There are three major concerns and opportunities that must be considered. First, is the impact of SB 863, the major reform legislation bill passed late in this year's session of the legislature. Second is the continued increase in loss cost on prior years' claims. Lastly, will the weak economy improve enough to start bringing new workers into the workplace and what impact will that have on Workers' Compensation costs?
SB 863 holds the promise of lower claims costs, improved efficiency in claims processing procedures, and ultimately rate relief for California employers. At issue is the time frame for writing new regulations that will implement the new law. They are scheduled to take effect on January 1, 2013 which may lead to rushed procedures and unintended consequences. Also major parts of the law will be challenged in court. The Independent Medical Review procedures raise the issue of right to appeal. The injured employee attorneys have already indicated they will challenge this portion on constitutional grounds. Time will tell what the ultimate impact of the new legislation will be on the system, but immediate reduced costs are not expected.
Unfortunately, increasing premiums and rates will almost certainly continue into 2013. The Workers' Compensation carriers are spending 138 cents for every dollar of premium. The overly competitive marketplace coupled with medical cost inflation has led to large developments in claims settlements beyond case reserves. The collapse of the economy has also led to decreased premiums, while claims have increased.
It will take at least 24 months for this cost bubble to work its way through the system. The most recent actuarial review of past years' claims cost indicates that rates are over 9% lower than they should be. While the Workers' Compensation Insurance Rating Bureau governing board, in a purely political move, decided to recommend no increase in rates to the Department Of Insurance, underlying costs continue to increase.
Finally, as the economy slowly recovers and payrolls increase, we will see hiring pick up. While it seems like this would lead to lower loss ratios as premiums go up, just the opposite is true. As you add employees in general, they will be less skilled, need more training and will be less able to work safely immediately. Increasing workforces will lead to increased accident rates and increased loss ratios.
The carriers will always compete for very clean, well-managed and low loss ratio accounts, so now is the time to redouble efforts with safety programs, training and claims management.
