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Repeal Workers' Comp Minimum Rate Law

June 27, 1993

California Insurance Commissioner John Garamendi's call for a 7% to 10% decrease in the state's workers' compensation minimum rate next month is opportunistic and misguided ("Garamendi Plans to Cut Rate for Workers' Comp," June 3).

The commissioner ought to focus on long-term solutions rather than quick fixes to the rating law. He reasons that reductions are justified because the cost of worker injury losses in 1992 dropped to 76% of every premium dollar, down from 88% the previous year.

Under a state law that expired at the beginning of this year, insurers were required to charge 32.8% over projected 1992 loss costs to achieve adequate, or "minimum," rates. This extra charge pays for job safety inspections, claims settlement costs, fraud investigations, taxes, licenses and commissions.

Under this formula, injury loss costs could have had to drop to 67.2% of the premium dollar in 1992 for insurers to break even. This is 9% lower than the actual experience of 76%.

In other words, insurers paid out 9 cents more than what they took in in premium dollars in 1992, and 21 cents more in 1991. Some of these losses are reduced by investment earnings and some by efficient operations.

Insurance companies that are able to deliver services for less than the mandated 32.8% overhead pay dividends to their policyholders (the industry overhead average was 29.2% in 1992); $800 million, or 10% of total premiums, was returned to policyholders as dividends in 1992.

If the commissioner were sincere about delivering workers' compensation coverage at the lowest possible cost, he would support repeal of the minimum rate law, which builds insurer costs into the minimum rate. Instead, he opposes repeal and replacement with an "open-competition" law that forces insurers to compete for business up front on price rather than on the back end with dividends.

Commissioner Garamendi states that he opposes repeal because premiums for small businesses will increase as much as 10%. Assuming that this is true, what better time is there to repeal the law than now, when costs have dropped 12% between 1991 and 1992? Any potential increase would appear to be offset by this cost decrease.

Many of us in the insurance industry support the repeal of the minimum rate law because we are tired of allegations of "guaranteed profits" and lack of competition in the industry.

Let us compete for business on the same field as our customers--on the basis of price.

Repeal will also remove the temptation of insurance commissioners to announce arbitrary rate reductions that only further their political ambitions and amount to little more than a quick fix to a gravely ill system.


San Francisco

Gorman is associate vice president and regional manager of the Alliance of American Insurers, a national trade group of more than 200 property and casualty insurers.

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