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Report: California Workers' Comp Reform Proposal Would Increase Costs

Posted on 29 Aug 2012 by Neilson

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California Workers CompCalifornia lawmakers are weighing a comprehensive workers' compensation reform package the state's Workers Compensation Insurance Rating Bureau said would increase costs by $300 million, marking a sharp contrast to supporters' initial estimate the package would cut spending by $1.2 billion to $1.4 billion.

According to the WCIRB's initial estimate, the bill would reduce claim frequency utilization costs by $400 million each year. However, the savings in the reform legislation would be offset by a $700 million increase in permanent disability benefit costs. In total, the bill would add $300 million in costs to the system a net increase of 1.4%.

That said, WCIRB said its estimate was "preliminary" and did not include aspects of the bill that cannot be priced actuarially at this stage. Opponents of the bill also noted it also did not factor in implementation costs, loss adjustment expenses fees, and unanticipated costs and liabilities.

The bill's supporters began circulating a draft of the proposal around the state house earlier this month, selling it as the product of negotiations between labor and employer groups. But opponents argue that with workers' compensation costs already increasing at a dramatic pace, the bill doesn't go far enough to rein in rates.

The WCIRB recently recommended the Department of Insurance adopt a 12.6% advisory pure premium rate increase that would go into effect on Jan. 1.

Today's WCIRB report shows there is much more work to be done in reining in California's workers compensation costs and in re-balancing the system financially," Marjorie Berte, Western region vice president for the American Insurance Association, said in a statement. "AIA will continue working with our partners in the business community to prevent an erosion of much needed reforms during the amendment process and in support of their efforts toward achieving a result that will be positive for all California's employers.
Berte added any reforms made to the workers' compensation system should result in net savings for policyholders, public agencies, and self-insureds.

A draft of the reform package estimated it would reduce workers' compensation spending by $1.2 billion to $1.4 billion by eliminating consideration of future earning capacity in the disability formula for injuries starting in 2013. It would do away with sleep disorder, sexual dysfunction and psychological "add-ons" to primary injuries that do not include these injuries. The proposal would require fees for filing medical liens in an effort to reduce trivial liens, according to an initial summary of the bill circulated by its supporters.

The bill would also increase aggregate permanent disability benefits by $720 million per yeara change supported by California Insurance Commissioner Dave Jones.

But at the time, Mark Sektnan, president of the Association of California Insurance Companies, said the initial cost reduction estimates could be misleading because it's often difficult to determine actual savings because some "may not be realized."
Sektnan said workers' compensation writers in California are facing a "crisis situation" because they have been operating with loss ratios of between 120 and 125. He added while this reform package may not be the solution, something needs to be done to fix the system.
Jones, who asked the WCIRB to assess the reform package, said the agency's analysis left him "concerned."

The analysis by the WCIRB indicates that SB 863 has cost savings that significantly offset the costs of providing needed increases of permanent disability benefits for California's injured workers, Jones said in a statement. I remain concerned about continued rising costs in the system, however, particularly medical costs and the expenses to adjust workers compensation claims, and encourage all stakeholders to look for additional ways to reduce system costs.

In 2011, the top five writers of workers' compensation insurance in California were: State Compensation Insurance Fund of California, which had a market share of 12.92%; Hartford Insurance Group, with 7.98%; Travelers Group, with 7.81%; American International Group, with 5.93%; and Zurich Financial Services Group, with 5.57%, according to BestLink.