SOUTHERN CALIFORNIA ENTERPRISE : Workers’ Comp Deregulation May Upset Rates

Sandi Bublitz and Rich Aries sell record albums--not necessarily to play on your dusty old turntable but to hang on the wall as works of art.

As retail concepts go, it’s different, maybe even strange. But that’s a business risk, not a worker health and safety one.

So Bublitz and Aries were particularly pleased last month to find good news on both fronts: Their three Now That’s Music stores, only months old, were finding an appreciative audience, and the entrepreneurs discovered that the rates they pay for workers’ compensation insurance would drop 16% in 1995.

Not every small business will be as fortunate now that California’s much-maligned workers’ compensation insurance system is tip-toeing into the uncharted waters of rate deregulation. Some might even see rates go up.

“We’re not exactly a high-risk business, unless maybe customers come in and dance with the employees, who then throw their backs out,” Bublitz quipped. “(But) I couldn’t be more grateful.”

As part of a workers’ comp reform package approved by the California Legislature in 1993, the state on Jan. 1 jettisoned an 80-year-old law requiring insurers to set a minimum rate that employers must pay to insure their employees against on-the-job injuries.

With half a month of “open rating” under its belt, the workers’ comp market has reacted with confusion, increased competition and rate decreases of 10% or more for some employers.

But experts predict that the biggest rate drops will be enjoyed by large and medium-size companies with good safety records, while small companies--especially those that don’t participate in group insurance plans--may actually encounter rate increases.

Rate deregulation is so new that industry watchers say it is too early to tell what will happen to the rates of most individual employers, especially given that minimum rates have already been cut three times in the last two years, resulting in an estimated $2 billion in savings already to employers.

“I think a lot of (insurance) companies are trying to figure it out,” said Richard Bogy, owner of a Toluca Lake insurance brokerage bearing his name and new president of the Independent Insurance Agents & Brokers of Los Angeles. “They’re trying to be competitive without being irresponsible.”

“This really is a sea change in the industry,” said Jim Zelinski, spokesman for State Compensation Insurance Fund, California’s largest workers’ comp insurer.

State Fund expects to collect 2% less in premiums overall this year compared to 1994, Zelinski said. But not every employer will share in the decrease, he warned.

“Some rates will go up, some will go down and some will stay the same,” Zelinski said. “Now the onus is on the employer to come up with a good work safety program.”

Ever since 1914, the state had seen fit to set a minimum rate to ensure that insurance carriers made a profit while offering affordable workers’ comp insurance to all employers. But that helped push rates up, critics contended.

And the workers’ comp system had plenty of other problems, including rampant fraud and soaring medical costs. California employers paid some of the highest workers’ comp rates in the nation.

The 1993 reform package and the recession helped push down the dollar volume of claims paid by insurers, and Insurance Commissioner John Garamendi, whose term ended this month, ordered three separate rate cuts to reflect lower insurer costs.

Competition is expected to drive rates down under deregulation, but insurers are not required to lower their rates. Employers who are considered to be poor insurance risks might see no change or could even pay more despite price competition. Although the system changed Jan. 1, employers’ rates won’t change until their policies come up for renewal during the year.

Small business owner Tom E. Hagerman, a vocal advocate of workers’ comp reform, said the system has improved. Workers’ comp fraud is now a “cottage industry” rather than the major business it recently was, he said.

What’s more, the rate Hagerman pays for about 50 employees at his Santa Fe Springs woodworking company, John H. Van Patten Co., dropped because of the previous rate cuts and will decline a little more because of deregulation, he said. Workers comp insurance represents about 16% of payroll costs now compared to about 24% a few years ago.

“Most of the slack in the pricing structure has already been squeezed out by virtue of the rate rollbacks,” said Hagerman, co-founder of the Independent Business Coalition Against Workers’ Compensation Fraud. “We had reached the point where rates were astronomical. Now they’re just high.”

Smaller companies than his are more likely to see higher rates now because, under the old system, larger employers subsidized smaller employers, Hagerman said.

“The little guys are basically hurt by the open rating,” Hagerman said. “We’ll just have to ride it out and see what happens.”

State Fund, a nonprofit that insures about half the small businesses in the state, pledged to the Legislature that it would stabilize rates for small firms, Zelinski said. The best bet for many small companies, said agent Bogy, is to join some sort of group insurance plan like those offered by many trade associations.

Indeed, the main reason for the whopping drop in the rate paid by Now That’s Music is the fact that the firm gets its workers’ compensation insurance through a pool operated by the company from which it leases its 15 employees.

Sandi Bublitz said her rate decrease doesn’t mean she won’t feel the bite of high workers’ comp rates. The contractors she employed to refurbish retail space were quick to pass their costs along to her.