SACRAMENTO — California's plunge into deregulation, which spawned the energy crisis, has now disrupted another segment of the economy: the workers' compensation insurance industry, where a wave of insolvencies has led officials to warn of a looming crisis.
Overshadowed by the state's electricity woes, the workers' compensation problem has attracted little public attention. But regulators and lawmakers are increasingly concerned that the system that provides benefits to those injured on the job is in serious trouble.
"There is no question that workers' compensation is at a critical stage," said Assembly Insurance Committee Chairman Thomas Calderon (D-Montebello).
Deregulation's role in the industry's troubles, state regulators say, began when a 1993 law repealed the requirement that the state set a minimum rate for insurers to charge for workers' compensation coverage, and instead allowed companies to charge whatever they wanted.
The new law gave California the least regulated workers' compensation system in the nation and set off cutthroat competition. Insurers began charging less than cost for their coverage, and the result was a precipitous drop in rates that had been the highest in the nation.
While that drop was a bonanza for businesses that had been struggling to pay huge premiums, many insurers did not have deep enough pockets to stay in the game. They either became insolvent or stopped selling in the California market.
"What we have at this time . . . is an unprofitable market that is in turmoil, several defunct or financially troubled companies . . . and diminishing competition," Deputy Insurance Commissioner Norris Clark told the Assembly Insurance Committee last month. "That sums up the financial health or more correctly the financial demise of the California workers' compensation industry."
Clark and other regulators worry that dwindling competition could result in skyrocketing costs again--at a time when employers are already struggling with soaring energy prices and business slowdowns.
For workers, the worst-case scenario could be a future in which some claims can't be paid.
"Insurers' long-term financial viability is of paramount concern," said Clark, "because [their] obligation to pay workers' compensation benefits in many cases may last 20 to 30 years or even longer."
Last year, workers' compensation coverage was provided to more than 500,000 California employers and their 13 million employees. Benefits were paid to about 1 million injured workers.
