Changes Needed to Reduce Volatility in California's Workers' Compensation Insurance Market
Dec 10, 2009
Problems and Recommendations for Change
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Since partial deregulation of insurance rates in 1995, the California workers' compensation insurance market has been very volatile. For reasons that go beyond price deregulation, there have been dramatic swings in insurers' underwriting profits and the share of coverage written by private insurance carriers, and a substantial number of insurers, including some of the largest market participants, have failed. The price that California employers have paid for workers' compensation insurance has been volatile since 1995 as well, continuing the considerable variation that occurred in earlier years. This book identifies and examines factors that contributed to the market volatility and the large number of insolvencies following price deregulation. It also examines the regulatory system that oversees the workers' compensation market and how the California Department of Insurance responded to the market turmoil that followed the move to open rating. It makes recommendations that aim to reduce market volatility and the frequency of insolvencies while realizing the benefits of a competitive market.
Background and Research Methods
Inaccurate Cost Projections
Pricing Below Projected Costs
Problems with Reinsurance
Problems with Managing General Agents
Inadequate Surplus Cushion
Relationship Between Underwriting Profit and Profit on Insurer Operations
Analysis of Whether Insurer Insolvencies Could Account for Increases in State Fund Premium
Background on Reinsurance
The research reported in this paper was sponsored by the Commission on Health and Safety and Workers' Compensation and was conducted jointly by RAND and Navigant Consulting. The work at RAND was conducted within the RAND Center for Health and Safety in the Workplace (CHSW).
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