Four-year decline, investment losses could spur increases

CALIFORNIA – The four-year decline in workers’ compensation insurance rates, which dropped another 18 percent last year, is showing early signs of a halt in 2009, according to North Bay brokers who warn that a dramatic swing could come fast and without warning.

“I have seen changes in a matter of 90 days,” said Ed Kempkey, president of Kempkey Insurance Services in Napa and 37 year insurance veteran.

“It’s looking more and more likely that we’ve hit the bottom of this. The carriers have relied on investment income to offset underwriting losses, but now that most investments have been downgraded, they will not be able to continue writing below the cost of claims.”

Three times last year the agency responsible for recommending pure premium rate changes advised carriers to increase rates in order to keep up with claim costs. But rates continued to plunge while claims moved the opposite direction last year, according to the most recent Workers’ Compensation Insurance Rating Bureau report released in December.

“Loss trending continued upward last year and will again this year, mostly because of the increasing cost of medical care,” said Casey Roberts, sales manager at NorthWest Insurance Agency in Santa Rosa.

He and other brokers said most carriers still held rates or increased only slightly Jan. 1, but the underwriting experience indicates change is on the way.

“Employers that haven’t paid attention to safety and continued to have claims were able to kind of skate through the soft market, but we are definitely seeing that underwriters are no longer interested in marginal risk,” Mr. Kempkey said.

Other brokers have experienced a return to looking at employer credit reports when writing new business, and they advise clients to practice vigilant risk management.

Increasing unemployment, in particular, increases susceptibility to post-employment claims.

“We are already starting to catch an increasing number of laid-off employees filing claims,” McDonald-Leavitt Insurance Principal David McDonald said.

“It’s become enough of a concern that we’ve warned our clients about it.”

Marin Pacific Co. Principal Daniel Dufficy, who has worked in the industry for more than 45 years, said his best advice to employers now is to stop shopping or stick with a stable carrier.

“I would say to stay with a credible carrier with a long track record, someone you’ve been with for a long time,” he said.

“The kiss of death for a company, especially one with a large payroll, is if they change workers’ comp every year. If you have been with someone a long time and had a couple of bad losses, they will stick with you. In the opposite situation you could get dropped or see dramatic rate increase.”

He said the market shift puts many at risk of sudden loss of coverage, which can be accelerated during a time of general economic recession.

When a downward rate cycle nears the bottom, many of the comp carriers exit the market quickly and without notice, experts warned.

Also, if an employer is with a company that becomes insolvent, which often happens in a saturated market, a business can be left desperate for coverage at the same time costs are rising.