Largest Underwriting Losses Ever Posted for California Workers' Compensation Industry in 1999 Reinforce Expectations for Continued Rate Increases
CWCE, July 2000

Results from workers' compensation claims in 1999 have reinforced expectations for continuing premium rate increases in California. This is bad news for business, but proof once again that bottom-line economics is sure to catch up with insurers attempting to garner market share with under-priced products.

The news was broken by the California's Workers' Compensation Insurance Rating Bureau (WCIRB). Its annual report on 1999 losses and expenses for the California workers' compensation insurance industry showed that, after policy-holder dividends, the industry experienced an underwriting loss of $2.8 billion, or 40% of 1999 premium. This is the largest underwriting loss ever recorded by the WCIRB and is well above the 1998 loss of $2.0 billion. This increase was primarily the result of a $1.1 billion increase in reported incurred losses, up from $5.8 billion in 1998 to $6.9 billion in 1999.

According to Dave Bellusci, the WCIRB's chief actuary, "the alarming trends in claim cost development and claim severity that we have previously noted, are continuing and appear to be escalating. Nevertheless, the principle factor driving the record underwriting loss for 1999 was market pricing levels that were not reflective of the underlying costs."

The WCIRB report also contains a segregation of 1999 paid benefits by benefit type. Permanent partial disability continues to be the largest component of indemnity benefits, accounting for $1.3 billion, or 42% of all indemnity benefits. With respect to medical costs, the report shows that physical therapists continue to receive the largest share of physician payments, comprising 17%, compared to 14% for orthopedists, 14% for chiropractors, and 12% for medical clinics.

Within a week of releasing this report, the WCIRB confirmed that, while it is still massaging the numbers, it will likely ask for an average 5% pure premium rate increase for all classes of policies incepting January 1, 2001. While some companies could still experience a decrease, others could see an increase as high as 30%. The Department of Insurance will be evaluating the WCIRB's final request in September.

Certain carriers are naturally experiencing financial difficulties as a result of their 1999 costs. Fremont Compensation Insurance Group was forced to dismiss 205 employees midsummer. Best's Insurance Financial Ratings has dropped the standing of a number of California workers' compensation carriers as a result of their 1999 performance.

Companies now have increased incentive to focus again on in-house efficiencies to cut costs such as safety programs and other initiatives. I detailed the nine best practices for controlling workers' compensation costs in CWCE's January/February 2000 issue. The most recent development, which combines the Internet with proprietary software to facilitate the management of claims is now being adopted by more and more companies. Different programs are available. Their appropriateness for an individual company is largely based on the number of people employed. Here are two of the leading systems for mid-sized and larger organizations:

COMPLink
Mid-sized employers using COMPLink for the management of workers' compensation claims are linking their human resource departments with both the medical provider and the claims examiner via the Internet. The efficiency of this electronic data interface has led to a mandate for its use in some states. Online communication not only speeds the claims process, it also gives employers a more active role by allowing them to view adjusters' notes, set claim protocols and determine pre-set authority levels for settlements and reserves. In addition, OSHA logs are automatically updated, and the system provides online ADA-compliant job descriptions that can be used as a guideline to help return the employee to work in a capacity that matches his current physical state. According to Safety Manager David Naples, who used the program at ETC Carpet Millss, "COMPLink allowed me to create reports in minutes that had previously taken my staff hours to complete manually." The cost savings were also impressive: In its trial period, the system allowed users to cut medical costs by as much as 36%.

CORE, Inc.
In addition to the oversight of disability benefits and employee absence-management, CORE blends the Internet and proprietary software to help large employers predict when employees will be unable to work and how long they'll be out. It is currently being used to manage disability benefits for 1.7 million employees at companies like Apple Computer, Inc., and DaimlerChrysler as well as those working for the state of Virginia. Core bases its predictive ability on a decade's worth of data gleaned from disability cases. It offers information on what types of accidents and illnesses are likely to occur, what time of the workday they will happen and how long an employee might be out recovering, basing information on the age of the employee and making recommendations for the early intervention of therapeutic tools. Like COMPLink, it focuses efforts on getting employees back to work.

As the workplace population ages, the frequency of injuries can be expected to keep increasing. While insurers can no longer afford to operate without an eye to profitability, businesses faced with the consequences are looking to reduce premiums by using every tool at their disposal to keep costs down. For many, electronic data interface through these propriety software programs have proven to be effective.

SullivanCurtisMonroe is an insurance brokerage based in Irvine, California, specializing in risk management. It is a member of RiskProNet Intl., a network of 29 premier regional brokers. For more information, call (949) 250-7172.