Title: Cofounder, president and CEO of CompWest Insurance Company
Resume: Mudge has 27 years of insurance industry leadership experience, including the past 20 years in California workers’ comp.
Schools: Mudge graduated cum laude from the University of Washington, with a bachelor’s degree in business administration, and earned his MBA degree in finance from the University of Puget Sound. He also completed the Advanced Executive Education Program for insurance executives at the Wharton School at the University of Pennsylvania, and is a member of Phi Beta Kappa and Beta Gamma Sigma honorary societies.
Awards: Eagle Scout
Boards and Commissions: He has authored articles for A.M. Best’s Property/Casualty Review and Underwriter’s Report; has served on committees of the California Workers’ Compensation Insurance Rating Bureau (WCIRB), the American Insurance Association; and on the board, including board chair, of the Insurance Educational Association (IEA). He has served on the executive committee of the San Diego Downtown Partnership and the board of directors of the Greater San Diego Chamber of Commerce and San Diego YMCA, as well as the corporate boards of ConfirmNet Corporation, Golden Eagle Insurance Corporation, San Diego Insurance Company, Industrial Indemnity Company, CWI Holdings, and CompWest Insurance Company.
Favorite Book or Quote: For fun I’m reading Inside Delta Force, but perhaps that’s because of the challenges in workers’ comp… For work, I’m reading Getting to Plan B. We’re data junkies here, so we’re always reading everything the bureau, institute, and WCRI publish as well.
With Mudge at the helm, CompWest was one of the first new carriers to jump into the California market after the workers’ comp reforms. With more than 20 years of insurance industry experience, Mudge's resume includes stints as president and CEO of Liberty Mutual's Golden Eagle and as chief operating officer and chief underwriting officer for Industrial Indemnity. He has also served on the board of the California Workers' Compensation Institute and on committees for the Workers' Compensation Insurance Rating Bureau of California.
What are the top three issues in California workers’ comp today?
The top three problems facing California’s workers’ comp are the unpredictability of claims outcomes, the unrealistic price levels by primarily out-of-state carriers or national writers, and the depressed California economy.
Are we headed for a hard market, and if so, when will it come? How long should we expect it to last? What are the repercussions?
Based on underlying cost indicators, we should be in a hard market right now, and all the signs are leading us to a hard fall. Escalating medical and indemnity loss costs since 2005 have been going up. Medical has risen 60% on average since 2004, and indemnity has risen 40% since 2005. Cost ratios for the market have rapidly shifted from profitable to, arguably, highly unprofitable. In addition, the weak stock market and depressed economy leave no release valves to offset these costs--absent raising rates, there’s nowhere to go.
It’s no longer a question of if but when we enter a hard market, so what is in the future of State Compensation Insurance Fund? Will its market share climb back to historic levels? Do you think that further reforms are needed for the governance of State Fund, for example, does it make sense to have Senate confirmation for board members?
They’ve done a number of things to increase transparency, and inject outside expertise. I’m an advocate of a financially healthy state fund in this state. It’s not healthy when State Fund approaches market share above 25%, when it grows to that level it is restrictive on choices for employers and it also puts pressure on State Fund’s operating resources, its ability to handle business volumes and claims. Now, will State Fund’s market share climb back up? It’s getting down to not historic lows, but on that level. Legislators have to realize that private capital has other places to go globally, unlike State Fund.
What needs to be done to improve return-to-work?
We need to start creating jobs in the state again, because there are lots of injured workers in the system today and employers who want to take them back, but there aren’t jobs for them. We need to create an economic climate for employers to start creating jobs again.
What do you see, other than medical, as the next big cost driver?
Nothing. Medical is the big cost driver. It’s 67% of the lost cost in California workers’ comp and is projected to be 70% nationally. There are a lot of things under medical, but it is the biggest cost driver.
Is it realistic to deal for more cost-cutting reforms in exchange for increasing PD benefits?
It’s not as simplistic as that. Employers and carriers need two things: predictability of cost and stability of rates. Workers’ comp is a mandatory line of insurance, and businesses have to be able to compete globally, which they can’t unless they have lower operating costs in California. They won’t have the ability to compete unless they can predict what workers’ comp costs will be. We need to have more predictable workers’ comp costs and a more streamlined benefit determination and delivery system, and then we can shift some of those savings to true permanent disability. You can’t just cut costs to PD and think you passed the savings on to employers. We need to make a system that’s more predictable and streamlined for employers and make it feasible for them to compete globally here in California.
Where do you see applicant attorneys focusing litigation in the future?
Everywhere they can. I think we could have a much better benefit determination system than having to litigate cases. Workers’ comp was originally designed as agreement between management and labor as a no-fault system. I am really bearish on the role of applicants’ attorneys—California has a much higher litigation rate to solve cases and it doesn’t need to be that way. It just adds costs to the system, which doesn’t allow dollars to be allocated to the workers. We need to get to a more non-adversarial system to speed up delivery of benefits to injured workers and get them more money where they need it. It’s too antagonistic. We need cost predictability so there isn’t a dispute and a streamlined mechanism so we don’t have to litigate.
Now that the federal health care bill has become law, what impact, if any, do you see that having on workers’ comp and do you have any concerns?
There’s potential benefit in that more workers will have health care, which will reduce their need to use the workers’ comp system as a health care delivery system. Negatively, the total cost of workers’ comp expense nationally is a drop of water in the health care ocean—these health care organizations have much more resources and political clout to shift costs back on the worker’s comp system.
What is the effect of more than $1 billion billion in payroll being absorbed by the self-insured groups?
If we look at recent events—notably self-insured groups in New York going bankrupt, and the issue around the contractors program in California that has gone bankrupt—we see that it’s very problematic when you have volume shifting into pseudo-insurance mechanisms that don’t have transparency of financial reporting or accountability to their members, regulators, and the outside world. It’s problematic when there isn’t the level playing field between these groups and other insurance institutions when it comes to regulation, transparency of reporting, and capital requirements.
Are loss adjustment expenses leveling out or are they still climbing? What is the cause?
They are still climbing. They’re climbing in response to increasing litigation since the early days of reform, which requires a lot more interaction to get a case resolved, and in response to the uncertainty of what the claim outcome is going to be. There’s a lot more adjusting expenses going on because of combating the Almaraz/Guzman decision as well as dealing with the add-on disorders being put on cases by lawyers and doctors: sleep disorders, sexual function disorders, and psychological disorders added to the physicality of the injury. This stuff needs to be evaluated or combated. Unless we can streamline the mechanism, I don’t see how costs will go down.
Is medical severity going to continue to climb or is it just a blip?
If you consider there have been five years in a row of increasing medical severity for claims, up 60% on average since the reform years of 2004, it’s not a blip, it’s a mountain. I don’t see anything that tells me medical severity is going down. Doctors get paid more money when they treat more, and considering the state of the economy, the workers on workers’ comp benefits who don’t have jobs to go back to are trying to stay on benefits as long as they can. We need to create employment opportunities.
Are there any changes to claims frequency?
Yes. Claims frequency for the first time in the past six years has turned up. We had a system where significant reductions in claims frequency were masking otherwise rising trends in medical and indemnity costs. Not only are those still rising, but we are actually seeing an increase in claims frequency, none of which bodes well for cost or rate to employers.