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In the insurance industry, frictional costs include claim adjustment, and administrative expenses that are not normal business expenses generally contemplated by fixing a premium amount by underwriting, but rather are consequences of extraordinary events that might put a strain on capital and profitability.

The WCIRB has released its Friction in the California Compensation System report, which details the primary drivers of California frictional costs, the impact of high frictional cost claims and recent trends in frictional costs.

Frictional costs in the California workers’ compensation system are much higher than other systems across multiple categories, despite some recent decreases in frictional costs in California. In California, it costs $0.48 in frictional costs to deliver $1 of benefits to injured workers. This is almost twice the median workers’ compensation system and significantly above other systems that deliver medical benefits

Recent favorable trends have moved California somewhat closer to the median state in the last 5 years, but it is still 61% higher than the median state in total defense costs per lost time claim at 36 months. Given the significantly longer claim duration in California, these differences are likely larger at later periods. Since 2015, total frictional costs in the California insured system declined by about $0.3 billion. This decline was largely concentrated in medical-legal costs.

The WCIRB has identified four primary drivers of California frictional costs, labeled the “Frictional Four”. They include the higher volume of permanent disability claims, the higher proportion of cumulative trauma injuries, the longer duration that claims remain open, and disproportionate levels of friction regionally within California.

California has by far the highest number of PPD claims filed compared to any other state and more than twice that of the median state. States that use the same version of the American Medical Association (AMA) guides to determine permanent disability as California do not have similar volumes of PPD claims. PPD claims are more complex, remain open longer, and incur more than three times the ALAE than temporary-only claims on average.

While data in other states is not readily available, CT claims are believed to be significantly more prevalent in California. The proportion of CT claims that involve nontrivial ALAE costs is significantly higher compared to that for specific injury claims. Prior WCIRB studies also indicate that the vast majority of CT claims are litigated with many filed later and on a post-termination basis.

Average ALAE costs differ significantly across the state with the highest costs in Southern California around the Los Angeles Basin. The average ALAE cost per indemnity claim in this region is approximately 29% higher than the rest of the state at 10th unit statistical report level.

The longer claim duration is estimated to have the most significant impact on California average ALAE costs, reducing it by over 30% when assuming an average duration similar to the median state.