by Les Boden

I’m going to answer this question. But before I do, I’m going to have to explain a few things about (ugh!) insurance.


If something bad happens to an insured person or company, the insurer is supposed to help soften the financial blow. You need a $50,000 operation and your medical insurer is supposed to cover most, if not all, the cost. A restaurant burns to the ground and the property/casualty insurer is supposed to cover much of the cost of the damages.

But insurers also are investment institutions. We pay the premium, they invest it, and then they pay it back to those of us who suffer losses. During the time between when we pay the premium and insurers pay us for covered losses, the insurers invest the premium and get a return. In effect, for the months or years between premium payment and insurer payout, they borrow our money without paying us interest.

If insurers, on average, pay out 100% of premiums, it’s a good deal for them. They have borrowed money interest-free and made money investing it. Of course, if they can pay out less than 100%, they have even a better deal.

Now for the news.

On July 19, the California Workers’ Compensation Insurance Rating Board (WCIRB) released a report on insurer premiums and payments that describes the recent experience of that state’s workers’ compensation insurers. (Sorry, IE or Netscape only.) In 2004-2006, these insurers paid benefits amounting to 33%, 27%, and 37% respectively of the premiums paid to them. The WCIRB report reports this percentage back to 1978, and in no other year were benefits less than 50% of premiums.

If benefits for injured workers were well under 40% of premiums, where did the rest go? Well, some went to processing claims (including fighting them), some went for lights, electricity, executive salaries, and so on. In 2006, for example, loss payments were 37% of premiums and expenses were 28% of premiums. So for every dollar paid for lost wages or medical care, 76 cents went to insurer expenses. Wow.

With this very high cost of delivering benefits, you might imagine that overall insurer expenses would soak up all the premiums received. However, when we add these expenses to benefits paid, the total comes to 56%, 50%, and 65% of premiums in 2004, 2005, and 2006 respectively. In other words, an industry that could make a substantial profit paying out 100% of premiums is doing much better than that. Much, much better. Last year, California workers’ comp insurers borrowed over $10 billion and will repay only 65% of what they borrowed. That’s a really good deal.

How does this compare with past years’ payments for losses and expenses? The WCIRB tells us that from 1993-2003, this percentage was below 80% in only 1 year and below 90% in only 1 other year.

How did insurers get so lucky? Well, it wasn’t exactly luck. The precipitating event was Governor Schwarzenegger’s 2004 California workers’ compensation reform. This reform made it harder for injured workers to get permanent disability benefits, and it slashed those benefits for those lucky enough to get them. Benefits fell over 40% between 2004 and 2006. This was a tremendous setback, especially for permanently disabled workers, whose benefits were meager even before the 2004 legislation.

This benefit cut was presumably designed to reduce employer costs, and it did. Insurers reduced premiums, but not nearly fast enough to keep pace with the reduction in insurer costs. As a result, insurers got a windfall. A huge windfall.

Why are California workers’ compensation insurers smiling? You know why.

Comments

  1. #1 Marcie Hascall Clark
    June 22, 2007

    The Defense Base Act Workmans Compensation insurance companies have fine tuned their fighting skills. These companies, AIG, CNA and a few others insure the government contractors working overseas- Iraq and Afghanistan included.
    They are receiving huge premiums from the contractors which are included in the contract which is paid for by the taxpayer. Under the War Hazards Act the government reimburses the DBA insurer it’s costs for dead and wounded contractors plus a fifteen percent administrative fee.
    We still have hospital bills on our credit report that the DBA insurance company hasn’t paid from August 2003. There is nothing that requires them to pay these bills in a timely manner.
    One of the requirements for reimbursement by the government is that the insurer does everything in their power to first disqualify the dead or wounded.
    In the case of contractors with PTSD they must first litigate to prove they have PTSD before the insurer will pay for treatment. Of course if they go ahead and shoot themselves and maybe someone else first they get off without paying anything. PTSD cannot be proven post mortem.
    According to the Department of Labor nearly 1,000 death claims and 10,000 injury/disability claims have been filed since the Iraq War began in 2003. In response to an FOIA I filed with the DOL I was told that less than one hundred of them had been settled.
    They are not paying their bills, they are not settling cases, they are fighting the wounded contractors with a vengeance.
    In addition, the DBA releases the contractor from all liability for any reason. There are no Standard Safety Procedures or Operating Procedures that must be followed. The contractor and his family members are barred from any litigation.
    The DBA insurers and the government contract companies are profiting well on the backs of the taxpayers and employees.
    http://www.dbacomp.com

  2. #2 Liz
    June 22, 2007

    Marcie, thank you for reminding us that injured workers and their families bear the burden when insurers resist making payments.

    It’s especially saddening to read – in the Washington Post series and elsewhere – about the many people returning from Iraq and Afghanistan with PTSD who have decided to go without treatment rather than go through the long battle to obtain it.

    I wish your family and all the others the best in getting what’s due from insurers.

  3. #3 TONY WINGATE
    September 20, 2009

    I WAS INJURED @ WORK ON 11/7/04…MY BOSS , MICHEAL SMITH OF SANTTA CLARITA LIED TO THE INS CO…FARMER’S…IF HE HAD TOLD THE TRUTH THEY STILL WOULD HAVE SCREWED ME BUT THIS IS CRIMINAL…I WALKED AROUND W/ A BROKEN NECK FOR 1 1/2 YRS…FARMER’S , BASED ON THE INFO MY BOSS GAVE THEM, TREATED ME AS A CRIMINAL…FIRST IT WAS I INSTIGATED THE FIGHT…LIE…6 MTHS LATER IT WAS I RECEIVED THE INJ. IN PRISON…LIE…THEN IT WAS PRE OR POST EXISTING…LIE…FUCK FARMER’S INSURANCE…I HAD TO GET MY SPINE FUSED IN A COUNTY HOSP…HOW DO THEY GET AWAY W/ THIS…IT’S CRIMINAL…NOW I’M CRIPPLED AND BROKE…FUCK MARVIN…MIKE…EVEN LITTLE COLE …FUCK THE WHOLE SMITH FAMILY AND FARMER’S…THANX ALOT !!!