Calif. State Fund Revises Broker of Record Policy

California’s State Compensation Insurance Fund announced it has revised its broker of record policy, as well as filed for a 5.2 percent overall rate increase for 2011. The rate filing also includes changes that it says will better serve employers in California’s workers’ compensation insurance market.

The company said while it recognizes these are difficult economic times for California business owners, the rate increase reflects only the inflation to claims costs. “While focused on maintaining rate adequacy, we will also take another step in spreading underwriting credit to more appropriately price all businesses and provide new opportunities for savings and better pricing for the best risks,” it said in a statement.

Specifically the rate filing expands the merit rating range for accounts $25,000 and above in premium to -/+ 40 percent to improve State Fund’s ability to price businesses and to compete for those with excellent performance.

State Fund policyholders will also have more flexibility to choose how their workers’ compensation policy will be serviced. The company said it will recognize broker of record letters for direct accounts and pay commission for those accounts in accordance with its 2011 Broker Agreement.

Recognizing brokers bring value to their clients through a variety of services, the 2011 Broker Agreement also increases the types of accounts for which brokers can receive commission, State Fund said. Additionally, policyholders who pay more than minimum premiums, who do not have or cannot get broker representation and insure with State Fund directly, will receive a 3 percent credit on their policy.

In September, several insurance agent/broker associations and workers’ comp ex-mod data provider Compline appealed to State Fund to change its broker of service policy and instead to recognize broker of record letters.

State Fund President and CEO Tom Rowe, in an exclusive interview with Insurance Journal in October, said he was reviewing the company’s distribution policy, and hinted that agents and brokers would be an “even bigger part of [State Fund’s] distribution strategy going forward.”

“We consulted with industry groups and brokerages, including IBA West and the Alliance of Insurance Agents and Brokers, and appreciate their support and advice as we worked through these strategies,” Rowe said. “Our mission is to provide an open and stable market for California employers and brokers. Our goal is to listen to our customers and provide as much flexibility as possible in our products and services, reflecting the diversity of California’s businesses. We know the past several years have been very hard on this state. We believe these changes will make us a stronger partner for California businesses.”

“We’re glad to see the outcome that producers will be paid for the work that they do,” said Michael D’Arelli, executive director for the Agents Alliance. He noted that his association met with State Fund at the insurer’s request about 10 days ago and was “heartened by its desire to reach out to us.”

At the meeting, D’Arelli said his board tried to impress upon the workers’ compensation insurer the value of recognizing producers for the work that they do, so his membership will be pleased with the recent decision to recognize broker of record letters.

Clark Payan, CEO of IBA West, said his organization has held discussions with State Fund on the broker of record policy since 1995, when the company decided to become a dual distribution company, instead of just a direct writer. “At our first meeting with Tom Rowe, he said he was looking at all procedures, and we were confident that he would see that [accepting broker of record letters] is a good thing for brokers and a good thing for policyholders. … This change is a big step for State Fund and for brokers.”

“Plenty of employers will continue to go direct, but for those who don’t, [the policy change] might enhance the opportunity to work with independent agents and brokers, who can provide value and service instead of just selling a rate,” D’Arelli said. He noted that the 3 percent offset for companies that go direct is “relatively minor.”

“Some agents and brokers feed commoditization, and that makes it hard to create value,” and more difficult to compete, he said. On the other hand, “producers that provide value and service for employers now have the opportunity to get paid for the hard work that they do. … I think State Fund will find more producers will be working to write the business and compete. This is great news for the independent agents, great news for State Fund, and I applaud them for the decision which is in line with the rest of the industry.”

The new rates will apply to new and renewal workers’ compensation policies with an effective date on or after January 1, 2011.