Why Workers' Compensation Insurance
Rates Are Going Up?

The Department of Insurance realizes that recent increases in workers' compensation insurance premiums have placed a burden upon brokers and employers. The Department has received numerous calls from consumers who are concerned about recent increases in workers' compensation premiums. Here is a brief explanation of why workers' compensation rates are going up in California:

1. Workers' compensation costs are increasing for a number of reasons,  particularly due to sharp increases in medical costs. Basically, the main reason for any rate to increase is increased claim cost. While it’s been recently reported by the Department of Industrial Relations that the number of nonfatal job-related injuries/illnesses went down in 1999, the severity (or the total cost) of the claims have continued to increase. When the cost to pay, investigate, or defend a claim increases, rates are affected.

2. Due to intense competition among insurers, worker compensation insurance prices were driven down below cost, to the point where some insurers could not afford to offer those prices. As a result, some insurers withdrew from California or restricted the writing of policies. 

3. On March 3, 2000, Superior National, the state's largest private workers' compensation insurer, was found to be insolvent and is currently being liquidated. The next largest private workers' compensation insurance provider, Fremont Compensation, is now under the effective supervision of the Department of Insurance because of its fragile financial condition. In both situations, the insurers' problems stemmed, in large part, from charging rates that were inadequate to cover their losses and other underwriting costs.

4. On October 23, 2000, Insurance Commissioner Harry Low approved an increase of 10.1% in the advisory pure premium rate that was recommended by the Workers’ Compensation Insurance Rating Bureau in an attempt to prevent more insolvencies. The pure premium rate is the rate of premiums required to balance loss costs and loss expenses of the industry. Significant downward deviation from the pure premium rate may hurt the solvency of the workers’ compensation industry. The system of open rating that began in California in 1995 does not give the Insurance Commissioner the authority to set rates for workers’ compensation, but it does give the Commissioner the responsibility to provide the insurance industry with the information it needs to set appropriate rates.

The goal of the Department of Insurance is to protect consumers and ensure that insurance companies are able to pay future claims. The Department of Insurance is exploring all options that would stabilize the workers' compensation insurance industry. In the meantime, employers should shop around--there still are some competitive rates in the market.

The following graph shows the historical loss experience for the workers’ compensation insurance industry in California, from 1990 to 1999. The graph displays the Total Claim Cost (Incurred Losses) for all insurers licensed to write workers’ compensation insurance in California. As you will notice from the graph, the overall claims cost (incurred losses) has been on an increase since 1995.


Last Revised - June 15, 2001
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