"After
significant rate increases, early evaluations of current year
results have been positive, and State Fund expects current
policies to make a positive contribution to surplus"
California's
Workers' Comp System Continues to Be In Crisis
California's
State Compensation Insurance Fund has issued
its audited statutory-basis financial
statements as of Dec. 31, 2002. Net premium
written for 2002 was $5.3 billion, an increase
of 49 percent from $3.6 billion in 2001. State
Fund's cash and invested assets as of Dec. 31,
2002, was $11 billion, or $2 billion more than
State Fund's carried reserve liabilities, net
of reinsurance. State Fund's investment
portfolio consists entirely of high-grade
fixed income securities. State Fund has no
exposure to junk bonds or common stocks.
After significant rate increases, early
evaluations of current year results have been
positive, and State Fund expects current
policies to make a positive contribution to
surplus. Without substantive workers'
compensation reform, further rate increases
are inevitable. The Workers' Compensation
Insurance Rating Bureau (WCIRB) has already
indicated that another double-digit rate
increase will be necessary effective Jan. 1,
2004. This trend is rapidly leading to an
intolerable situation for California
employers.
"California's workers' compensation
system continues to be in crisis. State Fund
did not create the crisis but we will continue
to work very hard to remain an available
market for California employers," said
State Fund president Dianne C. Oki. "We
also continue to work cooperatively with the
California Department of Insurance
("CDI") on measures designed to
reduce the volume of business we are writing
and to increase policyholders' surplus as part
of a comprehensive business plan."
State Fund's capital position must be raised
to support the amount of business it is
writing. California needs capacity to return
and if carriers again participate in this
market, the growing premium pressure on State
Fund will be reduced.
Growth in premium volume was caused primarily
by severe contraction of the California
workers' compensation market since 1999, as 28
private carriers became insolvent and other
carriers limited the amount of California
business they write. As a result, thousands of
employers turned to State Fund for coverage.
This growth, in combination with benefit and
medical cost increases, has generated
significant financial challenges for State
Fund.
PricewaterhouseCoopers ("PwC"),
State Fund's independent accountants, stated
that in their opinion State Fund's net loss
and loss adjustment expense reserves should
have been increased to $9.8 billion, or by $1
billion, from the $8.8 billion shown in the
financial statements. The CDI concurs that
State Fund should increase its reserves to the
level estimated by PwC. State Fund does not
agree.
State Fund estimated its reserves using
actuarial methods and assumptions about
medical and indemnity utilization and costs
for as much as 30 years into the future using
its best judgment and its significant
knowledge and experience of California
workers' compensation insurance. Milliman USA
- State Fund's Appointed Actuary - issued its
actuarial opinion in which Milliman stated
that State Fund's reserves were reasonable, in
conformity with actuarial standards, and met
the requirements of California insurance law.
"We take this issue very seriously,"
said Oki. "Accordingly, we will be
engaging another independent actuarial firm to
provide additional analyses and advice as we
reconcile the divergent estimates. Based on
that independent supplemental review, we will
make any appropriate changes to reserves in
2003."
State Fund reported policyholders' surplus at
year-end 2002 of $1.45 billion. If reserves
had been increased to PwC's estimate, State
Fund's policyholders' surplus would have been
$450 million. Based on either reserve
estimate, State Fund is solvent and,
considering future investment income on its
investment portfolio, has a significant
solvency margin of anticipated cash flow in
excess of estimated loss and loss expense
payments.
"State Fund strongly supports the efforts
to enact fundamental, systemic reforms,
control and stabilize costs and to restore
healthy competition to ensure the system works
for all of its stakeholders," said Oki.
State Fund's officials concur that action is
urgently needed to resolve the current crisis
in California's workers' compensation system
which serves more than half a million
employers and 13 million workers.
