What’s Driving Continued Fall in California Rates

There could be yet another workers’ comp rate reduction coming down the pike, after California’s rating agency filed a recommendation that benchmark rates for policies incepting on or after Jan. 1, 2019 be reduced by 14.5% from Jan. 1, 2018 levels.

The Workers’ Compensation Insurance Rating Bureau’s recommendation that the average benchmark rate be cut to $1.70 comes on the heels of an order by Insurance Commissioner David Jones to reduce these “pure premium rates” by 10.3% as of July 1, compared with Jan. 1 rates.

The advisory pure premium rates proposed to be effective Jan. 1, 2019 average $1.70 per $100 of payroll. This is $0.08, or 4.5%, less than the average approved July 1, 2018 advisory pure premium rate of $1.78. And the rate was $1.94 for policies incepting on or after Jan. 1, 2018.

While the published benchmark rates are an average for California’s 505 standard classifications, the pure premium rates approved by the insurance commissioner are only advisory and insurers may, and often do, file and use rates other than those approved.

Claims and claims-adjusting costs have continued sliding since 2015, the year after reforms addressed a number of cost drivers in the system. Still, the sustained claims cost decreases have surprised industry actuaries, who could never have imagined the full effect of those reforms.

The main drivers

The Rating Bureau cited the following continuing developments as the main drivers of the rate-decrease recommendation:

1. Old claims from 2016 and earlier continue coming in short in terms of expected ultimate costs (some workers’ comp claims can continue for years, and even decades, for severely injured individuals who may still be collecting workers’ comp disability benefits and still be receiving care and medication for their industrial injuries or illnesses).  The Rating Bureau has been missing the mark on how much it expects claims to cost as they age and, as a result, in the last many rate filings it has had to adjust rates to account for these expected effects on future claims.
2. Insurers and claimants continue settling the indemnity (disability payment) portion of claims with increasing frequency. In 2013, the year the legislature passed the most recent reforms, 48.3% of indemnity claims had settled at the 27-month mark (27 months into the claim). As of this year, 60% of 27-month-old claims had settled. The same holds true for other markers, at 39 months (62% in 2013 vs. 70.4% in 2018) and at 51 months (72% vs. 79.5%).
3. The cost of claims (both indemnity and the medical portion) continues to grow at a moderate rate. One of the biggest successes has been the continued slide in medical costs per lost-time claims. In 2010, the average medical outlay for lost-time claims was $37,966, and that had fallen to $30,452 in 2016. The average medical cost ticked upwards for the first time in 2017 since 2010, to $31,440.
4. Claims costs for 2017 were lower than expected. This is in part due to the downward indemnity and medical estimated ultimate claims costs for the 2017 accident year, which are significantly below the level the Rating Bureau projected in the Jan. 1, 2018 rate filing that it made last August.  The data show a steady decline in average length of temporary disability benefits. Members of the Rating Bureau’s governing committee said before a vote on the rate recommendation that the independent medical review process is resolving medical treatment disputes more quickly, which is allowing workers to get treatment and get back to work more rapidly.
5. Wages are expected to continue growing in California. And since the benchmark rates are expressed in relation to payroll (x amount per $100 dollars of payroll), growth in average wage levels on paper acts as a buffer on claims and claims-adjusting costs. That in turn could reduce the pure premium rate level indication.
6. Pharmaceutical costs are declining sharply.
7. The number of liens filed continues to decrease thanks to reforms that dissuade the filing of liens when invoices are issued, a common practice in the past.

The Rating Bureau noted that it does have some concerns that could raise costs:

• Increasing claims-adjusting costs (the administrative portion of adjusting claims).
• A record-high number of independent medical reviews (which are ordered if there is a dispute about how treatment should proceed).
• Continued high levels of cumulative trauma claims (these are mostly being filed in Southern California).
• The data also showed a spike in medical-only claims late in 2017, but the Rating Bureau surmises (since it hasn’t studied it yet) that the increase is from better reporting of first aid claims. The Department of Insurance and the Rating Bureau have put an emphasis on getting first aid claims reported and, to encourage this practice, will be eliminating the first $250 of every claim from the experience-rating calculation, beginning in 2019.

The takeaway

Rates will vary from industry to industry, and some sectors may actually see higher rates despite the new filing. And depending on location, industry and their own claims history, employers may or may not see rate decreases come renewal.

Also, employers in Southern California face surcharges on their policies due to the rampant filing of post-termination cumulative trauma cases in the region. These cases are often filed without merit and are difficult to settle.