The Workers’ Compensation system in California is more than 100 years old. It covers more than a half million employers and provides benefits to 800,000 injured workers annually. The WCIRB has released the new WCIRB Report on the State of the California Workers’ Compensation Insurance System. The Report, which the WCIRB plans to update annually, summarizes the cost of workers’ compensation insurance based on premiums paid by insured employers, shows how premium dollars are distributed among various system components, and identifies key cost drivers such as frequency and the average cost of claims. The Report also contains a brief summary of how post-Senate Bill No. 863 (2012) costs are emerging compared to initial projections.

Insurer rates have been slowly increasing over the past five years but are not significantly different from the rates charged in the 1970s. A steady long term decline in the frequency of claims has to some extent offset increasing medical and other costs. Yet rates charged in California have been markedly higher than rates charged in other states. The largest component of claims cost is the medical treatment benefit.

Claim frequency was 49.5 claims per 1000 employees per year back in 1991. There has been a steady decrease to 14.2 claims per 1000 employees per year in 2009. This has increased slightly to 16.6 claims per 1000 employees per year estimated for 2014. Note that this slight increase coincided with the onset of the great recession. Geographically, the largest percentage increase during that period was in Los Angeles County where claim frequency increased by 19% between 2009 and 2012 compared to the bay area which showed a 3 percent decrease over the same time frame. California also lead the nation in increase claim frequency during this period. Simply stated, Los Angeles County led the state that led the nation in workers’ compensation claim frequency increases after the commencement of the great recession of 2008. A number of explanations can come to mind as an explanation for this notable phenomena.

California reported medical costs per claim are among the highest in the country with an average cost more than 70% above the median level. This is the result of three factors. The high proportion of indemnity claims involving permanent disability, the longer duration of medical treatment in California, and higher level of medical-legal costs.

Loss adjustment expenses include the costs of the administration of claims, attorney and other legal expenses, the cost of medical cost containment programs, and other court and claims-related expenses. These costs have increased steadily since 2005. Instead of declining after the 2013 enactment of SB 863, these expenses increased by 7% per claim. Loss adjustment ratios are generally higher in California than for the average of other states. One reason is high litigation rates especially in the Los Angeles area and a large number of active liens. The unexpected high frequency of IMRs conducted pursuant to SB 863 is also impacting loss adjustment expenses.

With respect to SB 863, lien savings are emerging at a greater than expected level. However indemnity claim frequency is emerging at a higher rate than projected. The overall long term cost effects of SB 863 have yet to be fully determined.

California combined loss ratios are improving, but remain over 100%. In 2011 the loss ratio peaked at 119% and has now declined to 107%. Insurers can generate a profit with a combined ratio above 100% provided there be a favorable investment climate. However, long term ratios above 110% are not sustainable.