Controlling Workers Compensation Costs for Employers

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Pure Premium Advisory Rates Approved

Commissioner gives employers a payroll reduction

It is official - the Insurance Commissioner has approved the WCIRB's mid-year (July 1, 2012) pure premium rate filings. However, the Commissioner did get his two cents worth in - literally. Instead of approving the WCIRB's rate request that would have set the Pure Premium Advisory Rate at an average of $2.51 per $100 of payroll, the Commissioner revised the request to an average of $2.49 per $100 of payroll – thus giving the employers in California a two cents per $100 of payroll reduction.

Rates are 'advisory' only

Of course, the insurance carriers are not required to follow lock-step with the WCIRB's recommendations. These rates are 'advisory' only. There are, however, some reasonably solid statistics behind the filing. The Pure Premium Advisory Rate '... is the rate needed to cover the cost of benefits and adjustment expenses.' It does not cover an insurer's other expenses such as commissions, taxes, dividends, and profits.

The published Decision

In the published Decision, the Commissioner noted that carriers ' . . .filed manual rates, the rates that insurers file with the Department to price employer premiums before any discounts or surcharges, average $3.39 per $100 of employer payroll as of January 1, 2012.' This means the carriers' filed rates are, on average, 41.8% higher than the approved Pure Premium Advisory Rates.

The Commissioner further stated that rates charged to employers, including discounts and surcharges, are an average of 29.5% lower than the filed rates. Based on those statistics, it would appear, even though the filed rates are higher than the approved Pure Premium Advisory Rates, the net effect to the employers is closer to the approved rates.

According to the Decision, the 'claim frequency' for accident year (AY) 2011 was consistent with the higher AY 2010 level. The frequency level for AY 2011 was slightly less than the 2010 level. Since 2001, the 'Estimated Change in Claim Frequency' has been lower each year, with 2003 and 2004 showing double digit declines in frequency. The claim frequency spiked in 2009-2010 to about +9%. The reason for this sudden hike is not known. The 2010-2011 year again showed a slight downward trend in frequency.

Perhaps the most telling statement in the Decision was, 'Per unit medical costs do not appear to be increasing much, but medical utilization appears to be the main driver in overall cost increases.' Medical cost containment consists primarily of Utilization Review and bill review.

Cost Containment per Indemnity Claim

Chart 1 shows the rise in the average cost containment per indemnity claim since 2002. From AY 2005 (the first full year after reforms) through 2010, cost containment per indemnity claim has increased a total of 156%. The average annual growth has been 20.7% per year.

For the AY 2010, paid medical cost containment averaged 8.2% of all paid medical costs.

In his Decision, the Commissioner stated, 'If cost containment tools are not working and costing more than they benefit, we need to know why.' He called on the WCIRB to provide further information in its next Claims Cost Benchmark filing.

This rate filing (effective 07-01-2012) is the second filing for 2012. The last filing prior to AY 2012 was 01-01-2011. In the last 18 months, the rates have been changed twice. The overall effect on all 494 work classification codes has been a significant increase in the Pure Premium Advisory Rates. Chart 2 (below) is a Scatter Chart that shows the distribution of all the increases in the Pure Premium Advisory Rates.

Pure Premium Comparison

As the chart demonstrates, most class codes have experienced an average of between 40% and 50% increase since January 2011. Filed rates by the insurance carriers indicate they are following the Pure Premium Advisory Rates very closely. This has been confirmed by anecdotal reports from both brokers and employers on their 2012 policy renewals.

Chart 3 (below) shows the distribution of the Pure Premium Advisory Rate increases. The bulk of the increases were between 40% and 70%.

Pure Premium Comparison - Distribution of Percentage Change


'The Die is cast' and the 'Results are chiseled in stone'. Employers are already facing significant increases in their work comp premiums. It looks like they are in for several years of premiums increasing at double-digit rates.

At the same time, there is a quest by the regulators and all the other stakeholders to, once again, 'fix the system'. The call is for 'more benefits for the injured workers without increasing premiums for the employers.' In theory, that could be done with 'efficiencies' in the system. But, where will these 'Phantom' efficiencies come from? Claim frequencies are leveling off and decreasing; medical costs are flat; cost containment is skyrocketing. Will the carriers lead the way by controlling their own ballooning costs?

Stay tuned . . . . . .

Note: Registered users who are logged in may download a copy of Chart 3 Pure Premium Comparison in MS-Excel format:

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