Workers’ Comp Reform Ends Business as Usual at the Rating Bureau

For months, supporters of SB 863—workers’ compensation reform recently signed by Governor Jerry Brown—have argued that the legislation would deliver better benefits for workers at reduced cost to employers. As evidence, we pointed to Workers Compensation Insurance Rating Bureau (WCIRB) numbers confirming that SB 863 could reduce a planned 12.6% insurance rate increase by a few percentage points.

Never in our wildest dreams did we expect SB 863 to inspire anything more than a slightly smaller rate increase, but then the WCIRB Governing Committee stunned the California insurance world last week by eliminating that 12.6% rate hike entirely, potentially saving employers hundreds of millions of dollars while leaving SB 863’s benefit increases untouched. Sometimes, it seems, dreams really do come true.

Here’s how it happened:

The WCIRB Governing Committee is a 12-member body comprised of four “public” members: two labor representatives and two employer representatives. All eight remaining seats are held by insurance companies. Despite the lopsided composition, the committee generally runs well, and public members employ an actuary with substantial input into committee decisions and analysis. Not surprisingly, however, contentious votes typically break 8-4 in favor of the insurance companies.

The primary role of this committee is to use financial and claims-related data—filed by California’s workers’ compensation insurers—to prepare and approve “pure premium advisory rates.” These rates are generally seen as the most accurate estimate of how much insurers should charge employers to adequately cover the cost of workers’ compensation claims. Insurance companies are free to exactly follow or totally ignore the WCIRB advisory pure premium rates, but insurers who overcharge will likely lose market share and those who undercharge will eventually risk insolvency. So, the WCIRB advisory rates are a critical metric carefully watched by the industry.

Committee members met last Wednesday to adopt a reduced, post-SB 863 advisory pure premium rate increase. Following a WCIRB staff presentation outlining these relatively minor adjustments, State Compensation Insurance Fund (SCIF) president Tom Rowe moved that Governing Committee members simply recommend a 0% increase.

Mr. Rowe argued that many of SB 863’s reforms offered massive savings that actuaries have no way to estimate, therefore, only a 0% increase would accurately reflect the intent of those individuals who negotiated the bill. He also pointed out that the new statute will require administrative rulemaking, and a 0% increase will empower state agency officials to demand strict rules that keep costs down. As reasonable as that argument may sound to people who aren’t insurance companies, insurer members saw things differently and were strongly opposed.

Fortunately, Mr. Rowe’s motion won unanimous support from all four public members and another insurance industry member, giving the proposal six votes. One insurance representative was absent, and thus the five industry “no” votes fell short of a total necessary to defeat the motion. 

It’s hard to overstate what a major coup this motion was.

By eliminating the 12.6% increase, the committee essentially forced the insurance industry to account for the substantial—but difficult to quantify—savings within SB 863. This was, among other things, a rejection of the notion that the value of legislation can be accurately measured by overestimating many costs while ignoring many potential savings. Rather than erring on the side of national insurance company reserves and investment income, the Governing Committee wisely chose to prioritize the immediate, dire need of workers and employers for predictable costs and lower rates.

The 0% increase represented a voluntary refusal to raise rates in an uncertain environment—not exactly a common tactic for your typical insurance company, but one critical to struggling employers and workers across the state. Adopting this motion also helped discredit insurance company critics who claim that the industry remains uninterested in real cost containment.

This unexpected victory confirmed that when it comes to workers' compensation in California, more of the same will no longer suffice and a new way of doing business has prevailed. We’re honored to be a part of the process that produced such an admirable result, and we’re ecstatic that the WCIRB Governing Committee took such a direct step towards the goal of a more stable, efficient workers' compensation system.