California Workers’ Compensation Insurance: Claims Factors & Prevention

So last episode, we talked about California Workers' Comp insurers spending approximately $1.27 paying out claims for every dollar that they had charged.

So obviously, that's just a miscalculation on their part.

They had underestimated claims.

the payout of insurance for workers' compensation claims by 27 cents, which is ridiculously bad and hard on their margin.

If you think of a company who's selling any sort of asset and they think that they'll be able to get a specific ROI on it, maybe they anticipate that it'll be 80 cents that they'll pay out.

And then it turns out it'll be extra 47 cents on that side.

That's, you know, almost an additional 40% that they're losing, 50% that they're losing against what they had anticipated originally.

So there's actually something even more interesting in this.

It's that insurers are now showing early signs of changing and charging higher rates and after years of declining averages.

And so this is a byproduct of the statistic that we talked about last podcast, but we really didn't touch on what it will imply for the future of insurance in general and workers' compensation insurance in general.

The fact that these insurance companies have been holding the bar so low in terms of the price, paying out the higher claims, and then all of a sudden this big catastrophic year comes along and they have to pay out an extra 27 cents on every dollar that they were charging, they're losing money.

They've got to earn that back somehow.

And that's what we're anticipating.

The higher rates on the workers' compensation side, that bubble is really going to start bursting and expanding and growing.

So I'm a firm believer that California is entering into a new workers comp pricing cycle.

So if you're running a construction company, a restaurant, a warehouse, or any business at all, or planning to, then if you're going to have employees or you do have employees, there are a lot of things that I would recommend you look into and possibly do differently.

Now, if you're running the world's most perfect construction company, you've got all the risk mitigation strategies and the loss prevention, the gloves on, you've got the protective machinery all of the different features that you can prevent and control, you've got good relationships with your employees as well, and the proper return to work sort of strategy and way of doing things in the event of an injury and illness with a written safety program, you're doing excellent.

But I would argue that 90% to 95% of people and employers do not have all of the strategies in place.

So we're going to be talking about what you should be doing in the meanwhile while these rates, I think, are going to go up to make sure that yours stays more stable.

And so the truth is, is that when these insurers are collecting more premium, which they have over the last few years, that really isn't because of the hiring of rates.

It could also be as a result of audits.

So you think of the contractors who at the end of the year, they get a final audit report that says that they added a few millions of dollars to their payroll.

the workers' comp company, because they're based off of payroll, how much they're charging you, is going to say, hey, we insured you for $4 million of payroll.

You ended up doing six.

That's an extra $2 million of liability because we had written it on a payroll basis, which is standard, of course.

So last episode, we talked about California Workers' Comp insurers spending approximately $1.27 paying out claims for every dollar that they had charged.

So obviously, that's just a miscalculation on their part.

They had underestimated claims.

the payout of insurance for workers' compensation claims by 27 cents, which is ridiculously bad and hard on their margin.

If you think of a company who's selling any sort of asset and they think that they'll be able to get a specific ROI on it, maybe they anticipate that it'll be 80 cents that they'll pay out.

And then it turns out it'll be extra 47 cents on that side.

That's, you know, almost an additional 40% that they're losing, 50% that they're losing against what they had anticipated originally.

So there's actually something even more interesting in this.

It's that insurers are now showing early signs of changing and charging higher rates and after years of declining averages.

And so this is a byproduct of the statistic that we talked about last podcast, but we really didn't touch on what it will imply for the future of insurance in general and workers' compensation insurance in general.

The fact that these insurance companies have been holding the bar so low in terms of the price, paying out the higher claims, and then all of a sudden this big catastrophic year comes along and they have to pay out an extra 27 cents on every dollar that they were charging, they're losing money.

They've got to earn that back somehow.

And that's what we're anticipating.

The higher rates on the workers' compensation side, that bubble is really going to start bursting and expanding and growing.

So I'm a firm believer that California is entering into a new workers comp pricing cycle.

So if you're running a construction company, a restaurant, a warehouse, or any business at all, or planning to, then if you're going to have employees or you do have employees, there are a lot of things that I would recommend you look into and possibly do differently.

Now, if you're running the world's most perfect construction company, you've got all the risk mitigation strategies and the loss prevention, the gloves on, you've got the protective machinery all of the different features that you can prevent and control, you've got good relationships with your employees as well, and the proper return to work sort of strategy and way of doing things in the event of an injury and illness with a written safety program, you're doing excellent.

But I would argue that 90% to 95% of people and employers do not have all of the strategies in place.

So we're going to be talking about what you should be doing in the meanwhile while these rates, I think, are going to go up to make sure that yours stays more stable.

And so the truth is, is that when these insurers are collecting more premium, which they have over the last few years, that really isn't because of the hiring of rates.

It could also be as a result of audits.

So you think of the contractors who at the end of the year, they get a final audit report that says that they added a few millions of dollars to their payroll.

the workers' comp company, because they're based off of payroll, how much they're charging you, is going to say, hey, we insured you for $4 million of payroll.

You ended up doing six.

That's an extra $2 million of liability because we had written it on a payroll basis, which is standard, of course.