John H. Lewis
Mr. Lewis consults with labor and management on workers' compensation reform, and with carriers on improvements in programs and laws. He also advises on implementation of joint projects such as the "983 program" in the construction industry, which he originated. Based in Coconut Grove, Florida, he works frequently with California clients.
As in any business, workers' compensation (WC) insurance carriers look for ways to make profits. Their premium rates, dividend programs, and marketing decisions reflect their judgment as to where and how they can best do so. As was the case with airline deregulation, the upcoming (1995) relaxation of WC insurance rate regulation is likely to encourage carriers to concentrate on the more profitable sectors and deemphasize or ignore the rest. They will seek market segments where rates can be set at attractive levels, and avoid those in which rates are less adequate and risks are greater.
As a consequence, it is highly likely that implementation of greater price competition in the California WC insurance market will result in lower rates for some employers but higher rates for others. For example, small to medium-size employers with high risk profiles - such as those in labor-intensive industries utilizing casual or transient workforces - may well see their rates increase. Large, stable employers with less hazardous working conditions and lower risk work-
forces are likely to see their rates decline, at least initially.
The changes may create problems for insured agricultural employers. Many carriers may prefer to concentrate on other markets - those without many of the WC problems inherent in agriculture. If so, lack of competition may result in fewer options for insuring and higher rates.
Before the 1993 reforms, the California WC insurance system was considered unique. Most other states had rate regulation, but their structure was not as rigid as California's, permitting some downward flexibility in rate setting by individual carriers. Over the past 10 or 15 years, many states - including most of those with the highest levels of WC activity - have moved to more flexible, open rating systems, as will be the case in California in 1995.
However, other important factors are changing as well. Claim volume in California has dropped dramatically, for reasons that are not fully understood. Some observers cite changes in the economy, while others point to implementation of the anti-fraud provisions of 1991 law changes. Interest rates have also fallen, resulting in reduced returns on invested premiums. Since investment return is an important component of insurance company profitability - in some instances helping to offset concerns over rate adequacy and volatility of underwriting experience - lower investment return can easily translate into more conservative pricing and marketing decisions by carriers.
On the receiving side of the WC system, California has historically been among the states with the lowest benefit maximums. The 1993 reforms will raise California's relative position among the states somewhat. However, this position will still remain significantly lower than many states in most benefit categories.
Workers' compensation reforms are always the result of pressures from various sources, such as employers demanding lower costs, employees seeking better benefits, and insurance carriers looking for stability and profitability. But to outside observers, even those familiar with WC issues and problems, it is often difficult to understand the reasoning of the various parties. It is equally difficult to appreciate how each will react to changes such as the 1993 reforms. As a result, even ballpark estimates of what will happen to WC insurance rates are nearly impossible to calculate.
In short, everything is up for grabs. A system that has prevailed in California for over 80 years is now being changed in unprecedented ways. Unfortunately, reforms everywhere have a history of overestimated savings and underestimated costs. What seems likely on Sunday looks quite different on Monday. When Monday comes in California, we will find out how accurate the prognosticators were.