Bill to Implement Federal Financial Services Reform

THIS WEEK IN SACRAMENTO

Prepared by Norwood & Associates

November 26, 2003

Senate Committee Votes to Repeal Workers' Compensation Reforms

Senator John Burton wasn't bluffing. Yesterday he fulfilled his promise to try and repeal this year's controversial workers' compensation insurance reform effort, AB 227 and SB 228. The Senate Labor and Industrial Relations Committee, meeting as part of the extraordinary session called by Governor Schwarzenegger to fix the workers' compensation insurance system, voted 5-1 in favor of SB4X 1 (Burton), which would repeal AB 227 and SB 228.

The Chairman of the Committee, Senator Richard Alarcon, voted for the repeal bill even though he authored SB 228. He said he was voting to repeal his own bill because he wanted to send a message to insurance companies that the Legislature would not enact any further reforms unless they passed the savings on to employers instead of pocketing the profits.

Senator Burton authored the bill because Governor Schwarzenegger during the recall campaign called AB 227 and SB 228 "bogus." The California Chamber of Commerce and other business groups opposed the repeal, as did the Schwarzenegger Administration. They said AB 227 and SB 228 were important first steps and would bring real rate relief for employers. However, they said the reforms were not enough to solve the workers' compensation insurance crisis and further drastic reforms were necessary. Despite the employer opposition, the bill passed out of the committee and now heads to the Senate Appropriations Committee.

While it is doubtful SB4X 1 (Burton) makes it all the way through the Legislature, the Committee vote does indicate the Legislature is not inclined to rubberstamp the new Governor's workers' compensation insurance reform plans.

Insurers Accused of Pocketing Profits from Workers' Compensation Reforms

The special session convened by Governor Schwarzenegger was supposed to be about further reforms to bring down the cost of workers' compensation insurance premiums. The Senate Labor and Industrial Relations Committee, however, instead turned the forum into an insurance company bashing session.

Senator Richard Alarcon, Chair of the Committee, required all witnesses to be sworn in before testifying before the Committee. This rare procedure is usually used for investigative hearings involving criminal conduct. It appeared to many that Senator Alarcon and the other Democrats on the committee were trying to create the impression insurers were engaging in a conspiracy to keep workers' compensation insurance premiums high.

Senator Alarcon grilled every witness, especially employer groups and insurers, regarding their support for the Insurance Commissioners pure premium advisory rate recommendation of a 14.9 percent cut. Insurers repeated until they were blue in the face that the 14.9 percent rate cut was speculative, and they couldn't reduce rates that much until there was clean-up language to the reform legislation and they had some actual experience with the reforms to see if they really delivered the promised cost savings.

Senator Alarcon chastised insurers, saying they should immediately reduce rates. He promised he would not allow any further reforms, or even clean-up legislation, until insurers lowered rates. He argued that insurers were keeping the profits from the reforms, and he would not be a party to lining their pockets further. The Senator tried to make the case that insurers were earning obscene profits from workers' compensation insurance, and disclosed the salaries of several insurer executives.

Employers were put in a difficult position. Senator Alarcon asked them if they supported the WCIRB's advisory rate cut of not more than about 5 percent, or the Commissioner's 14.9 percent. The employers responded that this was not a political issue, but a debate among actuaries. They also said they wanted accurate rates, since they weren't eager for more companies to go insolvent and further destabilize the market. Senator Alarcon accused these employer groups of letting their members down by not supporting the Commissioner. He noted that several of these employer groups had insurers as members, and suggested they were being unduly influenced.

The Governor's special session has quickly degenerated into an all out assault on insurers. Despite daily hearings this week, the Governor's reform bill has not even come up once for a hearing in the Senate. Instead, Democrat Senators discussed their plans to introduce legislation to perhaps eliminate the worker's compensation insurance system entirely and allow insured workers' to use the tort system or create a cause of action for bad faith in workers' compensation.

Senator Alarcon also promised to introduce a bill to regulate rates and "excessive profits." Given all the anti-insurer rhetoric being thrown around, Insurance Commissioner John Garamendi actually played the role of the responsible regulator. When Senator Alarcon asked the Commissioner his opinion about regulating rates and profits, the Commissioner expressed caution, suggesting it might cause the availability of insurance to contract even further.

Labor groups also took a shot at insurance agents and brokers. They said agents and brokers were making more money in dollar terms in this environment, and that they shouldn't profit off the backs of injured workers. No legislation has been introduced, however, to cap commissions. In addition, no legislator has yet endorsed labor's suggestion.

At this point, there doesn't seem to be much hope that the Legislature and the Schwarzenegger administration will come to a quick compromise on further workers' compensation insurance reform. In fact, given all the anti-insurer and anti-broker venom injected into the debate this week, the initiative process seems to be the last remaining hope for embattled employers who at best are seeing rates for next year staying the same on average. The Senate and Assembly will undoubtedly hold further hearings next week on workers' compensation insurance reform, although no hearings have yet been scheduled.

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