State of Workers Comp in California Part 3 of 3:
Fremont General in bold
Argonaut is a multi-state writer of workers? compensation, specializing in
writing the larger classes. It also writes liability coverages.
Danielson Holding writes non-standard auto and workers? compensation
insurance in California.
Fremont General is one of the largest and highest quality California
workers? compensation companies. It has recently been expanding inside and
outside of California through acquisitions.
Based in Pasadena, Calif., Paula underwrites and distributes commercial
insurance products, specializing in workers? compensation products for the
agribusiness industry.
Superior National is a large California workers? compensation company that
has recently attracted attention and capital from Capital Z.
Zenith National is a California specialty company that specializes in
workers? compensation, along with other lines. It owns CalFarm, which is
the largest writer of farm insurance in California, and it is in the
reinsurance business.
RECENT DEVELOPMENTS
While competitive pressures in the California?s workers? compensation
market increased with the implementation of open rating in January 1995,
certain fundamentals of the workers? compensation market have recently
improved. In 1996, the total direct workers? compensation premiums written
in California leveled out at approximately $5.0 billion as compared to $9.0
billion in 1993, as the market began to experience rate stabilization. This
trend has continued into 1997, as demonstrated by a slight improvement in
premium pricing of 0.5% for the year ended December 31, 1997 over 1996.
Additionally, anti-fraud legislation passed by the State of California in
1993 continues to have a positive effect on the market?s losses by
controlling fraudulent claims and medical and legal expense levels. These
improvements have resulted in a reduction in the frequency of claims in the
California workers? compensation market. However, during 1997, the Company
has recognized an increase in claims severity for injuries sustained in
1995 and thereafter.
Beginning in 1997, there was a noticeable moderation of price competition
in California. Over the past several years, there was also a reduction in
the number of competitors resulting from mergers and acquisitions of
companies into other entities, as well as from companies electing to
discontinue the underwriting of workers' compensation insurance. The
effects of these two trends have now waned.
Risk managers in California are concerned about how legislation that might
seek $1.7 billion in workers' compensation benefits increases will finally
shape up this year. S.B. 320, authored by Hilda Solis, is far from taking
its final form. But it is the main vehicle through which labor and
claimants' attorneys will push for increases in temporary and permanent
disability benefits, death benefits and the lifting of a cap on vocational
rehabilitation benefits, several risk managers and their lobbyists said
during the 1999 Legislative Conference on Workers' Compensation in
Sacramento, California. S.B 320 could be a disaster.
THE STATE FUND
Governor Pete Wilson?s "Competitive Government" plan includes a study on
privatizing the California State Workers' Compensation Fund. Privatizing
the State Fund, which provides workers? compensation insurance to some
250,000 employers, would have a dramatic impact on the California workers'
compensation business. The State Fund is the insurer of last resort and it
eliminated the need to create an assigned risk pool. The insurance fund is
self-sufficient through employer premiums and operates as a mutual carrier
that returns all profits to insured employers in the form of dividends. A
change in the State Funds operation would affect all of the players in
California.
About one half of the states have state workers? compensation funds. A
trend to privatization is currently spreading among them. The State
Compensation Insurance Fund of California, the perennial California leader,
has a market share of about 20%. Private insurer participation would be a
windfall for the California workers' compensation companies.
RESERVE DEFICIENCIES
Workers? compensation insurance is characterized by a very long tail. An
injury early in a worker?s career could result in claims paid out for the
next 20 to 30 years. This makes the reserve sufficiency question very
important to the analysis of the workers' compensation business.
Analysts are now saying that the reserve structure of the workers'
compensation business is beginning to deteriorate. Most notably, the
combined ratio measured by NCCI for Accident Year 1997 climbed to 115%.
Workers? compensation carriers as a whole are estimated to be
under-reserved by $3 billion for 1997 and 1998. An estimate of a $1.5
billion reserve deficiency in California workers? compensation was made
last year by the Workers? Compensation Insurance Rating Bureau.
REINSURANCE
The workers' compensation insurance industry in California is extremely
competitive. Some of the players have acquired reinsurance contracts on
terms that are extremely favorable, and are utilizing that reinsurance to
support prices that the smaller players can not match. The companies who
use reinsurance in this fashion include Fremont General, American
International Group, American Financial Corporation, Clarendon Insurance
Group, and Mutual Risk Management. The UNICOVER disaster might change all
this.
A reinsurance pool managed by Unicover was acquired by Delphi in November.
Members of the Unicover pool, which managed abut $1 billion in premiums,
included Connecticut General, Lincoln National, Phoenix Home Life Mutual
Cologne Life Re and ReliaStar. Unicover recently disclosed pool losses, and
Cologne Re, a member of the pool as well as a retrocessionaire, late last
month said it was taking a charge of $275 million pretax to cover its
potential losses. That announcement raised concern that the industry may be
facing losses of more than $1billion and that other insurers will be stuck
with part of the tab.
This event had national repercussions because a workers' compensation
reinsurance pool was being managed by a life insurance company. Moreover,
it was not being managed very well.
On April 1, 1999, the California DOI announced that it would hold a public
hearing in May of 1999 to investigate the extent of potential losses
arising out of reinsurance programs sold by UNICOVER and other underwriting
managers. The DOI also announced that it might promote legislation to
address issues surrounding the reinsurance of workers' compensation by life
insurance companies. Connecticut and other state insurance departments are
also actively addressing the losses arising out of the Unicover pool and
the reinsurance of workers' compensation companies by life insurance
companies.
These efforts will have an impact on the workers' compensation pools and
this will have an impact on California workers' compensation pricing. All
of the analysts expect increased pricing and profitability pressures.
OUTLOOK
The national workers? compensation market is in a down cycle. And, the
California workers? compensation market is in a down cycle. This will not
change any time soon.
The three California companies to watch are:
The State Fund ? for a possible privatization
Fremont General ? a quality company that turns in the numbers regardless of
the market conditions
Superior National ? a company partially funded by Capital Z and a company
having a lot of talent on the Board of Directors
The workers? compensation business has always been a roller coaster ride.
This is especially true in California. |
