Gilroy – When Gov. Arnold Schwarzenegger signed his
much-publicized workers’ compensation reform package into law last
summer, he left no doubt that it would radically alter California’s
Gilroy – When Gov. Arnold Schwarzenegger signed his much-publicized workers’ compensation reform package into law last summer, he left no doubt that it would radically alter California’s business environment.
“No longer will workers’ compensation be the poison to our economy,” the governor declared. “We are making the state once-again a powerful, job-creating machine.”
Local employers know exactly what he was talking about.
“Our rates were so high we couldn’t keep people on,” said Renee Bannon, the controller for West Coast Linen Services Inc. in Gilroy. Bannon recently switched her company’s insurance from the State Compensation Insurance Fund, known as State Fund, to American International Group Inc., but only saved about one and a half percent. “I hope AIG will continue to lower our rates.”
Rates have gone down for many employers, but six months after Schwarzenegger’s bold talk, the reforms appear to be benefiting insurance companies much more than employers. While rates have moved down slightly, profits for many insurance carriers have risen dramatically.
But this might not be a case of profiteering. The culprit, says Insurance Commissioner John Garamendi, might be government inefficiency.
“State Fund has very serious operational and management issues that make it difficult to effectively pass cost savings on to employers,” Garamendi said Monday. State Fund also controls about 55 percent of the state’s workers’ compensation business. “Their previous financial problems have resulted in rates being very high. Since State Fund is keeping its rates high, the rest of the market has no competitive reason to reduce its rates.”
On average, major carriers have cut rates by about 10 percent since July 2004. State Fund reduced its rates by 7 percent last July and a further 5 percent last week. State Fund Spokesman Jim Zelinski said Monday that those cuts made “sound” business sense and that Garamendi overstates State Fund’s role in setting the market.
“We don’t create hard or soft markets,” Zelinski said. “We react to them. We’re a competitive carrier. We are confident that the reforms will lead to further cost reductions and when they materialize, they will be reflected in future rates.”
But State Fund doesn’t operate like other insurance carriers. It is an independent, but quasi-state agency that acts as a lender of last resort to companies that can’t get private insurance. It has about 260,000 policy holders. Many of Garamendi’s criticisms revolve around its inability to juggle them all.
Steve Costa, president of Head Start Nursery in Gilroy, said Monday that his workers” compensation rates are going down about 10 percent, but he doesn’t know if that’s due to the reforms or his own safety record, known as the modification.
“They can’t even tell me where I am on my modification,” he said. “I understand what’s supposed to be happening, but I’m not sure that they do.”
Whatever the reasons underlying State Fund’s rates, other carriers are taking advantage. Two of the biggest players in the state’s market, AIG and Zenith National Insurance Corp., posted healthy profits in the third quarter of last year. Zenith’s reported profits soared to $25.4 million compared to $16.1 million in the same period in 2003.
Zenith has lowered rates about 12.5 percent since July 1. Chairman Stanley Zax said last week that it’s far too soon to know what the effects of the reforms will be.
“There’s going to be litigation on all of these things. The regulations will be challenged,” he said. “I personally don’t care what anyone thinks of what we’re doing. We’re acting responsibly.”
And Steven Ader, insurance rater with the credit rating agency Standard & Poor’s, said Monday that insurance companies are wise to not rush into rate reductions.
“Everyone agrees that there are benefits, but it’s too soon to quantify them,” he said.
Ultimately, a major aim of the reforms is to increase competition and let the marketplace drive down rates naturally, and everyone agrees that that should happen.
“Over a long period of time there will always be a natural correction,” Ader said. “We’re seeing more companies move into California to write policies.”
And many of those companies are the same ones that abandoned the state in 1990’s, causing California to have the highest rates in the country. So the reforms could very well push the market even further in employers’ favor.
“Rates have stopped increasing and are going down, and that’s a very good thing,” said Rick Rice, assistant secretary in the state’s Labor and Workforce Development Agency. “We have no doubt that the market is going to take care of itself, and we’re watching these companies very closely.”