What Contributed to the Volatility of Californias Workers Compensation Market?
Since insurance rates were partially deregulated in 1995, the California workers’ compensation market has been very volatile. Insurers’ underwriting profits plunged and then rose to historically high levels, premiums have varied widely, and some of the state’s largest workers’ compensation insurers have failed. A RAND study identified six key factors that contributed to the insolvencies and volatility: (1) inaccurate projection of claim costs; (2) pricing workers’ compensation policies below expected costs; (3) reinsurance contracts that give insurers and reinsurers insufficient stake in policies’ profitability; (4) managing general agents with little financial interest in policies’ ultimate profitability; (5) under-reserving for claim costs by insurers; and (6) an insurer policyholder surplus that is inadequate to provide a cushion against adverse events. The study offered recommendations to address these factors, including requiring the California Department of Insurance (CDI) to app
