California Gov. Jerry Brown on Tuesday signed Senate Bill No. 863 (SB 863) that refashions the state's worker compensation insurance system. Fitch Ratings believes the changes will result in a slight net benefit for the insurance industry. The new law was enacted in part to improve the operating environment for insurers. It is also intended to lower costly workers compensation insurance premiums for employers while increasing certain benefits for injured workers.Workers compensation is currently among the weakest performing underwriting segments in the US property/casualty insurance industry. California is among the weakest performing states for workers compensation, with an estimated 2011 accident year (AY) combined ratios by the Workers Compensation Insurance Rating Bureau (WCIRB) of 136%.
With the overhaul in place, insurers are expected to be able to cut costs in a number of ways. They include the elimination of benefits for certain health conditions, the implementation of fee schedules in areas where they did not previously exist, a scaling back consideration of future earnings capacity when settling benefits, and limiting the scope/number of treating physicians.
Keeping the uncertainty surrounding cost estimates in mind, the WCIRB estimates that claim frequency will be reduced by 4.5%, or $0.9 billion, in 2013 due to various changes in the system as a function of the new legislation. That would be offset by an increase in permanent disability of 3.2%, or $0.6 billion, in 2014 and ultimately result in a 1.4%, or $0.3 billion overall annual system cost savings.
These projected savings reveal that the current round of reform will not rival the success of the reforms established in 2004. These changes will help to avert market crisis conditions similar to those experienced in the early 2000s that saw several insurer insolvencies and expansion of the State Compensation Insurance Fund to 53% market share in 2003. However, the modest anticipated savings also indicate that further price increases are required in the California workers compensation market to return the market closer to an underwriting profit and attract underwriting capacity to the state.
Additional information is available on www.fitchratings.com.