"The
premium costs to employers are out of control and will
continue to spiral upward unless legislative and regulatory
action is taken immediately"
Commissioner
Addresses Work Comp Crisis
Calif. Insurance
Commissioner John Garamendi held a press
conference March 3rd addressing the workers'
compensation crisis in California.
Specifically, Garamendi proposed a seven point
plan to return State Compensation Insurance
Fund to a state of financial stability. Below
is the text of Garamendi's speech to the
media:
"Last week, I outlined my plan to address
the serious crisis in the $15 billion
California workers' compensation system. The
premium costs to employers are out of control
and will continue to spiral upward unless
legislative and regulatory action is taken
immediately. The legislative action is needed
to control medical costs, create uniformity
and certainty in permanent disability
benefits, reduce litigation, and establish
standards of conduct for claims adjusters and
appeals judges. Regulatory action is needed to
preserve the fiscal integrity of insurance
companies, reduce fraud, and coordinate state
agencies' activities.
Today, March 3, 2003, the State Compensation
Insurance Fund has filed its annual financial
statement, which provides evidence of an
organization in need of aggressive action to
right its financial ship. I am working
directly with the management of the State
Fund, California's largest provider of
workers' comp insurance, to correct its
financial problems. Over the past few years
the fund's premium writings have grown too
rapidly because private insurance companies
reduced their business in California and
employers have been forced to insure through
the State Fund. This extreme growth has led to
serious financial problems at the Fund.
Meanwhile, its surplus has not increased
commensurate to its written premium and
reserve growth, and its total adjusted capital
is not at a desirable level.
Failure to take action now could have
disastrous consequences for both State Fund
and the California economy. With nearly 54
percent of workers' comp insurance policies
that cover more than half the employers in the
state, a solid, well run State Fund is
absolutely essential. Therefore, my course as
Insurance Commissioner is clear - the State
Fund must be strengthened and preserved to
ensure the viability of the state's economic
future. The course is clear for the
Legislature as well - it must act immediately
to stop the cost escalators that are so
entrenched within the system.
I have worked diligently with State Fund
management since taking office in January to
address this situation. At my direction, they
have prepared a comprehensive business plan
designed to accomplish several major goals,
including, but not limited to: Reducing
premium income, increasing surplus and
profitability, strengthening management and
creating operating efficiencies. Some details
of the plan are not yet complete, but the
general elements are well conceived and
comprehensive. The sum of these elements
should yield a stable, profitable State Fund
with the solid financial strength and the
management expertise to accomplish its
mission.
State Fund's business plan includes the
following steps:
1) State Fund will retain a management
consultant to ensure that it operates as
effectively and efficiently as possible. It
will also retain a consultant to assist the
new Chief Financial Officer. This consultant
will focus on finding additional opportunities
to strengthen the capital structure of the
organization.
2) State Fund will take steps to dramatically
reduce new business. Business submitted by
brokers and agents will have to demonstrate
that insurance is not available from any other
source.
3) Effective July 1, State Fund will implement
a further rate increase on new and renewal
policies. This increase will be adequate to
ensure that premiums paid by policyholders are
sufficient to pay all claims and
claims-associated expenses and restore surplus
to an adequate level.
4) State Fund will reduce broker commission
rates and conduct a review of business
submitted by brokers and their companies.
Those brokers found to consistently write
unprofitable books of business will lose their
certification.
5) State Fund will explore reinsurance
arrangements to reduce the strain on its
surplus caused by the rapid growth in new and
renewal business.
6) State Fund will also strengthen its
underwriting practices to ensure control over
the quality of new business it must write
because there are no other markets for those
accounts.
7) State Fund will review all of its accounts.
It will then implement appropriate surcharges
and reduce merit rating credits for
unprofitable accounts upon renewal.
The combined impact of implementing rate
increases, the reduction in commissions, and a
renewed focus on profitable underwriting
should help the State Fund's surplus by more
than $1 billion, and help achieve a reduction
in the amount of premium written.
Secondly, it is imperative that private
companies return to the California market to
provide competition and capacity. These steps
will stabilize State Fund and thereby help
stabilize the state's workers' comp market and
attract new insurers. If the State Fund, with
more than 40 percent of the premium in the
state market, can charge adequate rates that
allow it to meet its financial obligations,
other insurers should feel confident that they
could write profitable business in California
as well.
It is clear that the workers' comp market in
California is broken. We have the highest
costs in the nation, yet our injured workers'
benefits rank in the lower third of all
states. It is a system that is destined to
crash if serious structural change is not
enacted. Tough decisions must now be made, and
I am prepared to make them with the help of
the Legislature and the Governor.
In my recent proposal to fix workers' comp, I
listed seven areas of immediate focus,
including improved financial oversight;
medical cost containment; consistency in
determining the level of permanent disability;
improved coordination and communication
standards for service decision makers.
These initial actions I've announced today to
address the State Fund problem are an early
and important part of my overall effort to
correct California's workers' comp system. The
only way California employers will see a
reduction in their workers compensation costs
is with strong regulatory action and quick and
effective restructuring of the system by the
legislature. In the days and months ahead it
is imperative that we delve deep into the
system to correct the underlying factors that
are increasing costs and driving businesses
out of California."
