Workers’ Comp: How We Got Here

The workers’ compensation insurance marketplace in California may at times seem like the Wild West. From the employer standpoint, it involves a dazzling array of choices and options. It is driven by a value proposition that can perilously tilt to price rather than long-term service and protection. For insurers, it all begins at the Department of Insurance, with what is called the pure premium (claims cost benchmark). As can be expected in this complex system, the pure premium rate-setting process can appear to be as chaotic as any other aspect of this system. There is, however, a method to this madness. Well before federal antitrust laws came into effect, the U.S. Supreme Court determined that insurance was not a part of interstate commerce. Thus, when antitrust laws were enacted, they did not apply to insurance. Insurers were free to share their market data with each other without fear of government prosecution. That all changed in the 1940s when the Supreme Court changed its position and determined that insurance was now part of interstate commerce. Overnight, much of what the industry was doing in terms of sharing data and making rates was illegal. Congress stepped in, and by the early 1950s what we now know as the Workers’ Compensation Insurance Rating Bureau (WCIRB) was licensed by the California Department of Insurance and was doing its business under “active state supervision” – which, under the law, allowed insurers to continue to share information. During most of the history of California workers’ compensation insurance, fully developed rates (losses, loss adjustment expenses, and general expenses) were set by the WCIRB and approved by the commissioner. No insurer could charge a lower rate (with some exceptions), leading to the name “minimum rate law.” No multi-line or interstate combinations of experience were allowed. In other words, workers’ compensation insurance rates had to be standalone adequate. By 1993, employers were experiencing the pain of high insurance costs and a dysfunctional system. Major reforms were enacted, including the repeal of the minimum rate law. Effective Jan. 1, 1995, a new “competitive” rate law was adopted. The WCIRB was to develop an advisory “pure premium” – losses and loss adjustment expenses only – and insurers did not have to use it. Insurers had to file their own rates and rating plans and load their own expenses. And multi-state, multi-line experience was now allowed when determining whether premiums were adequate. Within about five years, the wheels had pretty much come off the insurance marketplace in California. There were insolvencies and impairments; capital was leaving the state; and there was an undeniable crisis that affected the system well beyond the borders of the Golden State. The causes were many and varied, and while the legislature made some changes to the rate law, its primary focus in 2003, 2004 and most recently in 2012 was to rein in the costs of the system and try to bring some stability to the marketplace. But the pure premium rate-setting process has pretty much stayed the same since its enactment more than 20 years ago. The WCIRB does more, much more, than collect the data necessary to develop pure premiums. It develops and administers the statistical plan for data reporting, the uniform classification system and the uniform experience rating plan, for example. Each of these requires the approval of the commissioner, and each is a regulation of the Department of Insurance. As such, they fall under the procedures of the Administrative Procedures Act (APA). For many years, this APA notice and hearing process was used for both the regulatory and rate-setting filings of the WCIRB. Since 2013, however, the two processes have been split up. There’s a good reason for this. The first is that the APA, housed in the Government Code, doesn’t apply to rate-making proceedings. It is the Insurance Code that requires a hearing on pure premiums but also requires that the commissioner issue an order within 30 days of the hearing. The fact is that the department and the WCIRB work very closely together throughout the year, and the intended procedure for the adoption of the pure premium rates acknowledges this. The regulations that fall under the procedural requirements of the Government Code (APA) are not as time-sensitive as the adoption of the pure premium – the latter requiring some sense of certainty not just before Jan. (or July) 1, but with sufficient time to make rate filings and, if necessary, send out notices of nonrenewal depending on the size of the rate increase. The new process developed by the department allows for that. The WCIRB makes available copious amounts of data regarding the performance of the system. These can be found on the bureau’s website: www.wcirb.org. Everyone who is affected by the system would benefit by spending some time looking at these and understanding why we are where we are today, and the still very long journey to get to where we ought to be.