Q&A: 2011 Workers' Compensation Rate Adoption

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Washington's State Fund is the 7th largest workers' compensation insurer in the country. It provides insurance to employers and workers at no profit; the money to pay claims comes from premiums and investment income. The State Fund does not get any money from state taxes that go into the state General Fund or from the federal government.

On Jan. 28, L&I announced the final workers' compensation premium rates for 2011. The 12 percent average rate increase was adopted as proposed. The new rates took effect Jan. 1 on an emergency basis while L&I continued the process of adopting permanent rates.

Questions and answers

Why did L&I raise rates for 2011?

L&I raised the rates in 2011 to meet the anticipated costs of workers' compensation claims expected to be filed during 2011. Every year in Washington, more than 100,000 claims are filed for medical treatment and lost wages due to work-related injuries, illnesses and deaths.

Last year L&I saved over $200 million in cost-cutting measures and improvements such as streamlining claims management, holding down growth in medical costs to below the national average, and aggressively fighting fraud. In addition, L&I drew on reserve funds to keep the rate increase as low as possible.

Despite the savings, an increase was necessary to cover claims costs in 2011 because, like other workers' comp insurers in the U.S., Washington's system is affected by the slow economy. For example, while fewer claims are being filed, injured workers are staying on benefits longer and fewer premiums are being paid because fewer people are working.

This January, the Governor proposed changes to the workers' compensation system to reduce costs and reform unsustainable expenditures. If all elements of the bill are approved, the state will save another $720 million over the next four years. We need these changes to help control future costs in our state's workers' comp system.

How much have the average rate increases been in the past five years?

  • 2011: 12%, or approximately 6.5 cents per hour worked.
  • 2010: 7.6%, or approximately 4 cents per hour worked
  • 2009: 3%, or approximately 2 cents per hour worked
  • 2008: 3.2%, or just over 2 cents per hour worked
  • 2007: 2% decrease, or approximately 1 cent less per hour worked, plus a six-month rate holiday in which $315 million was given back to employers
  • 2006: 0% change
  • 2005: 3.7%, or approximately 2 cents per hour worked

Why did my rate go up so much higher than average?

The rate increase of 12 percent about 6.5 cents an hour is an average for all employers. Here are examples of the actual rate increase for several industries:

  • Building construction and trades: 16%
  • Restaurants: 6%
  • Agriculture: 7%
  • Retail stores: 10%
  • Convenience grocery stores: 5%

An individual employer's rates can go up or down depending on a number of factors, including recent claims history, the number of hours reported, and the frequency and cost of claims for an industry.

Those changes also can increase or lower premiums paid by workers, given that workers in Washington pay a portion of the total premium.

Why did rates for up for employers with a claim-free discount?

Risk is averaged across each of the risk classifications, which helps keep premiums lower for all while helping those who have had a tough year and not penalizing those who have worked to keep a strong workers' compensation program.

While employers who have claim-free discounts (no time-loss claims for three years) may still see a rate increase due to their industry's poor performance, they will still pay 10 to 40 percent less in premiums than those who do not have a claims-free discount.

Maintaining a safe work environment and bringing workers back to work quickly and safely does have a return on investment. Without the claim-free discounts, many employers would have seen much higher increases in their premiums.

What if an employer can't pay?

L&I's Employer Assistance Program is here to help employers who are having trouble paying their premiums. We can set up a payment plan and in many cases we can waive late penalties and interest. L&I has already helped more than 5,000 businesses since we started this program in 2009. Please call 360-902-4817 for more information.

How do Washington's rates compare with other states?

It is difficult to compare workers' compensation rates state by state. Workers' comp systems have many other differences, such as different hazards workers are exposed to, benefits they are entitled to by law, and whether or not workers pay part of the premium. Nevertheless, most insurance professionals rely on the respected Oregon Workers' Compensation Premium Rate Ranking Summary.

In the most recent Oregon study, Washington's rates were right in the middle with about half of all the states. In 2011, the workers' share of the premium is 24 percent.

How do Washington's administrative costs compare?

According to AM Best, a worldwide insurance-rating agency, L&I spends less than half of what a comparable for-profit insurance company would spend on the administration of the workers' compensation program.

L&I's actual "paid" administrative expenses from 1999 to 2008 were 17.5% of the total benefits paid on claims. This compares with a national average of 68.2% from 1999 to 2008. This percentage was calculated using data from A.M. Best and L&I's cash flow statements.

Another way to look at this accounting information is on the basis of "incurred" administrative expenses that is, claim expenses actually paid during a period of time plus the increase in the company's accrual for estimated future administrative costs for all current claims. A.M. Best publishes incurred administrative expenses for workers' comp insurers. Those costs from 1999 to 2008 as a percentage of total benefits incurred are:'

  • U.S. workers' compensation industry: 55.4%
  • L&I: 14.5%

Why did the State Auditor say that L&I didn't raise rates enough?

The State Audit report recommended that L&I raise rates enough to "break even" in 2011 rather than draw down reserves to help keep the rate increase as low as possible.

It is important to note that the state workers' compensation system is fundamentally sound and that the benefits injured workers need if they are injured on the job will continue to be available today and in the future.

If we had charged the "break-even" premium rate that was indicated at the end of June 30 for the Accident and Medical Aid fund as recommended in the audit report it would have cost employers an additional $117 million the equivalent of over 2,000 full-time jobs.

Instead, L&I adopted a 12 percent average rate increase for 2011, which equates to an average of 6.5 cents per hour, and will draw down reserves to make up the difference.

Drawing down the contingency reserve is the right thing to do in this economic climate and does not threaten the long-term financial integrity of our state's workers' comp system. It has been done before, most recently in the 70s and 80s.

The Governor's proposed changes to workers' comp will address the troubling trends that are driving up costs and affecting the contingency reserve. We need these changes to help control future costs in our state's workers' comp system.

Why aren't private insurers allowed to offer workers' compensation insurance in Washington? Wouldn't that bring competition and lower rates?

If the Washington Legislature changed the law to allow private insurance companies to sell workers' comp coverage, we would have competition, but it wouldn't necessarily result in lower rates. The state of Alaska, which does not have a State Fund, has the highest rates in the nation. California has a combination of private companies and a state-operated system and its rates are among the highest in the nation. Also, Washington is one of only two systems that require workers to contribute to the cost of premiums (some $440 million last fiscal year, or about 27% of the 2010 costs.) Under private insurance, that contribution would go away.

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