California crisis No. 2
We’re talking about the workers’ compensation insurance industry, and while its problems understandably have been overshadowed by the rolling blackouts and skyrocketing rates spawned by electricity deregulation, the industry’s impending crisis can’t be ignored any longer.
Earlier this month, two companies, HIH America Compensation and Liability Insurance Co. and Great States Insurance Co., were seized by the state Department of Insurance, which feared that without immediate oversight they would likely become insolvent. That means that of the 12 companies that were specializing in workers’ compensation insurance when the industry was deregulated in 1994, eight have now either declared bankruptcy or operate under state supervision. The situation has business leaders worried that dwindling competition will mean rapidly increasing rates at a time when businesses are struggling to deal with enormous utility bills and labor leaders fearing that injured workers may soon find that their claims are worthless.
How did it happen? In the early ’90s, when the state was wracked by recession, business leaders pointed to the high cost of workers’ compensation as one of many reasons for economic stagnation. As happened with the power utilities, it was argued that if government would just get out of the way, competition would lower costs. But, as with the power utilities, deregulation proved to be a disaster.
In the case of the insurance companies, deregulation did lead to lower rates. But it also produced cutthroat competition that encouraged insurers to take gambles they would not have been allowed to take in a regulated system. Essentially, insurers began charging less for coverage than it cost to provide it, and hoping that workers wouldn’t make the claims that would force them to pay out.
Now that two-thirds of the insurance companies have lost that gamble, it’s time for the Legislature to step in and impose some controls. Assembly Insurance Committee Chairman Thomas Calderon (D-Montebello) and Senate President Pro Tem John Burton (D-San Francisco) are working together on legislation that would reinstate some rate controls and prevent the industry from offering below-cost coverage. We’d like to see Burton’s SB 71 move to the top of the agenda before the state is faced with deregulation crisis No. 2.