California Workers’ Compensation Insurance: Claims Factors & Prevention

Aaron (00:00) Hello everybody and welcome to the Speaking of Insurance podcast. My name is Aaron Bollinger, and today we're gonna be talking yet again about California Workers' Compensation Insurance. It's talk of the town in terms of insurance and financial talk, the crazy statistics that have been posted recently by a lot of insurance news outlets. And we're gonna be giving you all the debrief and the summary for people who do not probably understand as much as we have to crame our brains with in terms of the insurance information. So last episode we talked about California Workers Comp. Aaron (00:29) 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 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 Aaron (00:53) They'll be able to get a specific ROI on it. Maybe they anticipate that 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 after years of declining averages. And so Aaron (01:22) 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, you know, this big catastrophic year comes along and they have to pay out, you know, 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. Aaron (01:51) 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 in a 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 Aaron (02:20) You've got all the, you know, 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 a proper, you know, 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, you know. But I would argue that 90 to 95% of people and employers do not have all of the strategies in place. Aaron (02:48) So we're gonna talking about what you should be doing in the meanwhile, while these rates, I think, are gonna 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, Aaron (03:14) 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 gonna say, hey, we insured you for $4 million of payroll, you ended up doing six. That's an extra two million dollars of liability because we had written it on a payroll basis, which is standard, of course, but they're not gonna be like lowering the price on you because they're adding more liability exposure. And so we had talked about how even though Aaron (03:43) The dollar sixty-three that was charged in twenty twenty-five for the workers' compensation rate has gone up to a dollar sixty-four. So up up a penny, literally. Statewide average dollars per hundred dollars a payroll. The rate has gone from a dollar sixty-three for every hundred dollars of payroll to a dollar sixty four. So they're charging more money. Why that hasn't actually implied that the workers' compensation prices are actually increasing. Aaron (04:10) Because pure premium doesn't imply the causation of the increase in that premium, which we will be breaking down for you guys today. So insurance pricing has two major factors that a lot of people need to think about. That's premium income and claim costs. Even when insurers collect more premiums, they can experience underwriting losses if claims and expenses rise faster than the increase that they did in the rate. So that extra cent. Aaron (04:37) Obviously was not enough to make up for the extra 27 cents or extra 50 cents of added losses during that year that had had a huge impact on their loss ratios. So they're still losing money, even though they are charging more money, is what I'm trying to say. That's a simple simple way of putting it. So the recent statewide charged rate movement is small, that cent increase, but it's a long pattern of declining average rates that have preceded that event. Aaron (05:06) That have caused me and a lot of other insurance skeptics and statistical, you know, underwriters to realize that there is a big problem with current workers' compensation insurance pricing, which has been furthered by the statistical release of the extra 27 cents that insurance companies are paying out for every dollar paid to them. So, how can insurance companies collect more money and still experience underwriting losses? We just talked about this. Aaron (05:32) Let's say you're running a lemonade stand and you're charging a dollar a cup. Then you increase your prices to a dollar ten cents a cup, but the price of making it has gone up 40 cents. Aaron (05:41) Even if you increase the price of the product that you're selling, if the price to make that product in the first place goes up, you're still going to be losing money. Aaron (05:48) Because the lemonade is more expensive to create, it's more expensive to sell them, therefore. And so you have to be able to understand that these insurance companies are operating with a margin in mind that they need to make money, they need to make profit somehow in the long run. And so Aaron (06:05) One of the questions that I had written down that I think is important to distinguish is why doesn't a 127% combined ratio mean every individual insurer loses 27%? And that's because of appetites and specific insurance companies' consolidation of risks. You might be with a workers' compensation insurance company that specializes solely in construction, or maybe they just have a big hand in the pot of construction. If the claim payouts in construction have gone up, which they have statistically, then that insurance company Aaron (06:34) Is gonna be forced to either A, lose money, or B, next year increase the prices to an adequate amount to the point where they anticipate that they might make some money back. Most of the time it's gonna be B. But if somebody is insuring, let's say clerical workers, you've got a super great rate on people who are doing, you know, in office work typing and things like that for workers' compensation insurance. If there are less clerical claims, odds are that that company that specializes in clerical insurance doesn't have to increase their rates as much. Aaron (07:04) So understanding that even though workers' compensation premiums are up as an average, it doesn't imply that every single industry's have to be up necessarily, just that the losses are becoming so highly litigated and exponentially high that Aaron (07:22) These insurance companies are going to have to make more money and earn back their margin that they have because they also have reinsurance