Among the hundreds of bills swept through the process in the final days of this year’s legislative session was SB 316–a little-known measure that will have a significant impact on workers’ compensation insurers and, more importantly, the California workers’ compensation insurance market.
It is no wonder the bill received little public attention: It focused on the seldom discussed but important subject of workers’ compensation insurer reserves. SB 316’s significance, however, was not lost on legislators, who did not cast a single “no” vote on the measure in either house. The governor signed it into law last week. It becomes effective January 1, 2008.
Simply, the bill by Sen. Leland Yee, D-San Francisco, repeals an outdated, nearly 40-year-old law. That law made sense back in 1969. But since then California and every other state have enacted a modern system, known as the Risk-Based Capital methodology, for measuring an insurer’s solvency and determining the appropriate reserving levels.
Until SB 316 goes into effect, California has two reserve laws: the old one and the new one. This, of course, is forcing insurers to put aside more money than is needed to assure solvency. It’s estimated that California workers’ compensation insurers put 15 percent more capital into reserves than insurers doing business in other states. This cuts into California insurers’ surplus and lowers the scores they get from rating agencies. And it doesn’t provide any greater protection for injured workers.
A real downside is that the duel reserves are creating a barrier to attracting capital to California’s workers compensation market. In consumer terms, this means money has been tied up – money that otherwise could have been used to insure more employers and their employees.
When SB 316 becomes law, California will have just one reserve law. The bill will repeal an Insurance Code section that was added in 1969 to provide the only tool then available to set some type of minimum reserves for insurers. It establishes only crude measurements for solvency and an insurer’s ability to pay claims.
The modern, more sophisticated Risk-Based Capital standards for determining insurers’ solvency will remain in effect. Those standards mandate insurers to provide additional accounting or actuarial information whenever an insurer’s reserves require immediate regulatory attention. The insurance commissioner has the authority to require insurers to increase reserves whenever they seem inadequate.
The old reserve requirement did not prevent the wave of insolvencies that occurred a few years ago. SB 316 orders a study of those insolvencies so California can avoid any mistakes that may have been made.
SB 316’s modernizing of solvency regulation will foster the health of California’s workers’ compensation insurance market.
Repealing the outdated reserve requirement will make it easier for insurance companies, especially small specialized companies, to write more business in California. SB 316 allows insurers to shed an unnecessary reserve requirement and, therefore, gives them greater resources and flexibility to compete in the marketplace.
For California employers, the greater market competition encouraged by SB 316 will give employers more choices when they shop for workers compensation insurance.
Most importantly, SB 316 keeps in place California’s strong mandates for insurer reserves and deposits so that there is assurance that workers compensation claims will be paid.