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The Daily News of Los Angeles

California Insurance Commissioner John Garamendi is confident that workers’ compensation rates could drop 30 percent in the next six months if the state’s largest insurer has a fundamental change to its board of directors.

The State Compensation Insurance Fund dominates in California, writing more than 50 percent of the workers’ comp policies throughout the state. Perhaps State Fund’s most significant influence is the effect the company has on workers’ comp rates. Created by the California Legislature in 1914, the company’s board is comprised of five governor-appointed members who potentially have the power to improve rates for every employer in the state.

Two of the board’s seats will expire shortly, requiring Gov. Arnold Schwarzenegger to either reappoint the existing members or name two new directors. Garamendi said the latter option is the best chance that workers’ comp reform will finally be felt by the employers who continue to get inundated with costs.

“The most important insurance company of them all is State Fund,” he said last week. “And the governor needs to apply his attention to the State Fund’s board and make sure they are implementing policies that will lower the rates.”

The Legislature signed a workers’ comp reform bill this fall promising nearly $5 billion in one-time savings and an additional $5.6 billion in ongoing annual savings. The bill was enacted into law Jan. 1, and was moderately effective. For example, State Fund filed for an average 2.9 percent rate decrease in December. The company said the change was within the range recommended by the Workers’ Compensation Insurance Rating Bureau.

At the same time, Zenith National Insurance Company lowered its rates by 20 percent. The Woodland Hills-based company’s chairman said the economic environment factored into the company’s decision to lower rates, not State Fund.

Among other influences, Garamendi lowered the pure premium rate for workers’ comp by 14.9 percent in November. The pure premium rate is merely a recommendation for insurance companies because the commissioner does not have the authority to set the rates. But several other companies still followed the commissioner’s lead, lowering their rates to levels that kept them competitive with other companies.

Unlike the auto insurance industry, there is no governing body that dictates when an insurance company can raise or lower workers’ comp rates.

And that’s a major problem, according to Douglas Heller. “The key tool that is currently missing from the market is regulation of the industry,” said Heller, a senior consumer advocate at The Foundation For Taxpayer & Consumer Rights in Santa Monica.

“We’ve had deregulation for a little more than 10 years and the commissioner needs to regulate the industry. Otherwise, the insurance industry is going to continue to take their huge profits straight to the bank.”

In 2002, the State Fund reported net income of $26 million compared with a net income of $170.8 million in the previous year. The company also generated premiums earned, or revenues, of $5.4 billion in 2002, versus $3.6 billion in 2001.

“The bottom line is that our most recent rate filing ensures that we have the financial wherewithal,” said Jim Zelinski, State Fund spokesman. “And we agree that employers who are besieged by high workers’ comp rates are entitled to relief.”

State Fund’s most recent financial statements indicate the company had a policyholders’ surplus at year-end 2002 of $1.45 billion. Zelinski characterized the surplus as an “extra layer of financial protection.” Others perceive the surplus as cost savings not shared with employers.

Heller said State Fund and Zenith are businesses that need profits to survive. But excessive profit taking, resulting in higher workers’ comp rates, could push smaller businesses out of the state.

“And the other problem is, many of these workers’ comp insurers have made contributions to Schwarzenegger,” Heller said. “And then it becomes a political question for Garamendi: ‘Do I take on Schwarzenegger?”‘

Safeco Business Insurance – among the nation’s top five small-business insurers – contributed about $11,578 to Schwarzenegger’s California Recovery Team. Travelers Indemnity Company contributed $40,944, while Continental Casualty Company wrote the governor a check for $29,099, according to the California Secretary of State’s Web site.

Instead of special-interest money, Garamendi said he is more concerned about keeping a steady flow of dialogue with Schwarzenegger. “We’re talking. And he seems willing to listen,” the commissioner said. “He sometimes pulls numbers out of thin air, but that’s another story.”

Workers’ comp seems a priority for Garamendi, even if many of his observers say it’s purely a political move for someone eyeing the governor’s seat. His press secretary distributes a packet titled “The Garamendi Plan, Completing Workers’ Compensation Reform.”

In the packet, the commissioner outlines a list of issues that he says must be addressed this year to help reform the system. Garamendi suggests that State Fund shed business that can placed elsewhere in the market. He also recommends developing a more equitable and consistent permanent disability system, further defining reasonable medical treatments and implementing a policy that returns injured employees to work more promptly.

But industry executives say the commissioner has no power to accomplish such feats, especially when the governor is working on several bond issues.

“He has no authority to make reform packages. The legislature hasn’t given him any authority,” said Stanley Zax, chairman and president of Zenith National Insurance Corp. “There are no shortcuts, hopes or prayers that will make the rates go down. And this jawboning is nonsense.”

Zenith reported 2003 third-quarter net income of $16.1 million, or 85 cents a share, compared with net income of $8.7 million, or 46 cents a share, in the same period a year ago.

In October, Zax said legislative reforms in California were beneficial and should moderate the growth of medical costs. The chairman’s sentiments still resonate four months later. However, he believes the commissioner should spend more time focusing on rampant fraud throughout the industry.

“It’s a crackerjack operation. There’s money going down a rathole. We don’t need one more law. What we need is leadership. Just like the movie, show me the money.”
Evan Pondel, (818) 713-3662 – evan.pondel(at)

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