companies that they need to fulfill the requirements of. So underwriting guidelines are going to get stricter. And especially in insurance sectors and parts and industries that are higher loss ratio historically over the last few years, experience wise, we're going to be seeing an uptick as well that's going to be potentially in the tens to twenties of percent. So there's an important distinction that I do need to clarify. Aaron (07:52) And that is a combined ratio is an underwriting measure. It's not a competitive measure of insure profitability. So investment income can offset some underwriting losses. So let's say that we had talked about the inflation. If the inflation is maybe not five percent, but twenty percent, and you're still able to make money on the lemonade, then the insurance companies might very well be happy, some of them at least. But generally speaking, it's hard to get such a big return on that investment of the dollar that you get from the premium. Aaron (08:21) To the point where you're able to satisfy yourself with getting a a dollar twenty-seven paid back to the people that you owe. So the insurance company is getting paid a dollar at the beginning of every year, most of the time, unless an audit comes in at the end. A dollar at the beginning of the year, they go invest that. At the end of the year, might they might have a dollar and five cents, but they're on the hook for a dollar twenty-seven. So they're losing 22 cents potentially there if we're averaging at a 5% inflation rate. So the biggest hidden cost here. Aaron (08:49) Is claim administration and legal expenses. Usually you think about just the litigation of the person getting paid. But the fees for lawyers are absolutely ridiculous. If you've ever had to file a personal auto claim and you've had to go through, litigation with the people who are on the other side trying to, get as much money out of you as possible, or if you're on the side of the being the beneficiary of that level of litigation and getting paid out some high amount of money from some of the advertising firms that do it all over. Aaron (09:18) the highways, then you understand the level of money that those people are able to make and pocket. Aaron (09:26) In 2025, the projected allocated loss adjustment expense, it also called the ALAE, per indemnity claim, excluding the medical costs, containment program costs, was up 11% from 2024. So this is just a statistic that was posted by the insurance journal on October 8th from the WCRIB numbers. It's $13,860 now for the adjusted loss expense. So for those levels of legal expenses and claim administration. Aaron (09:54) It's costing the insurance companies an average of almost $14,000. And I wouldn't be surprised if that's increasing year over year because of a large part of the advertising and the ability of these lawyers to get more money out of the insurance claims. So workers' comp cost does go just beyond paying medical bills and wage replacements. These insurers incur costs of managing and resolving claims, including certain legal and medical legal expenses. Aaron (10:21) An example that I want to talk about is if an employee experiences a repetitive motion injury, the claim will probably involve multiple medical evaluations, questions about the cause of the injury, treatment disputes, and legal representation. All of those things are things that you don't immediately think of when you think about the repetitive motion injury. You think about, what's gonna happen for them getting paid out individually, not the aspects of the actual. Aaron (10:49) medical evaluations and the legal representation and the treatment disputes that does happen between insurance company and the insured and the insured's legal team. Each step can increase the cost and time required to resolve a claim. And so if you are an employee and you're the type of person who just wants to get back to the job, of course that's gonna be really hard with a repetitive motion injury potentially, because that can be, long-term disability. But generally speaking, Aaron (11:17) If you don't have one of those long-term injuries, getting back to work as soon as possible is one of the best ways to preserve the relationship with your employer. Not that you don't have a legal grounds to go get money, of course, from the workers' compensation insurance company, but just that in general, if you feel like you want to go back to work, then making less of a long drawn-out process out of it with all of the different medical evaluations and the treatment disputes that can come out of these types of claims. Aaron (11:47) could be a way to save time, your mental energy, and allow you to expend it possibly on getting back to work sooner instead of having to deal with all of the back and forth between the insurance company and your legal team. But of course you're more than entitled to do that. So what is the difference between the amount paid to an inch injured employee and the cost of handling the claim? And so there's a few different aspects because the amount paid to an injured employee direct to their pocket is the compensation for the wage plus whatever extra they're entitled to, but Aaron (12:15) That doesn't account for the medical treatment. That does not account for the legal expenses or the claim administration and the people who go in and actually, determine the claim settlement amounts. There are different nuances that people have to identify as employers and as employees when they are understanding the financial process of workers' compensation insurance claims. And so Aaron (12:38) Two of the exact same people can get the exact same injury. And it can have a completely different total claim cost based off of the way that they approach it. If you approach it with a legal team that goes gunning for the insurance company and tries to get you the most compensation, which you are more than entitled to, and they draw out the process and they get you the highest possible settlement, that could be great for you. But it could also be very detrimental to your employer. And so if you're on the maybe the middle ground Aaron (13:04) Of the listen, it's not my employer's fault that I did this thing and