If California's workers' compensation saga were to be adapted to a novel - fictional of course - the title might well be The 3 1/2 Percent Solution. The announcement in July of a proposed pure premium increase for January 1, 2005 caught many people off guard, even though the recommendation was due to a benefit increase enacted two years ago in AB 749. Of course, no one expected Commissioner Garamendi to approve the recommendation, and with some actuarial sleight of hand he ordered a 2.2% decrease in pure premiums together with a stern warning to the industry to slash premiums. This is an interesting comment coming from a solvency regulator

But then again Garamendi department was, in 1991, warned about Cal Comp's then $47 million deficit yet he permitted the carrier to continue on and set the regulatory stage for a group of insolvencies never before seen in history.

The ongoing vitriol from the applicant attorneys conveniently ignores the fact that both insurers and the Insurance Commissioner have already taken considerable steps in the advisory pure premiums to reflect reduced costs from recent legislation. The market has in fact been more generous than the Commissioner in lowering rates.

The public perception, however, is that the reductions are too little and, in some cases too late. This concern is exacerbated by industry critics who were shocked and appalled that the mandated benefit increase effective January 1, 2005 would actually raise costs.

According to them, AB 227, SB 228, and SB 899 reduced costs drastically - even before they were incurred. Furthermore, they have reduced costs for all time. These draconian reform measures - to hear the critics talk - eliminated any future costs from indexing temporary disability or from the additional mandated benefit increases for permanent disability contained in AB 749 and SB 899. You remember those bills. They were engineered by then Assembly Insurance Chairman Tom Calderon and his chief consultant who is now an industry lobbyist.

But, like a plume of smoke arising from Mount St. Helens, the 3.5% number didn't go away. It is. Sooner or later something is going to blow. The eruption could have come as early as October 27th, when Commissioner Garamendi reconvened the pure premium rate hearing. By that point, however, there was enough uncertainty about the new permanent disability rating schedule that projecting accurate cost savings from that reform would have been perilous.

Cost savings from the medical provider networks, at least as it relates to pure premiums, have already been calculated, although in his last rate order the Commissioner gave himself room to extract further savings from that program.

There obviously isn't data to justify a finding of further cost reductions as the networks won't be operational before January 1, 2005. Such a move would, consequently, be dependent upon further analysis of the new regulations - regulations that are recieving only a tepid response from some segments of the insurance industry.

The eruption could also come on January 1, 2005 when more premium reductions are expected. January 1 will be one of the most significant dates in the history of the California workers' compensation system. At that time, the new permanent disability rating schedule and the medical provider networks will become operative. It is also the time when the adjustment to PD (+/- 15% based upon return to work) will be effective for employers of more than 50 employees. The Governor and Republican legislators have staked a good deal of political capital on January 1 being a watershed date, and one way or the other it is likely to be.

Already, applicant attorneys are shocked and appalled that the State Fund is only reducing rates 5%. Clearly they are ripping off injured workers and employers alike. Yes, CAAA protesteth too much, but we knew that already, didn't we?

Front-loading savings from reforms is not new. Elected Insurance Commissioners have tried to do this since the minimum rate law days. Competitive, cost-based pricing puts a premium on it as well, as can be evidenced by the steep decline in dividends since the advent of open pricing. That being said, however, we are in uncharted waters. Policy analysts, armed with impressive numbers and grandiose assumptions, have fueled the flames of expectations. It is a siren's song that neither Republicans nor Democrats can resist, even if with different motivations. Furthermore, a self-insured employer can represent that there will be significant savings and there is really nothing in the short term that can verify that. Indeed, the political process doesn't really care if there are actual savings for self-insureds, optimism will suffice.

Insurance companies, however, cannot satisfy anyone with kind words and expectations. Businesses know clearly what insurers think about reforms when they get their premium notices. The reality of cost-based pricing can be a cold slap in the face to those, like Garamendi, who hate to see reality interfere with their 'statesmanlike' way of addressing tough public policy issues. In this environment, messengers will be shot. In this particular instance, we are not talking about extra bullets; we are talking about extra clips.

With all these bulls-eyes on the industry's back, one would think that self-inflicted wounds would not be necessary. But no, we are talking about insurance companies, aren't we? The industry has been late to the table to discuss implementation of SB 899 and, as has been its historic penchant, at least some in the industry have reacted negatively to proposed regulations from the Administrative Director implementing the medical provider networks and the new permanent disability rating schedule.

While there is historic justification for this hesitation, it is a dangerous position to take with an administration as aggressive as is this one to bring about real reform and with opponents who claim that the insurance industry is the reason injured workers lives are now ruined. Passions run high on this issue these days, yet the industry's response can best be measured as ranging from tepid to lukewarm.

If the California workers' compensation system is going to be returned to the employers and employees for whose benefit the system was created, then it will require the active cooperation of all stakeholders.

No one can legitimately expect applicant attorneys to do anything other than push back, every step along the way because their incomes are threatened, using their considerable resources to delay and frustrate the changes mandated by these new laws. In some cases they may be successful. Labor was clearly forced to the table and their reluctance to work with employers and the administration to build a system that is both efficient and compassionate is truly regrettable. That leaves it up to the business community, and for many businesses, that also means insurers. The insurance industry has yet to show it is, or step up to the task.