Thought that California workers’ comp rates were largely determined by claims costs?
If so, you are like most people. Year after year reports by the WCIRB (California Workers’ Compensation Insurance Rating Bureau) precede California Department of Insurance rate hearings on insurance carrier rates.
Indeed, next Tuesday September 27 Insurance Commissioner Dave Jones will be holding hearings in San Francisco on the latest WCIRB filing. In a report released this week the WCIRB said that rates actually charged by insurers are up 3% in 2011, from $2.31 per $100 of payroll in 2010 to $2.37 per $100 of payroll in the first half of 2011.
No one would argue that claims costs are irrelevant to the rate equation.
But a new study highlights another important factor in workers’ comp rates.
That factor is Wall Street.
The study, by UC Davis Professor of Public Health Sciences and UC Davis postdoctoral scholar Abhinav Bhushan (now at Mass General Hospital) is published in the September-October issue of Public Health Reports.
A UC Davis press release notes that:
“…the study shows that higher premiums are instead associated with decreases in the Dow Jones Industrial Average and interest rates on U.S. Treasury bonds.”
“Insurance companies appear to have been setting premiums according to their returns on the stock and bond markets, not according to the number of claims they have,” said J. Paul Leigh, UC Davis Professor of Public Health Sciences and senior author of the study. “They invest because they need a financial cushion to pay for claims and, if they lose, raise premiums to recoup their losses.”
“Understanding workers’ compensation trends is important so policymakers can establish regulations that protect workers and contain costs, said Leigh, who noted that, in 2009, between 3 million and 4 million cases of job-related injury or illness were recorded and costs to employers were close to $74 billion.”
“In conducting the study, Leigh and UC Davis postdoctoral scholar Abhinav Bhushan examined U.S. Bureau of Labor Statistics data on incidence rates for injuries and illnesses, along with data from the National Academy of Social Insurance on workers’ compensation costs (to employers) and benefits (to workers and medical providers) from 1973 through 2007. Beginning in 1992, the Bureau of Labor Statistics began identifying cases involving more than 30 days away from work, providing the study team with the opportunity to evaluate the impact of more severe work-related injuries and illnesses on premiums. That information was compared with Dow Jones Industrial Average indices and Treasury bond interest rates.
The researchers found that while premiums increased from 1992-2007, claims decreased 1 to 2 percent each year. Claims for serious illnesses and injuries varied, but decreased overall.”
“The team also discovered that for the entire 35-year timeframe of the study, rising premium rates were closely linked with the Dow Jones Industrial Average or Treasury bonds. As either the Dow or interest rates on Treasury bonds fell, premiums rose, and vice versa.”
“The association of premiums with the stock market and Treasury bonds was consistent and strong,” said Leigh. “Increasing premiums had nothing to do with the number of injured workers, who often are incorrectly blamed for increasing premiums for employers.”
The study was partly funded by the National Institute for Occupational Safety and Health.
As policymakers move forward, they would do well to remember that with rates it’s not necessarily all about the benefits and the claims.
It’s about Wall Street, too. Insurers invest premiums, so claims costs are but one component of the picture.
Category: Understanding the CA WC system