Insurance Commissioner Seeks Reduction in Workers' Compensation Cost Factors

California Insurance Commissioner John Garamendi is issuing press releases one on top of the next seeking reform of the state's workers compensation system. Atypically for the Commissioner, he is not placing the blame for high compensation premiums on Greedy Insurers®.

This release contains the Commissioner's response to questions that arose when he testified before the Legislature's Workers Compensation Conference Committee. He describes the scale of the problem and urges the Legislature to attack the root cause of the crisis -- exploding legal, medical and administrative costs -- and not to impose top-down limitations on premiums:

It is estimated that every $250 million in reduced system costs equates to a 1% reduction in pure premium costs. Accordingly, to eliminate the need for the prospective 12% increase, costs need to be reduced by 10.7%, or $2.7 billion. To eliminate the July 1, 2003 increase as well as the prospective 12% increase, costs need to be reduced by a total of 16.7%, or $4.2 billion. And to eliminate both of those increases plus the January 1, 2003 increase, effectively returning pure premium rates to July 2002 levels, costs would need to be reduced by a total of 24.6%, or $6.2 billion.

The current workers' compensation market is dysfunctional. The return to a competitive and robust market requires stable and predictable medical, legal, and administrative costs. The committee discussion leads me to believe that it may draft a law that mandates a reduction in the premiums for workers' compensation. There can be no reduction in premiums below the actual costs of paying claims, legal costs, administrative costs and a reasonable profit. Any requirement to lower premiums below these real expenses will create a market crisis similar to the electrical energy crisis of 2000. Furthermore, private companies will flee California leaving the State Compensation Insurance Fund, an already severely stressed organization, as the only source of workers' compensation insurance. I strongly urge you to consider this conundrum.

(Emphasis added.)

Commissioner Garamendi is recruiting business leaders (including the CEO of the Costco chain) and the non-profit community to support his reform proposals. While his incessant press releases suggest that he continues to eye higher office -- his interest in which was evident from his recent near-entry in to the race to replace Governor Gray Davis if Davis is recalled -- Garamendi's focus on the root cause of the crisis rather than on scapegoating the insuranc industry is welcome and refreshing.

More as this story develops.