This past week, the California Department of Insurance announced its approval for a 9.5 % reduction for rates on workers’ compensation premium for the state fund. This is good news for business owners within the state of California. It could also have ramifications throughout the workers compensation market across the country. Three things in-particular could impact the workers compensation market. Those three things are: Carriers on the open market will have to change their rates in the state to remain competitive against the state fund. Business owners who have less than favorable loss runs will be even more encouraged to control the frequency and severity of claims in order to take advantage of even lower premium on workers comp premium. Other states will be waiting to see if the rate reduction encourages businesses to continue to have a focus on safety and the rate of claims continues to lower. If this occurs than you can expect other states to follow-suit.
Carriers on the open market will have to change their rates
The main reason for having a state fund within the workers’ compensation system is to prevent carriers from charging outrageous rates on premium. When instances like this occur (Claims Costs throughout the state have gone down) the state fund lowers the rates to reward businesses for their actions. This will cause carriers on the open market to lower their rates in an attempt to remain competitive. It is in the carriers best interest for claims to be low. The less claims in an area means less claims the carriers have to pay for. If claims are low they in theory should be able to charge less in premium and still be able to turn a profit. In another state where claims are extremely high they will be forced to raise premium rates in order to deal with claims they are having to pay for. The amount the carriers lower their rates may not be directly proportional to the 9.5% reduction by the state fund, but rates should lower significantly on the open market.
Business owners will be encouraged to get their loss runs under control
The reason for the drop in rates is because of a drop in loss runs throughout the entire state. If people within the state fund see the benefit of lower rates on premium they will have even more motivation to fix whatever it is about their business that causes them to have to buy work comp coverage from the state fund. In many cases the reason for this is because of a lot of claims that caused their experience modification rating to be too high to find adequate coverage on the open market. Premium rates on the open market are significantly lower than rates in the fund.
Other states will pay attention to see if the rate reduction encourages businesses behavior.
This action is rewarding businesses for a reduction in claims in the state. If this action makes the loss claim continue to fall, than other states will more than likely follow suit. If the loss runs again rise, many states may interpret that as the lowering of rates did not positively effect behavior. That being the case they probably will not lower the rates in their state if similar circumstances exist.