Just asking the above question produces heartburn for businesses.  The thought of workers’ compensation rates on the rise is unsettling during good times and is compounded during this economically challenging time.

California has seen a significant workers’ compensation rate drop over the past five years. Legislation passed in 2004 had a favorable effect on insurers’ loss experience, which in turn led to a decrease in rates of approximately 65% over four years. In 2008, we witnessed rates stabilizing after they reached their lowest levels in 2007. Finishing the first quarter in 2009, rates, on average, have been 2-3 percent higher than 2008.  Overall, business has experienced significantly lower rates and there has been healthy competition by insurance companies to retain and win new business.

Recently there have been announcements suggesting a change to this stability. The Workers’ Compensation Insurance Rating Bureau (WCIRB) announced in April 2009 a recommended 23.7% increase to the ‘pure premium’ rate level. Public hearings on the WCIRB report begin on April 28. Any changes to the pure premium rates will take effect on July 1, 2009.

It is helpful to understand how workers’ compensation rates are established and when changes affect businesses. A primer follows:

The WCIRB provides statistical analysis to the CA Department of Insurance (DOI).  The DOI uses the statistical analysis to develop pure premium rates for approximately 500 job classifications (Class Codes) in California. California’s elected Insurance Commissioner is the head of DOI. The Insurance Commissioner advises the insurance companies of the DOI’s recommended ‘pure premium’ rates for all of the Class Codes.

Insurance companies use the pure premium rates as a component to their rating plans. These rating plans will include base rates for each class code and additional modification factors that apply to each policyholder. The pure premium rates are a significant part of the overall rate developed for each class code.  If an insurance company is going to change its rates, they start the process by filing the plans with the DOI.

Once insurance companies file their rate plans with the DOI, the Insurance Commissioner reviews the filings to determine if the rates would be unfairly discriminatory, threaten the insurance company’s solvency, or create a monopoly in California. Unless the Commissioner challenges the rates, the insurance company can start using the new rates thirty days after filing on new and renewal policies. The rates for new and renewal policies will remain in place for the term of the policy, which is usually twelve months.

As previously mentioned, the WCIRB has suggested a 23.7 percent increase to the pure premium rates. A few factors that may assist in moderating the suggested increase may be considered:

• Historically the Insurance Commissioner has reduced the WCIRB’s recommendations
• Our economy is facing financial challenges that will be compounded by increased insurance costs
• The Insurance Commissioner is an elected official with 2010 just around the corner

It is too early at this time to predict how insurance companies will react to the advised pure premium rate changes. Businesses and the financial sectors in California will watch closely to see what enfolds.

Regardless of the outcome, Riviera Insurance Services is well positioned to access insurance companies willing to offer competitive pricing along with offering advice to help keep the cost of coverage lower than market average over the long run.