Washington’s Industrial Insurance Premium Rates 2003:
The Department of Labor and Industries has proposed raising industrial insurance premium rates for 2003 on average 40.5%. This represents for the average employer a 37.1% increase in rates and a 52% increase in rates for the average worker. If this proposal is enacted, L&I projects we will have only a 3% contingency reserve in the industrial insurance trust fund. Historically business, labor, and government have agreed that a 10% reserve is the buffer necessary to cover workers’ compensation liabilities. With only a 3% reserve it will not take much to make the system actuarially insolvent.
The
Washington State Labor Council believes that L&I and the major
business associations in this state have brought about the trust fund
situation that we now face. Unfortunately
L&I’s rate proposal to deal with this trust fund crisis has created
a vehicle for the same business associations to lead a fight to undermine
workers’ compensation benefits and the basic solvency of our workers’
compensation system.
This
all could have been avoided had prudence and foresight been exercised. It
wasn’t. While the labor community is deeply concerned that this proposal
lowers the contingency reserve to a perilously low margin, it is our
belief that this rate proposal, though not without precedent, is not the
only viable option particularly taking into account our current economic
and political climate. We have two alternatives that minimize the hurt. To
fully appreciate these alternatives it is important for us to explain the
general context for these proposals.
Rate
Setting Around The Nation
Washington
is not the only state experiencing dramatic increases in premium rates.
Industrial insurance premiums are rising across the nation. Escalating
medical inflation costs, portfolio losses, and income losses of private
insurance companies have impacted the entire nation. According to Robert
Farnham, analyst for A.M. Best Co., “workers’ compensation carriers
around the country already have raised their prices 15 to 20% this year
[2002]… and there will be continued rate increases at least through 2003
if not the first half of 2004” (Workers’ Comp Executive, October 2,
2002). (Note:
Washington State did not raise premiums in the year 2002.)
What has happened in California is particularly instructive. Several years ago a few national insurance companies entered the California workers’ compensation market and severely drove down worker compensation premiums below actual costs in order to pick up market share. These insurers could do this because of the national scope of their business as well as operating diverse business lines. They succeeded in driving out of business hundreds of local insurers. They also created a situation where 25% of California’s businesses were forced into a workers’ compensation bankruptcy fund. According to the California Commission on Health and Safety and Workers’ Compensation the net result has been that industrial insurance rates have risen nearly 70% since 1999.
Washington
Rates and Refunds Since 1995
In 1995 a relatively large workers’ compensation contingency reserve caused by a strong stock market and extraordinary investment returns created a pressure campaign by our state’s major business associations to hold the line on workers’ compensation premiums and in fact refund money to employers. It was successful. Worker compensation premium rates have been zero or negative since 1995 (rate increases in 1997 balanced out temporary rate reductions in 1996). L&I also refunded to business $200 million in 1999 and another $200 million in 2000.
Making matters worse L&I reduced accident fund rates by 16.4% between 1999 and 2002 and made no changes in medical aid premiums. 1995 was the last year that workers’ compensation premiums were actually set at the actuarial indicated rate level.
Labor did not support these refunds and outright opposed the second $200 million refund in 2000. Had these refunds not been made, we would not, in all probability, be facing a rate increase in 2003. It was at the insistence of the business associations, that these refunds were stripped from the industrial insurance funds and returned to employers. The very same business associations are using L&I’s rate proposal to call into question the underlying strength of our workers’ compensation system.
Washington’s
Workers’ Compensation System Ranked
Washington State has long had one of the strongest workers’ compensation systems in the country. The Washington State legislature called for a performance audit of our workers’ compensation system and this was completed in 1999. Ed Welch, a renowned national expert on workers’ compensation, chosen to perform the audit, concluded that Washington State’s workers’ compensation system ranked in the bottom quarter of states relative to workers’ compensation costs and the top quarter of states relative to adequacy of benefits.
This is a most enviable position. The truth of the matter is that even if L&I’s rate proposal was implemented as is, Washington State would remain a relatively low cost workers’ compensation state.
Alternative
Rate Proposals
Labor is not unmindful of the costs that the current rate proposal exacts on both individual businesses and on workers and their families. So we offer both a temporary and a permanent proposal on lowering accident fund rates for all state fund covered employers.
In this time of budget crisis and trust fund uncertainty, it will require everyone pitching in to fix this problem. One way to do this would be to cancel what would be refunds to some employers as rates are going up for everyone. We suggest a one-year moratorium of retrospective rating refunds beyond the administrative costs that are required to keep the retro programs operating. L&I projects “retro refunds” in the amount of $134 million in 2003. Suspending these refunds, above retro administration costs, would allow accident fund premiums to increase by 9% rather than 30.7%. Overall premium increases would be in the neighborhood of only 21.8% rather than 40%, putting Washington in line with premium increases nationally.
Another more permanent approach would be to change the definition of Standard Premium. The dollar amount of “retro” refunds is based on the amount of standard premium paid. The standard premium includes premiums paid to the accident fund by employers and premiums paid to the medical aid fund by workers and employers. It has never made sense to the labor community to include medical aid premiums in determining the amount of the retro refund to employers.
By eliminating the amount paid in medical aid premiums from the calculation of the standard premium, all employers, including retro employers, would pay significantly less in premiums and the rate increase on the accident fund would be 19% instead of 30.7%.
Retro employers would still receive refunds as a reward for decreasing accidents but the refunds would be based on monies they paid into the accident fund not premiums paid by employers and workers into the medical aid fund.
Rate
Setting And Improvements For The Long-term
We, in labor, recognize that we will not be able to get the contingency reserve back to 10% by the end of 2003. We are, however, determined to reach the agreed upon 10% as quickly as possible. There is a solemn agreement between business and labor embodied in our law that physical and financial injury to workers is to be minimized. We must avoid, at all costs, unfunded liabilities that would lead to deterioration in benefits for injured workers.
We would further suggest that for efficient and effective claims management that the legislature authorize L&I to fund claims managers so that their caseload per worker is equivalent to what it is in the private sector. Finally we urge L&I to pay more attention to the actuarial indicated rate level when setting premiums each year.
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Copyright © 2002 — Washington State Labor Council, AFL-CIO