September 04, 2003

Drive Down Comp Costs, not Premiums, says Garamendi

George Wallace's Decs and Excs follows California's turmoil in workers comp insurance: Insurance Commissioner Seeks Reduction in Workers' Compensation Cost Factors. In a press release linked by Decs and Excs, Department of Insurance (DOI) Commissioner Garamendi anticipates a legislative attempt to force lower premiums. The Commissioner asserts that the better solution is to control claim costs, and that capping premiums below cost will only drive for-profit insurers out of the marketplace.

That sort of exodus would increase the stress on the California State Fund, the controversial writer of "last resort." State Fund has been increasing its market share and premium/surplus ratio dramatically in recent years. The Commissioner of the Department of Insurance (DOI) has questioned the adequacy of State Fund's rates and capital base, but State Fund has bristled at DOI's attempts at control. This past May, State Fund filed suit against the Commissioner, arguing that it was not subject to the Insurance Department's control, or the Risk Based Capital (RBS) Statutes, and was not near insolvency.

In a recent press release, State Fund disclosed and dismissed advice from its own accountants that it is underreserved by over $1 billion. As of last month, the lawsuit continued, with State Fund disclosing that it has requested approval of a reinsurance transaction to improve its financial position by moving $4 billion in premiums off of its books.

The situation sounds sadly like those in past years in other states, such as Texas in the 1980's, where a state-controlled "market of last resort" sold workers comp insurance below cost, running large deficits until it was shut down and put into run-off. Is that happening now in California? Time will tell. (More ... )

About 18 months ago, California Commission on Health and Safety and Workers’ Compensation released a comprehensive white paper "State of the Workers’ Compensation Insurance Industry in California" that is worthwhile reading on this subject.

The well-documented experience of Texas may be informative to those considering the best moves for California. The Texas Research and Oversight Council on Workers Compensation maintains a comprehensive library of studies of the Texas workers compensation market and effects of legislative changes over the past years there, including the impact of the residual market programs upon prices, competitiveness and solvency. The articles are offered by mail for free and many of the more recent reports are online for immediate download, including the December 2002 Biennial Report which reports on the current effects upon insurance prices resulting from past legislative change, medical costs and insurance industry insolvencies, including that of Reliance.

DougSimpson.com/blog

Posted by dougsimpson at September 4, 2003 09:03 PM | TrackBack
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