Eight California workers’ comp rate cuts since 2015 is a stunning figure.
Yet, that’s what is on tap if a August 2018 WCIRB Governing Committee recommendation ends up being adopted by California’s Insurance Commissioner.
While this would be advisory only, and does not reflect what many employers actually pay (i.e. the average industry filed rate as of July 1, 2018 is $2.13 per $100 of payroll in contrast with the DOI approved recommended rate of $1.78 for 7/1/18), the advisory “pure premium” rate would drop to $1.70 per $100 of payroll.
We won’t know for sure for a while, since there must be a rate filing, a hearing, and a DOI determination by Dave Jones.
A slide presentation from the WCIRB Governing Committee meeting reveals the basis for the recommendation. I’ll reference page numbers for the slides for wonks out there who wish to study them more (see link to the slides below).
There has been a downward loss development trend. Factors in this include the following:
• Claims are settling faster (see slide p. 5)
• Pharmacy costs are dropping (see slide pages 6 and 7). As a percentage of total medical spend, in 2017 pharma was less than half of what it was in 2012.
• Lien filings are declining (see slide p. 8). In the Los Angeles area, lien filings are a third of what they were in 2016
• Indemnity claim frequency is also projected to decline (see slide p. 15)
• Indemnity severity has continued to decline (see slide p. 16) and indemnity loss ratios trend downward (see slide p. 20)
Areas of concern were noted to be the following:
• Medical cost inflation is a concern (see slide p. 9). But medical severity increases are in line with other states (see slide p. 19). After about 5 years of declining costs, medical costs ticked upward slightly in 2017.
• Loss adjustment expense (LAE) costs remain a concern, particularly allocated loss expenses for private insurers (ALAE) (see slide p. 10).
• Projections for policy year 2019 project further increase in the ratio of loss adjustment expense (LAE) to losses (see slide p. 25). The projected increase is in both the allocated (ALAE) and unallocated (ULAE) expense categories. Whereas loss adjustment expenses are pegged in July 2018 at 33.9% of overall losses, this is projected to jump to a ratio of 36.5% for policy year 2019. If so, this represents what I would argue is an unacceptable trend. The cost of administering claims and delivering benefits eats up an unacceptable portion of the monies in the system.
Other items that are worthy of comment include:
• There is a “long tail” of expense in workers’ comp. The WCIRB estimates that for 2019 policy year claims, 25% of the medical expense will be paid 10 years later or more (i.e. 2029 or later) (see slide p. 17). No wonder that many employers and carriers are realizing that there is an advantage in trying to get files closed.
• The ratio of ULAE (unallocated loss adjustment loss expenses) to paid losses has improved for SCIF but has continued to deteriorate for national workers’ comp insurers (see slide p.23)
But let’s jump to the obvious question. Assuming an eighth straight rate decrease is adopted, where do we go from here?
In a normal labor-management wage negotiation, if labor becomes aware that management is increasing profits after steady rounds of cost cutting, labor might insist on sharing some of the bounty via wage or benefit increases.
As a new Governor and his people come on board in 2019, it is unknown what the priorities and expectations of all the stakeholders will be. Will there be a push to raise benefit levels or ease up on some medical treatment protocols and barriers in realization that employers have had a great run during the Brown years? Or are the major stakeholders in the 2012 labor-employer coalition pretty comfortable with things as they stand?
Stay tuned on that one.
Here is a link to the WCIRB slides presented on August 8, 2018 by David Bellusci, WCIRB Executive Vice President and Chief Actuary: