Marking 5 Consecutive Years of Continuing Declines
California Workers Comp Rates 2020 are going to cost the business community less. This is because in August of 2019, the Workers’ Compensation Insurance Rating Bureau (WCIRB) voted to lower Workers Comp Pure Premium Rates by an average of 5.7% below the rates of 2019. In 2019 Rates were down 23.5 percent compared to what businesses paid in 2018. This year marks the fifth year of declines and the ninth consecutive biannual decrease dating all the way back to 2015. These decreases mark a total decline of approximately 44 percent.
What is contributing to Declining California Workers Compensation Rates in 2020?
As of Jan. 1, 2020 advisory pure premium rates are $1.58 per $100 of payroll. This represents a significant decline of 5.7% compared to California Workers Comp Rates 2019. These declines are continuing because of continued downward loss development, claim settlements accelerating, declining pharmaceutical costs, as well as a decline in the number of filed liens. When this many factors are improving, insurance carriers are able to pass some of those savings on to the businesses purchasing coverage.
What is limiting the declines from being larger?
California still suffers from the most expensive workers comp rates in the entire country. There are numerous reasons rates remain high despite multiple years of declining premium. In the filing, the WCIRB also noted that factors such as increases in cumulative trauma claims, rising claim severities and continued high levels of allocated loss adjustment expenses are moderating the pure premium rate declines and warrant continued monitoring.
Information about Inclusions and Exclusions for California Workers Comp
In the state of California, all employers are required to purchase workers comp regardless of the number of employees. Sole Proprietors are not automatically included for coverage and are not required to carry coverage on themselves. SOle Proprietors are allowed to be included if they so choose by using the Acord 130 application. Partners are automatically included for coverage and are not allowed to be exempt. Corporate Officers, who are the sole shareholder, are excluded from coverage. LLC Members who work within the business are included for coverage unless the elect to be covered using the Acord 130 form.
Payroll Requirements for California Business Owners in 2020
The Payroll Requirements for Sole Proprietors who decide to include themselves for coverage is a minimum payroll amount of $52,000 and a maximum of $133,900 for rating purposes (As of 01/01/2019). Partners, Officers and LLC Members who are included for coverage must utilize a minimum payroll of $52,000 and a maximum of $133,900 for the purpose of rating workers comp premium (As of 01/01/2018).
California has the most expensive workers’ compensation rates in the United States. California Workers Compensation premiums can be so expensive that business owners try to find creative ways to avoid paying workers compensation insurance for their employee labor. The common practice is turning employees into 1099 contractors with the thought that since they are no longer employees the business owner is no longer responsible for workers comp. Business owners have to be very careful when doing this. State Compensation Fund sends a document with all of their quotes defining a true Independent Contractor vs a 1099 that is technically an employee. Some of the determining factors laid out by SCIF to determine if the 1099 is an employee or an Independent Contractor:
- Does the business have the right to direct and control? If yes, 100% Employee.
- If the trade requires a license, Independent Contractor must have their own license. Employees use the business owner’s license to complete the work.
- Who provides the instruments/tools to perform the work?
- Has the Independent Contractor chosen the burdens/benefits of self-employment?
Another commonly used band aid business owners try to implement to avoid paying california workers compensation insurance premiums for employees is to give the employees a percentage of ownership then exclude them from coverage by having them sign the appropriate exclusion form. California business owners commonly give employees 1% ownership then exclude them from coverage to avoid paying workers compensation insurance. The state of CA has passed a new law effective 01/01/2017 that now requires a minimum ownership percentage before a CA business owner can qualify to be excluded from workers’ compensation insurance. Effective 01/01/2017 California business owners must own at least 15% of Corporate stock to qualify to be excluded. If a business owner meets the 15% minimum, they must sign the appropriate workers’ compensation exclusion form and file it with the insurance company.
All existing Corporations with a workers’ compensation policy must sign a new exclusion form with their insurance company by 01/01/2017. Otherwise the insurance carrier must INCLUDE the business owner from 01/01/2017 until a new exclusion form is signed and filed with the insurance provider. It’s best to circle back to your insurance agent to gather the updated exclusion form. If your insurance agent is not aware of this rule change or how to solve the problem, look for another agent such as myself. Workers Compensation Insurance is typically your biggest insurance expense, you deserve an agent that understands this type of insurance.
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 California 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.