The WCIRB has completed an analysis of allocated loss adjustment expense (ALAE) cost trends in California workers’ compensation. Allocated loss adjustment expense (ALAE) costs are the costs of handling claims that can be attributed to an individual claim.
Loss adjustment expenses (LAE), which represent the cost of administering and settling workers’ compensation claims, are a significant component of advisory pure premium rates developed by the WCIRB. Allocated loss adjustment expenses (ALAE) are the portion of LAE that can be attributed to a particular claim and include the costs related to defending claims when there are disputes over workers’ compensation benefits as well as medical cost containment program costs (MCCP) and other costs such as investigating the compensability of workers’ compensation claims.ALAE levels have historically been much higher in California than in other states.
ALAE costs have increased sharply over the last several years despite implementation of many of the components of Senate Bill No. 863 (SB 863) intended to reduce total loss adjustment expense (or “frictional cost”) levels which include ALAE costs. The WCIRB regularly studies the costs underlying the high ALAE in California as well as the factors driving the recent increases in ALAE levels.
The major findings of the report are:
1) Average ALAE cost per claim have increased by more than five-fold in the last 25 years. In addition, despite the implementation of SB 863 in 2013, average ALAE costs have increased by 20% since 2012.
2) California ALAE costs as a percentage of losses are by far the highest of any state and more than twice the countrywide median. Other interstate comparisons suggest that the differences in California ALAE costs are largely related to activities that occur later in the life of a claim.
3) Recent increases in ALAE levels are related to both increases in the frequency of claims involving significant ALAE costs in addition to the average ALAE cost on those claims. Although the majority of claims with significant ALAE costs occur in the Los Angeles Basin area, recent increases in ALAE costs have occurred broadly throughout California.
4) Cumulative injury claims are much more likely to involve significant ALAE costs than non-cumulative injury claims and these types of claims have been growing faster than other types of claims, indicating that the recent growth in cumulative injury claims is likely a key driver of recent increases in ALAE levels.
5) The proportion of claims with significant ALAE costs that have been settled by compromise and release has more than doubled since 2010. Claims settled by compromise and release incur significantly higher ALAE costs than claims closed by other means, suggesting that the recent increases in these types of claims is a factor driving recent increases in ALAE levels.
6) Based on a recent WCIRB claim survey on ALAE costs, a majority of permanent disability claims involve an applicant’s attorney and Workers’ Compensation Appeals Board appearances. In addition, significant portions of permanent disability claims involved depositions, liens, disputes for which no lien had yet been filed (i.e., “pre-liens”), surveillance or investigation costs, or costs of preparing subpoenaed records.
The full report is available in the Research and Analysis section of the WCIRB website.