Nevada workers’ comp rates stable

David Strow

Thursday, Aug. 30, 2001 | 10:55 a.m.

California's attempt to deregulate the workers' compensation insurance market has left that state on the verge of massive hikes in insurance premiums.

But that isn't the case in Nevada. Eighteen months after Nevada businesses became free to choose their own workers' compensation insurance carrier, rates and benefits remain stable in Nevada, said Doug Dirks, chief executive of the Employers Insurance Co. of Nevada.

"Nevada is in a far better position right now (than California)," Dirks, head of Nevada's largest provider of workers' compensation insurance, said. "Our reserves are adequate, our rates are adequate, and the marketplace as a whole has been pretty responsible here. It's been a fairly smooth opening (of the market) overall."

EICON was once known as the State Industrial Insurance System, the state-owned monopoly provider of mandatory workers' compensation insurance. But in January 2000, EICON became a private company and Nevada companies became free to select their own carrier of workers' compensation insurance.

As of Dec. 31, 2000, EICON had about 50 percent of the workers' compensation insurance market in Nevada, with about 18,000 clients. Though EICON remains the dominant player, some inroads have been made by competitors -- in December, for example, the state of Nevada pulled out of EICON, and is now insured by American International Group of New York.

But many of the 250 competitors licensed to compete in Nevada have been backing away, Dirks said.

"Some are starting to pull back, realizing demand wasn't quite what they anticipated," Dirks said. Others are deterred by the fact that much of the demand for workers' compensation insurance comes from the construction industry, a high-risk industry many insurance companies don't want to underwrite, he said.

Observers agree the transition to competition has, so far, been a smooth one.

"It seems to have worked reasonably well, as far as I can tell," said Paul Thistle, professor of finance at University of Nevada, Las Vegas, and expert in risk management and insurance. "When you change from a highly structured, highly regulated market to a market with much less regulation, one thing you have to worry about is disruptions from radically different rules."

Still, problems in Nevada's newly deregulated market may not become apparent for several years, Thistle said.

"Frankly, 18 months is not a long time, particularly for insurance," Thistle said. "If insurance companies underprice (premiums), either intentionally or because they underestimated (costs and claims), it can take several years to catch up with them. The jury is still out, and it's probably going to take several more years before we get a clear picture for how this has worked."

Underpricing was the problem in California, Dirks said. New competitors offered insurance at steep discounts, leaving them without adequate reserves. That, combined with below-average worker benefits in California, will result in massive rate hikes, Dirks believes.

"Just to get to break-even, they would need a 40 percent to 50 percent rate increase," Dirks said, adding that doesn't include hikes necessary to bring up the quality of benefits.

But in Nevada, rates are pegged to a market rate set by the state. New competitors were initially required to charge this rate; a year later, they were permitted to charge 15 percent above or below the rate. That's now been accelerated to a 25 percent range.

"That's helped stabilize what could have been a (unstable) situation," Dirks said.

Because Nevada's rates remain stable, EICON officials believe workers' compensation may actually become a recruiting tool for Nevada.

"If you're a business owner, the biggest (insurance) cost is workers' comp," said George Lonas, EICON senior vice president of marketing. "Nevada looks pretty attractive because our rates are pretty stable."

Still, EICON isn't ruling out rate hikes. About one-third of the funds paid out in workers' compensation claims go toward medical treatment. And inflation in medical costs is running about 8 percent to 10 percent a year, Dirks said.

"I suspect we'll see pressure to see rates go up," Dirks said. "We really aren't seeing it yet, but that seems to be the trend nationally. Inflationary pressures will ultimately lead to rate increases."

The state's insurance commissioner will next set a benchmark rate for the state in July 2002.

Still, competition will help ease the impact on Nevada businesses, Thistle said.

"To the extent there's more competition in Nevada, that will help keep rates rising more slowly," Thistle said. "As firms jockey for market share, one way they do that is to try to keep prices as low as they can.

"Any time you have a state-regulated monopoly, they're going to be inclined to be pretty inefficient. In a competitive market, firms have to operate efficiently, and those lower costs will be passed through."

EICON, as a monopoly, also didn't have a choice in picking its customers. In a competitive market, it does have that choice, and it has pared its rolls accordingly; currently it has 16,000 policyholders, down from 48,000 when it was state-owned. EICON declined to renew 18,000 of those policies lost in the past 18 months.

Now, EICON can decline to renew a policy if it believes the company is not taking adequate risk management measures. That's forcing many companies to become much more serious about their workplace safety programs, Dirks said.

Companies can always go to those insurance providers who are required to underwrite any applicant, but those policies of last resort usually come with a 25 percent surcharge.

"That really gets a company focused (on safety)," Dirks said. "Now the market forces people to bear the costs of not being safety conscious."