Cal Insurance Regulation

On November 28, 2007, the Commissioner issued a press release in which he announced that "the workers' compensation insurance market is enjoying historically high profitability" and that the 2003 reforms "have resulted in dramatic decreases in costs and increases in profitability for insurers."  Based upon these findings, the Commissioner decided that there should be no change to the workers' compensation pure premium rates. 

While I do not necessarily believe that the Commissioner is inaccurate in believing that workers' comp carriers have been able to maintain better books of business (at least from an underwriting perspective), I believe the statements in his press release and decision require some dissection.

For instance, the Commissioner's statement that there has been a "historically robust" workers' compensation market obviously depends upon what period of time you are looking.  If we were to only look at the years 2003 to the present, it would appear, from the industry's combined loss and expense ratios, that carriers have operated in the black.  Consider Exhibit 5 of the the WCIRB's November 5, 2007 Summary of Insurer Experience, which the Commissioner apparently relied in making his findings.  According the WCRIB report, the Accident Year Combined Loss and Expense Ratios for 2003, 2004, and 2005 were 79%, 55% and 51%.  For 2006, it is estimated to be 62%.

However, in the years from 1995 to 2002, these ratios were well above 100% (128%, 140%, 176%, 184%, 166%, 142% and 112%).  As I understand this report, WC carriers during this period of time, on average, were paying more (a lot more) in expenses and losses than they were taking in in premiums during those years.   Certainly, during this period of time, it could not be said that the market was "historically robust."

Further, from the perspective of premiums written by the industry, there has been a steady decline over the last three years.  According to Exhibit 1 of the November 5th Report, the amount of written premiums in California (gross of deductible credits) was $23.5 billion in 2004, $21.3 billion in 2005, $16.3 billion in 2006, and $6.9 billion in the first six months of 2007.  (According to the report, the $6.9 billion amount is approximately 23% below the written premium reported for the first two quarters of 2006. )  These declining numbers (which likely reflect the exodus of businesses from California), would also not be reflective of a "historically robust" workers' compensation market.

Finally, I'm not sure the reasoning underlying the Commissioner's belief that rates charged by insurers remain "too high" is soundly founded.  The Commissioner bases this belief that while  "cost of claims have dropped 70 percent" since the reforms of 2003, "insurers' rates have lagged behind since they have only been reduced by 55 percent" during the same period.  [See the p. 1 of the Commissioner's Order.] 

I'm not sure where this 70 percent figure comes from.  It is not reflected (at least, not expressly) in the WCIRB report.  (If someone, could point this out to me, it would be greatly appreciated.  I must confess that my expertise does not lie in the interpretation of these reports.)  From Exhibit 3 of the Report, it seems that the the estimated ultimate losses (from 2003 to 2006) dropped 50% from $12.2 billion to $6.1 billion, which would appear to be in line with the rate decrease. 

It is possible to come close to the 70% figure by comparing the Accident Year Combined Loss and Expense Ratios from 1999 to 2006 (from 184% to 62%), which marks an approximate 67% percent decreases in the ratios, but this can't be the 70 percent figure that the Commissioner references because it is beyond the 2003 period that the Commissioner references.  Also, since these ratios are a function of premium, it would not seem logical to use this as a basis for comparison to trends in premium rates.

In any event, even assuming the accuracy of the 70% figure set forth by the Commissioner, the belief that there should be a further substantial  decrease in rates may be a bit aggressive.  While the the loss ratios for 2003 through 2005 have been steadily decreasing and are under 100%, as revealed by Exhibits 4 and 5 of the WCIRB report, there was actually an increase in the ultimate accident year loss ratios in 2006.  As noted in the report, this increase is primarily due to declining premium rates -- meaning the downward trend in rates is out-pacing the downward trend in costs. 

No doubt, in looking at the decreasing combined loss and expense ratios, WC carriers are in better straits now.   I do not know, however, that these ratios (particularly those reflected in the calendar year periods) demonstrate grounds for substantial rate decreases, particularly given the exceedingly higher ratios borne by carriers in the early part of this decade.  It would seem that a larger range of time for examination is warranted to determine whether current rates are excessive or inadequate and, therefore, require further adjustment by the industry.