A recent article in WorkCompCentral, titled “Comp Is a Cash Cow, but Insurers Want Higher Rates,” suggests that California's workers' compensation system is thriving and that insurers are unjustly seeking rate increases.

However, a closer examination reveals a more complex and concerning picture. California's workers' compensation costs are significantly higher than the national average, driven by systemic inefficiencies and escalating administrative expenses.

Jon Wroten

Diverging combined ratios: California vs. national trends

Nationally, the workers' compensation insurance market has demonstrated remarkable stability and profitability. According to the National Council on Compensation Insurance, the calendar year 2023 combined ratio for private carriers stood at 86%, marking the seventh consecutive year under 90% and a decade of underwriting gains.

In stark contrast, California's workers' compensation system is experiencing significant financial strain. The Workers’ Compensation Insurance Rating Bureau of California reports a projected combined ratio of 123% for accident year 2023, the fourth consecutive year exceeding 100%. This indicates that insurers are paying out substantially more in claims and expenses than they are collecting in premiums, a trend that is unsustainable in the long term.

Underlying factors in California's high costs

Several factors contribute to California's elevated workers' compensation costs:

• Administrative inefficiencies and legal complexities. California's system is burdened with high administrative expenses and a complex legal environment. Litigation and claims adjusting expenses alone account for 7% of total claim costs, the highest among studied states.
• Benefit delivery expenses. Benefit delivery expenses absorb 12% of claim costs in California, compared to 6% in states like Texas and Wisconsin.
• High medical costs. California's medical costs per claim are among the highest in the nation, driven by factors such as higher utilization of medical services and higher prices for medical treatments.

Impact on employers and the need for reform

The high costs and inefficiencies of California's workers' compensation system place a significant burden on employers. Small and medium-sized businesses, in particular, struggle to absorb these expenses, which can hinder growth and competitiveness.

Reform efforts have been initiated, such as the 2012 legislative changes of SB 863, aimed at reducing frictional costs and improving benefit delivery. However, the anticipated savings have not fully materialized. Over the past decade, many of the savings of the reform have been slowly undone, with frictional costs creeping back into the system and rising, causing employer costs to continue to rise.

A call for comprehensive reform

While some narratives portray California's workers' compensation system as a profitable venture for insurers, the reality is that the system is fraught with high costs and inefficiencies that adversely affect employers and employees alike. Comprehensive reform is necessary to streamline administrative processes, reduce legal complexities and align costs more closely with national standards.

Addressing these issues is crucial to creating a more equitable and sustainable workers' compensation system that serves the interests of all stakeholders in California.

Jon Wroten, MBA, CPP, is senior vice president at The PATH Alliance and is managing director of California Risk Advisors. He is the former chief of the Office of Self-Insurance Plans for the State of California and has taught business, insurance and risk management as an adjunct professor at Sierra College for over 15 years.