There are several reasons for the sharp increase in workers' compensation insurance costs in California. The California Department of Insurance offers the following reasons why costs are climbing, and probably will continue to climb for some time:

1. One of the main cost drivers in workers' compensation is the provision of medical care. Though the number of nonfatal job-related injuries/illnesses have been going down steadily in the past few years, the severity (or the total cost) of claims have continued to increase. Recent studies have determined that the cost to medical providers exceeds the regulated reimbursement rate because of the additional duties medical providers are required to perform under workers' compensation laws and regulations. As a consequence, when the cost to pay, investigate, or defend a claim increases, rates are affected.

2. Beginning in the early 1990s, workers' compensation rates were largely deregulated, allowing insurance companies to price compete. Because of the intense competition in the insurance market, many carriers decreased prices below cost, to the point where some insurers could not afford to offer those prices. As a result, a number of insurers withdrew from the California market, or restricted the writing of policies, creating a shortage of available coverage, creating abnormal market demands.

3. In March of 2000, Superior National, then the state's largest private workers' compensation insurance company, was declared insolvent and is now being liquidated. The second largest private workers' compensation insurance company in California, Fremont Compensation, is also under Department of Insurance supervision because of its fragile financial condition. The demise of both companies stemmed in large part from inadequate pricing, and their losses and underwriting costs exceeded the rates they were charging.

4. Since 2000, the Department of Insurance has been approving incremental increases in the advisory pure premium rate. The advisory pure premium rate is recommended by the Workers' Compensation Insurance Rating Bureau, the agency charged with evaluating the statistical adequacy of workers' compensation premiums in the market to ensure a stable system. These rate increases have been implemented in an attempt to prevent more insolvencies. Note that these rates are advisory only, and the Insurance Commissioner does not have the authority to set rates for workers' compensation. However, the Commissioner does have the responsibility to provide the insurance industry with the information it needs to set appropriate rates. It should also be noted that several studies by the WCIRB continue to forecast inadequate rates for catastrophic events, such as a major earthquake during work hours.

While there are many insurance companies writing workers' compensation in California, the choices are becoming more limited. That is why the State Compensation Insurance Fund (aka SCIF) has grown into the nation's single largest workers' compensation insurance provider, even though they only do business in California.

Other independent studies, primarily by the Insurance Services Organization, have found that work comp rates have been significantly below the rate of inflation for well over a decade, and still remains several percentage points below what an inflation adjusted rate would otherwise be today assuming normal market conditions.

It may be some time before the work comp insurance market stabilizes to the point where insurance companies return to the state and healthy competition grows. Nevertheless, for an employer with a good safety record, low experience modification factor, and strong agent/broker affiliations, relatively reasonably priced insurance is still available. Alternatives for larger employers, of course, include self-insurance and the captive market.

Alex Michon, Aon Group, Alex has been placing large fully insured and self insured workers' compensation programs with The Aon Corporation for seven years. In addition to negotiating and placing insurance coverages, his responsibilities include having up to date knowledge of all insurance company policy forms and the positions of the many carriers participating in the marketplace. Alex works with a wide array of clients and specializes in alternatively financed workers' compensation programs. You can reach him by e-mail at Alex_Michon@ars.aon.com or at 916-369-4839