers’ compensation premium rate ranking study is completed later this year.

To understand what, in part, is driving rates, see the “WCIRB Report on December 31, 2013 Insurer Experience” released on April 4, 2014 that includes projected and actual claims statistics, with the caveat that the projections reflect currently available information and will be adjusted as new data becomes available. WCIRB based its findings on data submitted that represented virtually all of the market for workers’ compensation insurance in the state.

Key takeaways

> The ultimate aggregate losses on every injury that claimants sustained on or before December 31, 2013 would exceed the amounts that insurers reported by roughly $5.1 billion. According to the WCIRB, the amount was comparable to that statistic for the prior two years.

> The written premium, defined as “gross of deductible credits,” for workers’ compensation insurance policies in California during calendar year 2013 roughly totaled $14.8 billion. This amount was approximately 18 percent higher than the reported written premium for calendar year 2012 and 68 percent higher than the written premium that was reported for calendar year 2009. The $14.8 billion additionally was the highest premium total in California since calendar year 2006. WCIRB identified increased premium rates as a more significant factor than the sizes of payrolls regarding the increase in written premium.

> The projected industry average charged rate, which was defined as rate that reflected rating-plan adjustments, except for a few items that included retrospective rating-plan adjustments and policyholder dividends, was $2.85 per $100 of payroll. This amount was roughly 10 percent more than the average rate for the second half of calendar year of 2012 and 36 percent more than the average rate during the 2009 calendar-year rate.

> The projected ultimate accident-year loss and allocated loss adjustment expense (ALAE) ratio for accident year 2013 was 86.5 percent. Increasing premium levels in 2013 resulted in that projection being less than the ones for the previous four accident years.

> The preliminary reported calendar year combined loss and expense ratio of 109 percent for 2013 was less than the combined ratio for the few years before 2013 but represented the sixth consecutive calendar year in which the combined ratio exceeded 100 percent.

> The projected average cost, also referred to as “severity,” of a 2013 indemnity claim was roughly $87,000. This amount was a little higher than the projections of that cost for the 2011 and 2012 accident years. The projected average loss and ALAE severity increased more than 58 percent since the AB 227, SB 228 and SB 899 reforms took effect. The projected average indemnity cost of a 2013 indemnity claim was more or less similar to the projections for the past several years, as was the projected average medical cost of a 2013 indemnity claim. WCIRB noted that the increase in projected average ALAE cost of a 2013 indemnity claim (excluding the cost of medical cost containment programs), which was roughly 3 percent higher than that of 2012 and roughly 88 percent higher than that for 2005 (i.e., post AB 227, SB 228 and SB 899), occurred despite anticipation in the workers’ compensation industry that SB 863 would lower ALAE expenses.

WCIRB mentioned in its webinar that the 2013 ALAE severity came in higher than expected—i.e., a 3 percent increase—and that the projected 12 to 13 percent decline didn’t happen. Many of the provisions of SB 863 were designed to reduce frictional costs in the system and to limit the number of liens filed. WCIRB pointed out that there has been a larger utilization of Independent Medical Review (IMR) than projected. It further noted that many IMR fees have not been paid yet. So the objective of SB 863 to significantly reduce ALAE has not been realized.

> The anticipated indemnity claim frequency for calendar-year 2013 was 4.7 percent higher than the 2012 frequency and 6.6 percent more than the 2011 frequency. WCIRB identified larger numbers of cumulative injury claims, permanent disability claims, injuries that impacted more than one body part, and the quantity of claims from the Los Angeles/Los Angeles Basin regions as relevant factors regarding 2012 claim frequency. In its webinar, though, WCIRB explained that it doesn’t have a “firm grasp” at this time on the details of what happened in 2013. WCIRB believes that part of the increase in 2013 is being driven by SB 863. WCIRB will follow up when it obtains more information later this year.

WCIRB also pointed out during its webinar that, historically, while other parts of California seem to track closely to national data, the L.A./L.A. Basin has been the “outlier in terms of frequency”, with “stark differences” noted particularly in 2008, 2010 and 2012 between the L.A./L.A. Basin and the rest of the state. However, for 2013, WCIRB is unsure whether the 4.7 percent increase is being driven by the L.A./L.A. Basin or by a statewide phenomenon. WCRIB further noted that while NCCI data for 2013 is not available yet, it is expected that frequency will continue to decline in the rest of the country and that there will be a sharp increase in California [see WCIRB’s Analysis of Changes in Indemnity Claim Frequency—2013 Report].

Documents to watch for in 2014

1. NCCI data for 2013 on claim frequency.

2. 2014 Oregon workers’ compensation premium rate ranking study.

3. WCIRB quarterly reports on 2014 insurer experience.

4. Additional WCIRB cost monitoring reports on SB 863.

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