Just a handful of years ago, it appeared that workers’ compensation costs in California would hit the stratosphere. The confluence of increased litigation, larger permanent disability awards and escalating medical costs combined to drive prices upward. Recent legislation, however, has enabled carriers to decrease premiums significantly over the past couple of years.
“From Jan. 1, 2004 to July 1, 2006, the pure rates in California have gone down approximately 55 percent on average,” says Warren Meyer, area senior vice president for Arthur J. Gallagher & Co. “It’s a huge difference.”
Smart Business spoke with Meyer about why workers’ compensation costs have dropped so quickly, how the new regulatory environment has attracted more insurance carriers, and what his prediction is for workers’ compensation costs in 2007.
What are the primary reasons why workers’ compensation costs have dropped so significantly in the past couple years?
The primary reason is the passage of Senate Bill 899 (S.B. 899), and specifically several provisions of that bill relating to the guidelines for medical treatment that are now in place. Also, the bill initiated greater employer control when an employee is injured on the job.
Prior to the reforms, employers had 30 days of medical control whereby they could direct an injured worker to a medical provider for treatment of the injury. With the reforms, they have unlimited medical control, provided that they join a medical provider network. The benefit is that employees are no longer opting out after 30 days and getting their own doctors; they must stay within the network and seek treatment.
Will the cost reductions from the regulatory changes in workers’ compensation remain?
The bulk of the cost reductions should remain for a number of years. However, there is some concern about pending legislation that could potentially erode some of the reforms. In addition, a number of cases are up for appeal within the workers’ compensation system that may ultimately need to be addressed by the Supreme Court of California. Those two issues may end up eroding some of the benefits, but the bulk of the benefits should remain.
How has the improved regulatory environment changed the availability of workers’ compensation insurance in California?
The environment has improved significantly over the last 24 months with the entrance of a number of new insurance companies. Prior to the reforms, the supply of workers’ compensation insurance providers was very, very low. Now, because occupational medical costs have come more in line with non-occupational medical costs, insurance companies have a better handle on what the ultimate costs will be and therefore can price their products appropriately.
The passage of S.B. 899 has allowed new insurance companies to enter the market and enabled inactive insurance companies to return to California to underwrite workers’ compensation. Probably the most notable point is that we are seeing a number of multi-line insurance companies offering workers’ compensation once again, whereas in the past, they had — for all intents and purposes — pulled out of the market for guaranteed-cost business.
Are alternate risk financing programs still a viable tool for companies to minimize the costs of workers’ compensation?
They certainly are, especially for larger companies that have a predictability of losses and can absorb the expense of the alternate programs. However, as guaranteed-cost programs or zero-dollar programs become more competitive, the benefit for these alternate risk programs has decreased. A number of medium companies are now rolling into guaranteed-cost programs to minimize the downside risk of workers’ compensation.
How important is for top management to stay committed to maintaining a safe work environment?
It is very important for management at all levels of a company to remain committed to a safe work environment and to pro-active claims management. Preventing losses remains the No. 1 means of reducing overall workers’ compensation costs. California continues to use an experience modification rating system, so historical losses will continue to affect the pricing of workers’ compensation. Therefore, management should continue to stay focused on preventing losses and aggressively managing claims once they occur.
What is your forecast for workers’ compensation costs in 2007?
At this point, our forecast is that prices will remain flat or go slightly lower. However, pending legislation before the governor could potentially increase benefits for permanent disability and therefore slightly increase workers’ compensation premiums into next year. Overall though, the trend for 2007 looks very positive with a strong supply of workers’ compensation insurance companies that have aggressively priced and solicited new business.
WARREN MEYER is area senior vice president for Arthur J. Gallagher & Co. Reach him at (818) 539-1365 or [email protected].