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The return of competition: the current state of worker's compensation in California

In the early 2000’s, workers' compensation in California was in an abysmal state. In 1995, California switched to an “open rating system” where insurers were allowed to price workers' comp as they chose.  The industry abandoned the previous “minimum rating” workers' comp system, in which the insurers had had to obey a state-mandated minimum premium.  The free rein given to insurers caused prices to drop to record lows, with insurers losing money in a 1:1.45 ration.  This meant, according to the late Ed Woodward, former president of the California Workers' Compensation Institute, that for every dollar taken in by an insurer, $1.45 was paid out by that insurer.

"New insurers are joining the workers compensation market, creating more competition and lowering rates even further. "

-Gov. Arnold Schwarzenegger

To combat this vicious cycle of monetary loss, and end the downward spiral of ever cheapening premiums, insurance rates were raised to epic heights. 

From 2000 to 2003, workers comps premiums increased drastically.  This raised concerns of overpricing and prompted legislative reform of California’s workers comp in Senate Bill 899.  Dave Bellusci, the Senior Vice President and Chief Actuary of The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) stated, “The sharply increasing rates did become a major issue in the State and was the driving factor behind the legislative reforms enacted in 2003 and 2004.”

In spring of 2004, Governor Arnold Schwarzenegger signed the bill into law, effectively lowering premium rates and stabilizing workers' comp in California.  According to the Office of the Governor of California, the major provisions of this bill are: the creation of medical networks, a two-year Temporary Disability Cap, promotion of Return to Work opportunities, Permanent Disability, Apportionment, and a reform of penalty costs. 

WCIRB, upon reviewing the provisions of SB 899, estimated that the bill would “reduce projected statewide benefit cost by approximately 15%, or $3.0 billion, and loss adjustment expenses by approximately 9% or $0.3 billion.” 

Susan Gard, an information officer for The Division of Workers' Compensation of California, (DWC) informed Insure.com of the existence of a study, commissioned by DWC, and completed by Biskmore Risk Services.  This study shows that workers' compensation premium costs levels have dropped significantly in California, and are approaching levels that are currently held by other states, instead of maintaining its status as the highest cost workers’ compensation setting in the country.  This study also shows how the legislation has enabled a return of competition to the workers’ compensation market. 

The study shows that in 2004, there were 10 new entrants into the California market, fewer companies were exiting the state market, and lower monetary loss (which encouraged private insurers to enter the market).  These circumstances heralded the return of competition in the market, which in turn, would ensure lower prices, more efficient service, and better products.

The Insurance Information Institute (III) reports that workers compensation costs in California are still falling.  In September of 2006, WCIRB suggested another premium decrease of 6.3% that would be effective in January of 2007.  According to a report from the National Association of Insurance Commissioners (NAIC), 2004 was the first year in ten years that “average returns for workers' compensation insurers doing business in California did not lag behind those in the other states.” The Office of State Senator Charles Poochigian, one of the “principle sponsors and architects of SB 899” reports that as of January 2006, the cumulative rate reduction of workers' compensation (since the beginning of the reform three years earlier) was 37.7%.

Rate Reductions (%)
January 2004
July 2004
January 2005
July 2005
January 2006

One the one-year anniversary of this momentous California occasion, on April 19, 2005, the Governor remarked, “Today, as we celebrate the one-year anniversary of the passage of these historic reforms, I am pleased that we are already seeing tremendous results. We are reducing the costs by getting injured workers the immediate treatment they need to get back to work faster. Premium rates for California businesses have already dropped by 17 percent, and more relief is on the way. New insurers are joining the workers' compensation market, creating more competition and lowering rates even further.”

From record low to record high to relatively stable, the premium rates for workers' compensation have had a rocky journey for almost two decades.  SB 899 closed the door on many workers' compensation problems, as a crème - brûlée closes a fine meal, with finesse and satisfaction.  Reform legislation in the form of SB 899 has helped bring much needed stabilization the workers' compensation industry in California.

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