dropped this thing. But maybe I am definitely entitled to some things, making sure that you strike the middle ground with your employer, the insurance company, and the expectations for your legal team could be a way to make sure that again, we talk about how much time do you want to spend injured? Not very long. Of course, if it's a long-term disability injury, go go get your check. You know what I'm saying? From the insurance company. And Aaron (13:30) Obviously we don't encourage claim filing, but of course as an employer, you're gonna legally have to do that through the insurance company in the event of a long term disability claim. But as an employee, if if there is a level of middle ground that you can strike, then we definitely encourage people to consider that. Aaron (13:45) And so one of the reasons that there are so many disputes is because of the lack of accurate initial reporting in the immediate aftermath of an injury and potential claim event. So if you're the employer and you alert the insurance company immediately with exactly what happened, all of the background, all the documentation, and you get the process ready. And of course you're scared, which is understandable because it's a financially hard time for a lot of businesses in California. Aaron (14:12) And even if you're thriving, it can definitely derail you to have a huge workers' compensation claim. Reporting it properly in the first place can be a differentiator for possibly a 10 to 20% of that claim payout. That's not a legal estimate or legal advice. That is just an estimate of pay. The reality is that insurance companies are going to pay out higher amounts because of the disputes in the event of inaccurate initial reporting. Something to keep in mind. Aaron (14:41) Another statistic that's very interesting is that in 2022, cumulative trauma, so the buildup of some sort of tra bodily trauma, possibly mental trauma from an employee at a work site, at a job, working at a specific place for an employer was 18%. So of all of the California indemnity claims that were paid out, it was 18%. Since then, over the last four years in 2026, it is now reported to be over 25%. And so this is a buildup possibly of Aaron (15:10) new age of litigation and encouraging of these types of claims, it is obviously becoming more frequent. But if a warehouse employee develops shoulder pain after like years of lifting packages, unlike just a single fall, when the injury is determined to be developed and the employment exposures contributed that contributed to that buildup of that injury can be the difference maker between a valid claim and an invalid claim. If it was Aaron (15:40) built up over maybe potentially lack of safety features in the the job site or an unhealthy level of expectations for lifting things at that warehouse, then it could very well be a claim that gets drawn out and has that long-term disability potential. So employers should definitely care about ergonomic programs because of this and documenting any reported symptoms, addressing the repetitive tasks before they become serious injuries that are long sustaining Aaron (16:08) And potentially catastrophic to your workers' compensation insurance. And so one other especially interesting statistic that I had written down is that approximately 25% of cumulative trauma claims had no medical payments recorded at 18 months in the reported development data. So this helps explain why early claim estimates can change over time. And that's because even after 18 months of the reported development data. Aaron (16:35) When the cumulative trauma claim was filed the following 18 months, a fourth of them didn't have any medical payments paid out. So that just shows the lingering effects of potential cumulative trauma and again highlights the importance of having those safety programs and healthy expectations of employees and their physical exertion, especially for contractors and those similar. Aaron (17:02) And so there is a world where a business can have an excellent loss year. They don't have any losses on their workers' compensation program, but an older claim develops at that retro date, or maybe not at that retro date, and it turns out that an employee was improperly set up with a heavy workload and they were carrying things on their shoulders and they had a shoulder dislocation or a traumatic injury to their shoulder that had built up over time and is now preventing them from getting jobs. Aaron (17:31) at other places. That can be a huge payout employers and employees potentially if you're listening to this. So making sure that you understand the nuances of that coverage and how detrimental it can be to not have a proper safety program in place and expectations for employees. Aaron (17:51) I would say that the most number one asked question in probably all of 2026, latter of 2026 for workers' compensation is can you expect that your premiums will increase in 2027? And so this is a particularly relevant topic because of the California regulators responding to the workers' comp costs. The California insurance commissioner, Ricardo Lara, approved a six point six percent increase in pure advisory premium rates effective September first that we had talked about. Aaron (18:20) But this is interesting, is that we had actually figured out that it was following an 8.7% increase the following year, so or the prior year. So it went up 8.7% in 2025, and in 2026, it's going up 6.6%. And so this is the critical point. These are pure advisory premium rate changes. This is not a mandatory increase in every business's final insurance bill. This is just general insurance average increase. Aaron (18:48) Ability for these insurance companies to get legal permission to start to increase the prices to make back some of the money that they have been losing on the workers' compensation side. Aaron (19:01) And so for this reason, some businesses may see increases while others see relatively stable pricing or potentially decreases. And it depends on your classification, claims experience, payroll, insurer, reputation, and relationships as well with the insurance companies. Aaron (19:16) To cap it all off for you guys, I would like to talk about the action-oriented