Insurance Commissioner Recommends Mid-Year Workers’ Compensation Rate Reduction

Employers could see minor reductions, credits

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SAN DIEGO, May 12, 2015 - At long last there is some good news for California employers related to Workers’ Compensation rates.  Late last week, Insurance Commissioner Dave Jones recommended a pure premium rate decrease of 10.2% effective July 1, 2015.  Before employers get too excited about a double digit rate decrease it is important to remember this is only a benchmark rate and not one that has to be followed by workers’ compensation carriers.  In fact, it is highly unlikely that any will reduce rates by more than 5% and will instead try to provide additional rate relief for employers through scheduled credits.

The rate reduction was based on the Workers’ Compensation Insurance Rating Bureau’s findings which showed lower than projected claim severity, favorable medical loss development and better than expected accident year losses for 2014.  The commissioner also indicated the current carrier reserves and profitability related to a stretch of high premium rates should result in better pricing starting in July 2015.

In reviewing the California Workers’ Compensation market trends as of 12/31/2014[1], there are clear indications a softening of the market is imminent. The medical cost trend has been declining since 2011 and is down 9.7% in 2014 as compared to 2011.  In addition, the projected ultimate combined ratio for 2014 is 103 as compared to 121 in 2012 and 109 in 2013.  The combined ratio is a key measure of profitability for workers’ compensation carriers.  A combined ratio of 100 would be the breakeven point but carriers can still be profitable above 100 with decent investment income. 

Despite these favorable trends, there are still indicators that will give rise to caution by carriers.  The projected indemnity cost per claim is up 20% from 2011 and claim frequency continues to rise.  Most carriers are also not getting the same return on their investments (the current yield on 10 Year Treasuries is 2% compared to 5% 10 years ago).  These factors combined with an average indemnity claim cost of nearly $84,000 will prevent most carriers from following the rate recommendations. 

So while the news is much better than years past, employers should not expect to receive a 10.2% rate reduction across all classification codes.  Minor reductions are expected in most base rates and depending on a company’s historical loss performance, further premium savings may be found in a favorable experience modifier and negotiated scheduled credits.

For questions on the Insurance Commissioner’s recent recommendation or your workers’ compensation program, please contact your Barney & Barney representative or:

Jeff Cruz, MBA, CPCU, Client Executive
(858) 587-7577

[1] WCIRB Report on December 31, 2014 Insurer Experience released April 20, 2015