WCIRB Recommends 16% Rate Increase for January ‘09
With medical inflation on the rise and a full year with no change in California workers’ compensation pure premium rate, the Workers’ Compensation Insurance Rating Bureau of California is recommending a 16% overall average increase to pure premium rates. It is for new and renewing policies as of Jan. 1, 2009. The recommendation could actually increase later in the fall – to as much as a 20% overall increase. This depends upon changes to the permanent disability rating schedule under consideration by the Division of Workers’ Compensation.
The final recommendation, which could still shift by a tenth of a point, will be officially filed with Insurance Commissioner Steve Poizner’s office on Friday.
WCIRB staff was originally recommending an even higher increase of 17.4%, but the Bureau’s governing committee moderated the impact somewhat by adopted an alternate computation for loss adjustment expenses.
Accounting for 10.8 of the 16 points of increase is the growing rate of medical inflation. For this rate filing, the Bureau boosted its growth trend for medical losses from 1% to 5%, which is more in line with historical medical loss inflation. For comparison, Bureau actuary Dave Bellusci told the committee that if last year’s recommended 5.2% increase in the pure premium rate had been computed using the higher medical growth rate the final recommendation would have been a 9% hike. Ultimately even the lower rate hike was rejected by Poizner.
The filing can be expected to have a substantial political impact on deliberations at the Division of Workers’ Compensation concerning the large increases to the permanent disability rating schedule favored by applicant attorneys and Senate president pro Tem Don Perata. How that might translate into an affect on the confirmation of Carrie Nevans as Administrative Director is only educated conjecture at this point.
“Even with this increase it’s still about a 60% cumulative decline from the high-water mark,” says Bellusci. At its zenith, California’s average pure premium rate was $4.81 per $100 of payroll compared to $1.68 currently. The proposal would boost that average rate to $1.95.
The proposed increase includes a modified use of the loss adjustment expenses from the State Compensation Insurance Fund in its calculation of the overall LAE projection. Poizner’s office rejected the inclusion of State Fund’s data the last time an increase was proposed, opting instead for a calculation based solely on the results of private carriers.
A week ago, the Bureau’s actuarial committee was unable to reach a consensus on a new methodology that would temper the impact of State Fund’s impact on the overall calculation and opted to keep the existing methodology.
But the Bureau’s staff did some additional analysis of the data and offered the governing committee several alternatives that included use of weighted and tempered State Fund data. The ultimate formula selected, which tempers State Fund’s data at 50%, drops the overall LAE projection from 28% to 26.8%.
Under the 50% tempering rate, the Bureau is using only half of the difference in State Fund’s LAE ratio to the average of private carriers. The remaining 50% is considered to be unique to State Funds operations and is not indicative of the true cost of administering the claims. Overall, the data is also weighted to represents State Fund’s declining market share.
The change in the LAE computation accounted for the drop in the overall pure premium rate recommendation from 17.4% to 16.1%. If State Fund data had been excluded entirely as the Department of Insurance did last year, the Bureau’s original recommendation would have been for an approximately 14.4% increase.