California issues alert over insurance "early warning signs"

California issues alert over insurance
Source: Newsweek

California regulators are concerned that spiraling medical and medical-legal costs are making it more expensive to treat injured or ill workers than the state's workers' compensation insurance system can afford.

In a letter to state leaders sent on Tuesday, California Insurance Commissioner Ricardo Lara warned that while costs are increasing for carriers due to higher medical expenses, administrative fees, and more frequent cumulative trauma claims, the rates charged by insurers have remained low. According to the commissioner, now is the time to increase rates -- before it is too late.

"California law charges my Department with issuing an average advisory pure premium rate each year based on our analysis of data on claims and cost trends," Lara wrote in the letter. "After more than a decade of steady or decreasing rates, this year, the data supports an increase in the average advisory pure premium rate."

Under California law, all employers are required to carry workers' compensation insurance, even if they have only one employee, a mandate introduced as a result of the trade union movement's early 20th-century victories.

This type of insurance covers any work-related injuries or illnesses and provides basic benefits, including medical care, temporary and permanent disability benefits, supplemental job displacement benefits, a return-to-work supplement, and death benefits.

Premium rates are calculated based on a variety of factors, including how employers are classified according to the nature of their operations, the number of employees, and the employer's claims history.

According to Hinden & Breslavsky, APC, a law firm specialized in injury claims, workers' compensation insurance rates in California are among the highest in the nation. In 2020, the firm reported that the average premium in the state was $1.45 per $100 of payroll, which was higher than the national average of $1.19 per $100 of payroll.

The latest biennial report from the Oregon Department of Consumer and Business Services (OCBS), published last month, also confirmed that workers' compensation insurance rates in California are the fourth-most expensive in the nation, after those in Hawaii, New Jersey, and New York. Last year, its rate was $1.86 per $100 of payroll, about 170 percent of the national median.

According to Lara, California's workers' compensation insurance rates are not nearly as high as they should be -- a growing mismatch that his department says could impact California businesses.

"The Governor and Legislature acted over a decade ago to enact far-reaching reforms that have helped to reduce workers' compensation rates," Lara wrote in his letter to Governor Newsom, Senate President Pro Tempore Mike McGuire, and Assembly Speaker Robert Rivas.
"For the past decade, the pure premium rates adopted by myself and the previous insurance commissioner have shown continued progress toward reducing excessive costs in the system while protecting injured workers," Lara said. "Because higher insurance rates can affect businesses' ability to hire and sustain financial growth, it is important to be aware of early warning signs and respond appropriately."

Experts at the California Department of Insurance (CDI) have recommended raising the "pure premium rate" -- which serves as an advisory benchmark for rates -- by 8.7 percent over last year's approved rate, an increase which was adopted by Lara and should become effective on September 1. But insurance companies operating in the Golden State are not bound to follow this recommended increase, and are still free to set their own rates.

In a press release, Lara said that California needs to be "proactive in analyzing and addressing these early warning signs of a shift in market conditions in order to foster a vibrant and competitive insurance marketplace."

"Our workers' compensation system is designed to help injured workers and keep costs down for employers. These considerations should guide us in striving for data-driven solutions," he said.