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As with California's electricity industry, the state
has deregulated its workers' compensation system and this new competitive
environment may prove problematic for emerging tech companies –
unless they know how to navigate the system.
California approached deregulation of the workers' compensation
system because its rates increased by double digits for several
consecutive years. Other states had gone to "open rating" systems,
in which insurers could establish their own rates, provided they
retained adequate pricing for paying claims, expenses, and maintaining
adequate surplus and reserves for developing and future claims.
In 1995, California adopted the open rating system as well and saw
rates plunge. Unfortunately, as with the problems California faces
with its nascent unregulated electric utility industry, the open
rating system has a few glitches. The two largest private carriers,
and several smaller carriers have been placed in liquidation or
under state "supervision." Because of this, the state's insurance
guaranty association (CIGA,) had depleted its surplus in April of
this year and is projected to be in the red by more than a billion
dollars within five years. Many of the remaining carriers also face
insolvency.
Although rates dropped initially, rates are increasing on average
by nearly 25 percent. Given this situation, how can an emerging
growth company successfully navigate this system?
First, choose a broker and a carrier who understands the technology
industry. I have seen insurance "malpractice" suits over the past
two years in which employees were misclassified. Because of this
error, employers either paid higher rates than necessary or did
not pay enough premiums, and then owed thousands of dollars after
a final audit.
Consider a trade association program that has secured a carrier
to write coverage for association members at a lower cost. Membership
in such an association can lower a company's risk profile to the
insurer.
Second, buy only from "Admitted" companies rated "A" or better by
A.M. Best Co. Although you may pay a little more for this –
perhaps as much as 20 percent more – you will be protected
from a carrier that is on the brink of insolvency. If you were to
file claims with an insolvent carrier, and those claims went into
litigation, the plaintiffs' attorneys would be able to negotiate
significantly higher settlements for their clients. These higher
settlements would count against your experience, causing you to
pay more much for workers' comp insurance for several years.
Third, leverage your workers' compensation insurance against your
commercial package policy. Some carriers are willing to write a
competitively priced workers' comp policy if they also write the
property/liability package.
Finally, invest in a real and manageable safety program. Even if
your company only has 10 employees writing software all day, there
is an exposure to soft tissue and repetitive motion injuries. Ergonomically
correct chairs, keyboards, mice and workstations will keep your
frequency and severity of claims down. Good claims experience still
provides you with the best lever.
David W. Pearce manages business development for Marsh
Advantage America. A service of Seabury & Smith Inc., March
Advantage America manages and administers insurance programs for
growing businesses, associations and affinity groups, educational
institutions, nonprofits and individuals. Mr. Pearce can be reached
at 714.245.7825 or david.w.pearce@seabury.com.
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