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INSURANCE MARKET UPDATE |
MAY 1994 |
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Effective January 1, 1995, California will abandon its mandatory rate structure for workers' compensation insurance and replace it with what is known as "loss cost" rating. This may sound ominous, but it is actually very good news. It will bring rate competition to the workers' compensation insurance marketplace in California for the first time ever.
There are some associated perils. This is a significant regulatory change, and, like deregulation of the savings and loan industry, it affords opportunities for both the principled and the predatory. You can expect that new and unusual promises will be made. Some will be deceptive. Knowledge can be a useful resource here and, in the face of uncertainty, so, too, can competent and independent professional advice. This Insurance Market Update should help you advance far enough on the knowledge curve to use your advisors well.
Your workers' compensation premium has two principal components: 1) losses (including loss reserves) and 2) company expenses (loss control, R&D, marketing, and so on). Detailed, statewide data on losses is compiled by the Workers' Compensation Insurance Rating Bureau. Under the current system of rate regulation, the Bureau uses this data to recommend periodic rate adjustments to the Commissioner of Insurance. The recommended rates include: 1) "loss costs" and 2) a fixed percentage for company expenses. The rates may be approved, in whole or in part, or rejected, but once a decision is made, their use is mandatory throughout California.
Under the system scheduled to go into effect on January 1, 1995, the Bureau will no longer concern itself with company expenses. Its reporting function will be limited to "loss costs" (hence, "loss cost" rating). Loss cost rates will be advisory only, and companies will be free to modify them as they wish and to add whatever they believe to be an appropriate amount to cover expenses and provide for profit. There will be rate competition as a result. There will also be alternative approaches to structuring products and services--some will advance financially sound and welcome innovations; others will test the limits of propriety under the new rules.
The most innovative individual approaches will be available only to the largest firms. Small and medium-sized firms will continue to be best served by well managed group programs, but even these may be packaged in unfamiliar wrappings. You can expect innovation here, too. For large firms and small, this is where your knowledge will be put to a test.
Clearly, companies with a history of efficient management of group programs for architects and engineers and better than average underwriting results (lower losses) are positioned to compete more effectively than those with little or no experience or less restrictive underwriting guidelines. In the past, dividends have been paid from group profits, and the dividend history of companies offering workers' compensation insurance to architects and engineers on a group basis in California is a good measure of their relative competitive strength going into a very new rate environment.
Currently, five group programs are available to small and medium-sized firms. Here are the companies which offer them, the A.M. Best's rating assigned to each, and the underwriting results achieved over time as measured by policyholder dividends paid (remember, the rates charged were the same):
| Best's | Average Dividend Paid | ||
|---|---|---|---|
| Underwriter | Rating | 5 Years | 10 Years |
| Kemper (California Group) | A+(XV) | 42.28% | 40.86% |
| Fireman's Fund | A(XIV) | 21.52% | 22.23% |
| Legion (Formerly Hartford)* | A-(VII) | 28.62% | 21.74% |
| Kemper (National Group) | A+(XV) | 16.60% | 16.92% |
| California Compensation (CalComp) | B(VII) | - -** | - -** |
Under the new system, there will be rate competition, but where are the savings to be found that will give insurers the ability to lower their rates? They will have to come from selective underwriting, more efficient company operations, and, possibly, lower profits. Companies may be able to effect reductions in expenses, but expenses represent only 28% to 32% of the total premium. A 15% reduction in costs would generate only a 4.5% reduction in rate. Add a percent or two squeezed from profits and the result is interesting, but not enough to justify wild dancing in the streets.
Any further reductions in rate will have to come from superior loss experience. In the past, superior underwriting results have produced benefits to insureds in the form of dividends. In the future, it can be expected that prospective dividends will be mortgaged, to a greater or lesser extent, to produce lower rates going in. Some companies may choose to call this mortgaged dividend a "commission rebate." But, however it is packaged, the true benefit to you will be some combination of reduced rates and deferred dividends. The message is this: The rates that are quoted are not likely to mean much in the absence of an understanding of the financial strength, the services, and the dividend history of the company that stands behind them.
Since, by law, dividends cannot be guaranteed, there is something to be said for securing as much of the benefit up front as you reasonably can. But, in the final analysis, the most competitive alternative is likely to be packaged as a combination of reasonably competitive premiums and dividends actually paid. The Kemper California Group has been the most competitive alternative for our clients in the past, and we believe it will continue to demonstrate superior results. Our recommendation to those who qualify for the Kemper Group is to plan to stay the course. Promises of performance will be made by others, and we will help you evaluate these, but it will take some time before the smoke clears and realistic assessments can be made about the results.
| Professional Practice Insurance Brokers, Inc.
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| 10 California Street Redwood City, CA 94063 (415) 369-5900 |
4401 Colwick Road Suite 700 Charlotte, NC 28211 (704) 365-0900 |
540 Frontage Road Suite 3030 Northfield, IL 60093 (847) 441-0210 |
2244 West Coast Highway, Suite 200 Newport Beach, CA 92663-4724 (714) 729-0700 |
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© 1996, Professional Practice Insurance Brokers, Inc. This newsletter is published as a professional liability loss prevention service to PPIB clients and friends. It is intended for use by architects and engineers as an information resource. It is not intended to afford legal or insurance advice or opinion. Readers are urged to consult competent legal and insurance counsel for assistance in applying the information presented here to their own unique circumstances. |
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PROFESSIONAL PRACTICE INSURANCE BROKERS, INC.
a Hilb, Rogal and Hamilton Company
© 2000 Hilb Rogal & Hobbs Professional Practice Insurance Brokers, Inc. All Rights Reserved. California License #0641361.