California Workers' Compensation Costs Continue to Climb
 Sept. 28, 2009

According to recently released data compiled by the Workers’ Compensation Insurance Rating Bureau (WCIRB), workers’ compensation results continueto deteriorate for insured entities in California.  This comes on the heels of the WCIRB's recommendation that the underlying pure premium rate for California workers’ compensation rates should be increased by 22.8%.

These results reflect the relationship of California’s soft workers’ compensation market matched against rising claims costs.  Written premium dropped 18% from the same time periods in 2008.  The average insurer rate per $100 of payroll was $2.33.  This is roughly the same as the first six months of 2008.

Three areas of concern are loss ratios, combined ratios and the average cost of indemnity claims.  In each case, results continue to deteriorate.  Loss ratios on an accident year basis increased as did the expense components for insurance companies. The result is a combined ratio of 111%.  Historically this adverse result would be offset by investment income, but insurers are not optimistic that investment income will put much of a dent in the losses experienced on the workers’ compensation line in 2009 or 2010.

The average cost of indemnity claims ballooned to $56,799.  This is based on results for the 2008 accident year and reflects an increase of 12% from 2007.  The cost of medical treatment continues to drive claim costs upward at an alarming pace. Medical treatment and evaluations represent 65% of the total cost of workers’ compensation claims.

Even if losses and expenses remained stable, loss ratios and combined ratios would of course increase. The competitiveness of rates in California is dependent on insurance company profitability.  If the workers’ compensation line is not profitable, rates will increase or insurers will choose to limit their commitment to writing business in California.  Does this mean these adverse results are being experienced across the board by every insurance carrier?  No, in fact some carriers are writing workers’ compensation insurance very profitably and expect to remain competitive in their workers’ compensation pricing for the coming year.  The proof is going to be in the January rate filings which should be released at the end of November and will contemplate any bills signed into law affecting the workers’ compensation system this fall.

As rates creep upward it becomes increasingly important that manufacturers control their exposure to losses and loss results.  A key component of all workers’ compensation rate making models is the experience modification.  To learn more about the experience modification calculation and for help in managing your safety and workers’ compensation costs contact the CMTA at wcgroup@cmta.net.

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