The California Insurance Commissioner has issued a Decision regarding the WCIRB’s January 1, 2014 Pure Premium Rate Filing approving advisory pure premium rates that average $2.70 per $100 of payroll effective January 1, 2014, which is 6.7% higher than the average filed pure premium rate as of July 1, 2013. The WCIRB in its October 23, 2013 amended Filing proposed advisory pure premium rates that average $2.75 per $100 of payroll.

In justifying approval of the lower rate, the Commissioner’s report stated as follows. “The gap between the recommendations of the WCIRB and the Department is due to two differences in the methodology used. First, the WCIRB included in their analysis a portion of the State Compensation Insurance Fund’s (“SCIF’s”) loss adjustment expense. The Department of Insurance did not include SCIF’s loss adjustment expenses. Second, the Department of Insurance recommends an additional 2.5% reduction in medical losses due to anticipated savings in SB 863, which the Department projects will result from the new Independent Medical Review process. This additional 2.5% reduction is not reflected in the WCIRB’ s recommendation. I agree with the Department that the Advisory Claims Cost Benchmark and pure premium rates should exclude the loss adjustment expense of the State Compensation Insurance Fund and include the Department’s additional projected medical loss savings”.

The WCIRB filing for January 1, 2014 demonstrates that insurers continue to charge premiums that are very close to the estimated cost of providing benefits and adjusting expenses. At the same time the Commissioner’s report noted that insurers once again filed substantially higher manual rates (rates that could be charged to employers). The rates actually charged to employers, however, are substantially lower on average than the filed rates. This is due to a common insurer practice of discounting from the filed rates. The extent to which insurers will discount from the filed rates in the future, however, remains to be seen. Current observations suggest that discounts are shrinking.

The WCIRB testified at the hearing that, over the last year or two, the charged rates have risen at a faster rate than the rise in the pure premium rate. In other words, trends suggest that insurers are beginning to moderate the extent to which they discount from the filed rates. The fact that insurers are substantially discounting their manual rates has helped to keep workers’ compensation insurance prices lower,. despite increasing costs. The data suggest, however, that insurers may be recognizing that this trend cannot continue in the face of increasing system costs. Consequently, insurers are now charging higher rates to employers.

Over the past few years, the department of insurance observed that many insurers draw down from their surplus and capital to sustain lower pricing. As I have noted in prior decisions, however, this is a trend that cannot continue indefinitely. Over the last two years, we’ve observed an increase in premiums as insurers limit the extent to which they discount from their filed rates. The Department of Insurance will continue to closely monitor this trend to ensure that discounting is fair and

At the time this rate increase was evaluated and approved, neither the WCIRB nor the Department of Insurance included the effects of the recent federal court injunction against imposition of the lien filing fee, nor the California Supreme Court ruling in Valdez, nor the estimate by Maximus Federal Services that IMR requests will soon exceed 50,000 per month.

The WCIRB will begin calculating 2014 experience modifications shortly and expects to publish nearly all first quarter 2014 experience modifications by November 27, 2013. When these recent factors have been considered, it may well be that a 6.7% increase is overly optimistic.