California Workers’ Compensation Insurance Market Becoming More Lucrative

Prices are improving in the California workers’ compensation insurance market — at least according to one specialty workers’ compensation carrier in the Golden State.

According to PacificComp President and CEO James E. Little, prices have been improving as some of the national insurance carriers that were writing workers’ comp have left the market. “Some have been gone now for a couple of years, but you can see there’s a firming in the underwriting standards, a firming in the pricing, and a movement of underwriting capacity out of the state. It’s not happening rapidly, but it is a gradual process. And as we look back today, we have significantly more adequate rates than we did a year ago.”

The improvement in the California workers’ compensation insurance market is one reason PacificComp has relaunched as a specialty carrier doing business exclusively with independent agents and brokers. In August 2009, citing the strain of escalating medical costs on the workers’ compensation system, increasingly intense price competition and the uncertainty over the sustainability of the 2003-2004 legislative reforms due to recent court decisions, Employers Direct stopped soliciting new and renewal business on a direct basis in the state.

Yet after a lot of evaluation of policyholders and how they prefer to purchase their workers’ comp coverage, Little said his company concluded that the trusted advice of an independent agent and broker is the preferred distribution method customers are seeking. The company is seeking about 112 independent agents with which to do business.

“We felt that that would be an appropriate way to go forward and made a decision to begin retooling the company — discontinue our direct operations and retool the company, particularly in our systems area to provide services to independent agents and brokers — rather than the previous way we approached the market,” he said. Because California’s workers’ compensation insurance market is complex, there is a need for a specialty writer of workers’ comp that understands the state’s volatile environment and can do a better job of taking care of injured workers and servicing claims, he added.

However, some analysts of the workers’ comp market are not so positive on where it’s headed. Analysis by the RAND Corp. and Navigant Consulting recently indicated the market would remain vulnerable to wide swings in performance unless changes are made to improve the predictability of costs, transparency of pricing decisions, regulatory oversight and consistency of the incentives facing different parties.

“We do not recommend that California re-regulate workers’ compensation rates,” said Lloyd Dixon, lead author of the study and a senior economist at RAND, a nonprofit research organization.

Nevertheless, the study, “California’s Volatile Workers’ Compensation Insurance Market: Problems and Recommendations for Change,” listed 29 recommendations for continual improvement, and noted six factors that have contributed to insolvencies and volatility in the past 15 years, including:

• Inaccurate projections of claims costs;
• Pricing workers’ compensation policies below expected costs;
• Reinsurance contracts that give insurers and reinsurers insufficient stake in the profitability of the policies;
• Managing general agents who have little financial interest in the ultimate profitability of policies;
• Under-reserving for claim costs by insurers; and
• Insurer policyholder surplus that is inadequate to provide a cushion against adverse events.

“I don’t want to give you any mis-impressions that I think everything is perfect, because it’s not,” Little said. “Unfortunately, there are still companies out there who haven’t identified these issues or are ignoring them. I think that we are going to see some problems, but I’m hopeful that we don’t have the same level of problems that we had in the late ’90s. But if this continues and stops moving in the direction that I think it’s moving, we very well could have another catastrophe on our hands. But let’s hope not.”