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 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, compared with $1.94 the rate set for 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:
- Old claims from 2016 and earlier continue coming in short in terms of expected ultimate costs. The Rating Bureau has been missing the mark on how much it expected 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.
- Insurers and claimants continue settling the indemnity (disability payment) portion of claims with increasing frequency. The sooner claims are settled the less expensive they turn out to be since the indemnity portion is capped. Generally, the medical portion is not capped in the best interest of the employee’s health and recovery.
- 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 fell 20% between 2016 and 2010 to $30,452. It’s inched upward slightly since then.
- 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.
- 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.
- Pharmaceutical costs are declining sharply.
- 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.
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.