conclusion that I will start to be implementing after my talking about insurance for 20 minutes. Let's get actionable with it. Of course, we talked about in you know very vague language the ergonomics set up for potential contractors and other jobs. But five concrete things that you can do today to make sure that in 2027, hopefully or following years, over time, your workers' compensation premium as an employer goes down. Aaron (19:46) That is review payroll classifications. So making sure that employees are classified according to their actual duties and applicable California rules. We've seen cases where people have classified people who have worked for them as maybe let's call it plumbing, but if they do any roofing, then it's possible that they at the end of the year you do get hit with that audit on that roofing side of work that they were doing. And the premium goes up fifty, sixty, seventy, eighty, even double the percentage of what you were paying before. And so misclassification can Aaron (20:15) Also have expensive audit adjustments that happen at the end, not just, you know, this wasn't done right, this wasn't good on your reputation as an as an insured, but also the insurance company has a legal right to increase that rate of yours. Establish a return to work program. I'd mentioned it briefly, but where it's medically appropriate, modified duties can help injured employees return safely and potentially reduce disability related costs in the long term. Aaron (20:44) Can be a big differentiator as an employee to have a return to work program. It could be great. Insurance companies love that type of stuff. If you do have a current worker's compensation policy with a company, telling somebody that, hey, we just implemented a return to work program could also potentially give you a credit where applicable. The next is ask your broker for your X mod worksheets. We like to provide some of our insureds this complimentary at Bull Insure, but it helps identify incorrect payroll and it helps look at. Aaron (21:12) Classification and prior loss information and prior payrolls as well to understand how payrolls and losses have adjusted their premium and also the modification, the X mod for the higher paying employers out there. This is definitely applicable to you. Aaron (21:29) it is just an experience modification factor. It usually ranges from anywhere from like zero point five to one point five to two if it's really bad. that just adjusts based off of how well your claims history in the following three years minus the most recent year is compared to other people in your industry. And to meet that Aaron (21:48) Requirement of getting a Xmod or meet the threshold of getting a Xmod, you have to meet a specific payroll requirement. So don't worry. If you're growing, it'll be there one day and it'll become a super big issue or a super big helper for your insurance premium dollars because they do offer credits to those who have better loss histories than other people in their industries. Another thing is to verify subcontractor insurance. Aaron (22:11) We've seen cases where having improper certificates of insurance and not having supporting documentation for an uninsured subcontractor can expose you during your final audit and increase your premium rates as well, consequentially. The last one is start your renewals early. We like to look at policies 120 to 90 days out. If you're in that window, you can reach out to our team. If you're not and it's a little bit closer, we can still definitely take a look and see if there are options for you. But Aaron (22:39) Make sure that your broker is looking at the available markets, looking at all available credits, and that they have an understanding of insurance companies' appetites. If they are just a super niche broker and they just do, you maybe in a few other businesses and they do not have good relationships with existing insurance companies who are writing and growing in the workers' compensation sector, then you might not be getting the best rates, claim service, and payment terms and policy conditions that you should be eligible for and may actually be contractually required to have. Aaron (23:09) So if you guys liked this podcast, please leave it a five-star review. If you guys listen to Workers' Compensation Insurance podcasts, respect, major respect. hopefully I was able to drop a couple bits of knowledge for you guys. And I'd like to pose a couple questions to you as we close out. Do you think the claim frequency and claim handling expenses will continue to increase in California? It's been a trend. It's been historically up. It is looking like it will continue up. Aaron (23:37) Are there any situations where you could see it not increasing? Again, the claims handling expenses and claim frequency. Maybe you think that the frequency will go down, but possibly the payouts go up. We've seen that on the auto insurance side, the claim severity going up as well. Aaron (23:53) So the biggest takeaway for me from this podcast and the notes that we've written and what we've discussed and what I've talked about with my team isn't just that California workers' compensures are having hard financial circumstances and that it's time to feel bad for them. It's that employers need to understand what goes on with their insurance dollars, how they're being spent, and what's actually being done with them. Your payroll, class code, claims experience, and the way that you approach workspace safety. Aaron (24:21) All matter and can be the difference for the amount that you're paying for your insurance. Insurance should be an ongoing risk management approach to your business, to your employees, to your relationships, not just another bill that you pay once a year. With this level of proactivity, you'll be far better than other people in terms of your risk mitigation and your actual payments that you have to pay to insurance companies. Again, it is just the proof is in the pudding. Aaron (24:50) people who do have a proactive approach, pay less for insurance, and usually make more money in the long run. So with that, I'm out. Thank you so much for listening. Hope you guys have a wonderful rest of your day and happy Monday.