Employers should prepare for higher workers' comp prices

While California's insurance industry awaits the results of recently enacted reforms to workers compensation, employer premiums will likely still face upward pressure for most of 2013 as implementation takes shape, insurance experts said.

Senate Bill 863, which was signed into law last September by Gov. Jerry Brown, attempts to curb escalating costs on premiums with a number of treatments, among them changing how benefits are calculated for injured employees, among other measures.

Unfortunately for employers, who for the past two years have contended with double-digit rate hikes, relief probably won't come until the second half of the year, if not later, because of a hardening insurance market that has kept pressure on carriers.

[caption id="attachment_68424" align="alignleft" width="125"] Hale Johnston[/caption]

"2013 in California workers compensation will be a dynamic year for everyone," said Hale Johnston, senior vice president and regional manager of the western region for Employers Insurance Company. "The market has been incredibly under-priced and it's been hardening. That trend will likely continue."

Even for companies with little or no claim action, premiums are increasing by approximately 8 percent, according to Brian Murphy, vice president of Heffernan Insurance Brokers North Bay Branch in Petaluma.

That could be compounded, however, because most insurance carriers filed for rate increases in July, meaning employers with policies renewing in the beginning of the year will likely be subject to both January and July increases, Mr. Murphy said.

[caption id="attachment_68425" align="alignleft" width="125"] Brian Murphy[/caption]

"On average we're seeing base-rate increase of about 17 percent. By law, carriers have to send notice to policy holders if they intend to increase rates by more than 25 percent, and we've seen a lot of those notices go out lately," Mr. Murphy said.

The latest data from the Workers Compensation Insurance Rating Bureau, which advises the state on rates, estimated a 2011 combined ratio of 139 percent -- meaning insurers will pay out $1.39 in claims and expenses for every $1.00 collected in premiums.

"Regardless of what SB 863 does to fix the system, the insurance companies are feeling significant pressure to increase rates in order to lower their combined ratios," Mr. Murphy said.

The bill aims to increase benefits for injured workers by approximately $700 million, while promising to lower system wide costs to the tune of $1 billion.

It attempts to do so by changing how benefits are calculated for injured employees. It creates a binding-arbitration process to resolve disputes over coverage and eliminates coverage for certain conditions prone to more litigation, such as mental health issues and insomnia. The bill also seeks to prevent disputes with providers over payment, known as liens.

[caption id="attachment_68426" align="alignright" width="115"] David Weinstein[/caption]

Whether the bill achieves its stated savings goals remains to be seen, however laudable the effort is, said David Weinstein, assistant vice president of Vantreo Insurance Brokerage's CompZone Division.

"I think you can say it's a pivotal year for comp," he said. "Clearly, prices are going up. The hope is that (SB 863) gets to some of that. To me, it's to be determined."

Mr. Johnston, of Employers, agreed, noting that other lines of insurance such as property-casual have similarly hardened over the past few years.

"If you're an employer and you're looking for benefits (of reform) right away, it will be difficult to quantify until the end of 2013," he said. "We all have ideas of what we think the effect will be, but it's hard with workers compensation. You don't know the cost of an insurance policy until many years later."

Mr. Murphy, of Heffernan, said some insurance executives expect the bill could actually lead to increases costs because of its relative vagueness.

"The challenge for the industry with SB 863 is that the cost increases are set in stone and relatively easy to quantify, yet the anticipated costs savings are much more subjective and are relying on numerous assumptions that may or may not come true."

Depressed investment portfolios in the insurance industry, coupled with the tepid economic environment, have helped harden the market, particularly for carriers, who kept policies priced artificially low, Mr. Johnston said.

One silver lining for the Bay Area, Mr. Johnston said, is that Northern California employers have it slightly better than their counterparts in Southern California because it's less litigious over claims.

For the year ahead, it's imperative for employers to both minimize claims and to understand what is driving their claims, Mr. Murphy and Mr. Johnston said.

"It's very easy for business owners to blow off their insurance," Mr. Johnston said. "Cheap can cost more. Find the right carrier, and really the right agent, to manage your comp costs over the long run."

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