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Employment

Donna Eyman: Poor Timing for Workers’ Comp Rate Increases

California carriers submit their proposals for higher premiums effective July 1

In the past two months, a few California workers’ compensation carriers have submitted their proposed rate increases for July 1. It is unfortunate that the workers’ compensation industry, after six years of dramatically declining premiums, filed for increases at a time that couldn’t be worse for California businesses because of the economic conditions.

Donna Eyman
Donna Eyman

The 23.7 percent recommended increase by the Workers’ Compensation Insurance Rating Bureau is not a fixed increase that will be adopted by individual insurance companies. So far, Employer’s Direct Insurance Company out of Agoura Hills (not Employer’s Comp) filed a huge 33.9 percent increase in its rates after incurring $60.9 million in underwriting losses in 2008 and $6.6 million in the first quarter of 2009.

Zenith Insurance in Woodland Hills is asking for only a 4 percent increase. State Fund’s rates for July 1 show a 15 percent average increase, but some classification codes are up 30 percent to 35 percent while other codes are going up only slightly.

Cypress and Oak River posted a 10.3 percent increase. Netherlands and Peerless proposed a 10 percent increase. Each carrier still calculates final rates with debits, credits and experience modification factors that create a more individualized approach to rating a particular business.

In just a couple more weeks, all firms with a July 1 expiration date will know the exact impact of the increases. While rates are mostly going up, it will not equate to an across-the-board dramatic increase for all California businesses.

The historical perspective on workers’ compensation pricing is interesting but still doesn’t help businesses deal with higher prices right now. Currently, California employers pay an average of $2.25 per $100 of payroll compared with 2003. Six years ago, the average rate per $100 was $6.45. So, while rates have come down an average of 65 percent in six years, businesses were mostly thriving then and the higher rates were easier to handle for most firms.

Many business owners rightfully ask, “How can the workers’ comp industry even think of raising rates in California at a time like this?” The answer lies in the loss ratios and balance sheets of the insurance companies. While many assume that insurance companies make huge profits, the balance sheets this past year show different results.

Many may remember the last insurance cycle about a decade ago in California when many workers’ comp carriers went belly up because their pricing became too low compared with expense factors. Some either went under entirely or were purchased by other larger companies for survival. Simply put, some of those carriers will face insolvency if the bleeding continues. Others will survive with smaller increases, and as history shows, the insurance industry can be as cyclical and volatile as real estate and the stock market.

Nevertheless, purchasing workers’ compensation coverage is not an option but a requirement, which makes this poorly timed industry increase particularly frustrating for anyone running a business in California.

— Donna Eyman represents Eyman Parker Insurance Brokers Inc. and James G. Parker Insurance Associates Inc.

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