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SETTING THE RECORD STRAIGHT The state of the insurance industry, as it pertains to the trucking and transportation sector of the economy, continues to be dismal. Premiums continue to escalate at an alarming rate. The alarmists, including myself, continue to sound like Chicken Little. It would be a refreshing turn of events to talk about something else. If I could do so I would. Over the past year premiums have increased from 25 to as much as 100%. Many companies are non-renewing and many more have or are going out of business. Farmers has stopped writing trucks. They are non-renewing policies that have been on their books for years.
Those of us that write workers’ compensation through the State Compensation Insurance Fund recently received a letter from them entitled “Setting The Record Straight About State Fund”. The State Compensation Insurance Fund has been under fire from the industry. Workers' comp rates have experienced the same increases in premiums as the rest of the industry. Workers' comp rates, as it relates to the trucker, have increased as much as 100% in many cases.
Before I get into this, I would like to give you a brief background on the workers' comp market. Workers’ compensation went through a deregulation process called “Open Rating”. This took away arbitrary rating schedules, developed by a rating bureau, allowing insurance companies to develop their own rates. At that time, insurance carriers rushed into the market, slashing rates, in fact buying market share. The market was rate driven, and prudent underwriting practices were cast aside and rates fell. The workers’ compensation policy is a unique product. Its intent is to afford coverage in the event of a work related accident. But other coverages exist, such as employer’s liability, which opens another door. One of the more select attacks on the policy is “wrongful termination”. Workers’ compensation has no tail. Unlike physical damage, cargo or even liability, where a limit exists, benefits can be paid out indefinitely.
The State Compensation Insurance Fund was originally created as a shock absorber in the workers' comp system, providing the availability of workers’ compensation insurance for employers at a reasonable cost. In ordinary times, these were not incompatible expectations. Their financial position at year end 2001 provided The Fund with assets of $9.6 billion and liabilities of $8.1 billion. This provided a surplus of $1.4 billion.
The State Compensation Insurance Fund has been faced with a unique challenge. Over 25% of the private market has disappeared into insolvency or regulatory supervision. This reduction in market has put a serious strain on The Fund. Growth is not necessarily good, but in the Fund’s case “it remains manageable”. The Fund has grown 44% in 2000 and 108% in 2001. This growth has put a strain on both their human and financial resources. Their reserve continues to remain flat at $1.4 billion.
Insurance companies are expected to maintain adequate reserves. The National Association of Insurance Commissioners has developed the Risk Based Capital (RBC) system. At year end 2000, the Fund’s surplus was $462 million above the RBC requirement and available capital was $1.4 billion. After premium growth of 108% in 2001, the RBC requirement was $1.556 billion, the funds available capital remained at $1.4 billion, 8% below the RBC requirement. With only a modest 3.5% increase in profitability these requirements would have been met.
There are three principal risks that an insurer is subject to. 1) Adequate reserves. 2) Pricing to pay claims and expenses. 3) Risk of catastrophic loss. At this time, risk of catastrophic loss has magnified many times. Not only have we had to deal with accidental loss and natural loss during business hours, but, more recently, we have been faced with terrorist events.
With The Fund’s decline in surplus, they have chosen to remove themselves from the recognized insurance rating services such as A.M. Best and Standard & Poor’s Rating Service. These services have lowered their ratings of The Fund. “The reason that we withdrew from the A.M. Best rating process is that we have come to recognize the responsibility of providing an available market will inevitably, periodically, force us to act differently than a private insurer trying to protect their A.M. Best rating. Even though there is no legal requirement for State Fund to meet RBC requirements, our RBC status will continue to be published in our Annual Statements filed with the Department of Insurance and will continue to be a major State Fund fiscal goal.”
“State Fund is financially strong. Recent audits – including those performed by the California Department of Insurance (DOI) as well as MillimanUSA – validate State Fund’s solvency and adequacy of reserves.” The Fund has $10 billion in assets with an investment income of $521 million. Rates have been increased by 22.5%, as of January 1, to address their reserve needs.
To paraphrase their summary, “The State Fund has met the challenges stemming from unparalleled growth due to the chaotic California worker’s compensation market over the last two years and remains financially strong.”
If you have comments or questions, Roland L. Enz can be reached through California Plus Insurance Service at 1-800-699-7101.
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