Effective business solutions for middle market organizations.

.A full spectrum business consultancy specializing in Risk Management, 
Human Resources, Management, Finance and Operations.

Tel./ FAX : 800.474.8807   -  e-mail: dhaynes@streamlinegroup.net  - 10126 Meadow Glen Way East  -  Escondido, CA 92026

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Special Report
by Dennis Haynes, President - The Streamline Group

Way back in the dark ages, around 1995 or so, California legislators enacted a series of reforms intended to "save" the Workers' Compensation system.  One of these created the now infamous "Open Rating" system of pricing. Prior to 1995, the rates for Workers' Compensation were set by the State of California.  Insurance carriers were mandated to all use the same rates.  The differences between carriers were the quality of services offered, and financial returns tot he policyholder, known as dividends.

Seeing that several other States had released the rates from their control, and the resulting drop in costs to employers, California followed suit....and , of course, we would do it better.  The insurance commissioner makes statements the Department of Insurance (DOI) was going to closely monitor the carriers to ensure they remain solvent, and can continue to pay claims.  The DOI was prepared to act swiftly. 

The rates were deregulated with a great deal of publicity...and for a while, things were good.

Carriers began to give sharp discounts in order to get "market share".  Competition was fierce for any kind of business.  Discounts were given for practically anything the underwriters could marginally justify. Employers were very happy.  Even with high losses, the annual premiums went down...and down ... and down. EBI, seeing something no one else does, shuts down all its' California operations

The carriers' idea was to get as large a percentage of all the business available in California, and hold on until the rates started to go higher.  This was the model in other states with Open Rating.  In other states, rates took a dramatic drop for about 3 years, then rose, until the rates were much higher than when the states regulated the prices. The only problem was ..... rates continued to drop in California through 1999.  The technical term for carriers writing anything at any price was "predatory pricing".  At one point, carriers were literally charging $ 0.05 for a product costing them $ 1.00!!! Even worse, predatory pricing begins in other states as well.

Carrier losses went higher, prices kept dropping. The DOI continued to "monitor" the situation.

San Diego, 1997.  The Department of Insurance takes over Golden Eagle Insurance due to a lack of funds to pay claims.  Carriers go crazy bidding for the book of business.  Lawsuits are filed. Earnings, if you can call them that, continue to decline.  Carriers with parent companies willing to throw more money at the problem tend to be in relatively good shape.  Investment earnings from the continuing economic expansion are helping keep carriers afloat. Predatory pricing continues.  No one can beat The State Compensation Fund's pricing on business it really wants. Several carriers go on the DOI Watch List.  Employees begin to get restless.  Carrier stock prices, however, remain stable.

EBI reopens California operations.The average cost per claim skyrockets.  The number of claims comes down dramatically.

1998 - 1999.  Superior National buys CalComp, a company 4 times larger than itself, and becomes, overnight, the largest private Workers' Compensation carrier in California, the fifth largest in the country.

Thanksgiving, 1999.  Superior National's stock plummets drastically.  Other carrier stocks begin a similar downturn.  Company officials remain publicly calm.

Roughly October 1999.  The DOI FINALLY steps in and issues mandatory rate increases, and changes the rules for filing rates.  Prior to this, carriers could "use and file", meaning, pricing was no big deal to the DOI.  This is changed, now, to "file and use", meaning the DOI was not allowing any carrier to use any rate they wanted anymore without prior approval.  Renewals used "weasel words" with phantom rates.  The quote received and accepted by employers suddenly were raised when the bill came in.  Employers are getting furious about hikes.  After all, they have had 4 - 5 years of drastic reductions.

Calabassas, March 3, 2000.  The DOI takes over Superior National because, surprise, there is no money to pay claims.  

March, 2001.  The DOI takes over both Great States Insurance and HIH.  Fremont is basically being operated by the DOI. More carriers are put on the Watch List. The State Fund writes $800 million in premiums in the last quarter of 2000.

What's Next?

  • More insurance carrier insolvencies.
  • A total depletion of the State's Insurance Guarantee Fund by 1/1/2002.
  • A doubling of the surcharge to employers for the Guarantee Fund, so it can continue to pay claims for the failed carriers.
  • Huge rate increases to cover existing claims costs.
  • An increase in benefit levels by the Democratic-controlled legislature ... resulting in even higher rate increases.
  • Specific industries, such as construction and health care, will find it extremely difficult to get coverage because fewer carriers will want them.  Expect refusals to quote.
  • The only recourse for many will be ...The State Compensation Fund, operated by the State of California.  The Fund cannot deny coverage to anyone, but can apply huge surcharges to these employers' premiums.
  • No employer is going to be immune to price increases.  That is a fact.

Plenty.  Take a deep breath.

First, stop having a "System Victim" mentality.  The insurance industry has done an excellent job of convincing employers they have no power in Workers Compensation.  Employers are told that this is the "System", and there is no way to change it or the results.

The industry has also presented itself as the experts and professionals who are here to work in the employers' best interests.  Just let them take care of everything for you because you cold not possibly understand..

This can't be further from the truth! Employers are much more powerful than they realize.  Decide to take control.  Stop being a Victim.

Second, become pro-active in your program. Ask questions of you broker/agent, health care provider and carrier representatives.  Take an active role in Claims Management.  Don't be put off.  After all, who is paying whom?

Third, Check industry Associations and find out if any group-type programs are available.  Group pricing is usually less expensive due to increased buying power.

Fourth, establish an effective Early Return to Work program.  This is an extremely effective cost containment tool.

Fifth, make sure the carriers are fully aware of the extent of your workers' compensation cost containment program.  Impress them with your pro-activity.

Sixth, make sure the carrier can meet your needs.  An Early Return to Work program is ineffective in the hands of a claims examiner who has no idea how it supposed to work.

The Streamline Group, Inc. has had decades of experience in the identification and establishment of pro-active and other cost-containment programs based on the specific needs and operations of its clients.

Effective business solutions for middle market organizations.

.A full spectrum business consultancy specializing in Risk Management, 
Human Resources, Management, Finance and Operations.

Tel./ FAX : 800.474.8807   -  e-mail: dhaynes@streamlinegroup.net  - 10126 Meadow Glen Way East  -  Escondido, CA 92026

Our Services         About Us         Home Page         CA Workers Comp.