[caption id="attachment_25760" align="alignleft" width="149" caption="David Weinstein"][/caption]
This year many California employers are paying a higher rate per $100 of payroll for workers’ comp insurance for the first time since 2003. Analysis from the Workers’ Compensation Insurance Rating Bureau (WCIRB) indicates that the average rate paid during the first quarter of 2010 was up 5 percent from a year ago.
While arguably moderate, any degree of rate increase occurs at a particularly poor time for California employers already dealing with the most adverse economic conditions seen in generations. In the business community it’s well known that companies have, and likely still are, making extremely difficult cost-reduction decisions. Even incremental premium price increases are felt in terms of salary reductions and job loss.
Employers will be able to help offset potential rate increases in more than one way. Continued emphasis should be given to workplace safety. Besides the obvious desire to keep employees from harm, a strong financial motive exists. This is true for employers issued a “benchmark” Ex Mod rating, as well as for those companies that do not receive ratings. Workers’ comp carriers heavily weigh an employer’s prior four to five year claim history as they calculate premium costs. Reducing the frequency and cost of your claims increases the attractiveness of your business to insurance carriers and will help you obtain lower premiums.
It is believed that employers may consider alternative coverage options, such as deductible plans, at increased levels next year. Such policies can in fact provide businesses with up-front premium savings. It’s critical that such plans be considered carefully and the policy details be fully understood. Bear in mind that alternative plan structures often increase the level of risk, and future cost potential, your business retains in return for a lower up-front coverage cost. Strongly consider evaluating these types of policies with a trusted adviser who possesses extensive insurance knowledge before moving forward.
Workers’ comp carriers are also facing tough financial challenges. Nationally, policy revenues dropped 15 percent in 2009, and carriers saw premium levels decline for a fifth straight year. The WCIRB has estimated that California carriers will realize a 2009 “combined ratio” of 124 percent, meaning that they will pay out considerably more than the premium revenues they earned. In the context of such data the WCIRB continues to recommend significant increases in pure premium advisory rates, most recently a greater than 27 percent hike for 2011.
Despite numbers such as these, carriers have been forced to keep pricing relatively low as they compete for business in a shrinking market. Management of this reality has largely been achieved through internal cost reductions, use of tighter underwriting standards and with the assistance of improving returns from the equities and bond markets. It is not particularly well known that insurance carriers often make a considerable portion of their profits from the investment side of the business. Carriers can generate substantial revenue by investing the “premium float” until the money is needed to address liabilities from claims.
Recent attention has been given to California’s State Compensation Insurance Fund (SCIF), which faces significant challenges as its higher-yielding bonds mature and are replaced by bonds that produce less revenue. However, SCIF is by no means the only insurance provider faced with this prospect. It’s possible that next year could see a situation where many carriers face both a decline in investment revenue and an increase in operating costs. Offsetting such losses will be what many industry observers describe as a very slow degree of premium growth. Should these conditions emerge, it’s logical that at some point carriers will be forced to look at increasing rates in order to generate additional income.