State to Slash Base Rate for Workers’ Comp by a Record 16% : Insurance: The move is an attempt to heat up price competition as date for deregulation approaches.

The California Department of Insurance plans to announce today its biggest reduction ever in workers’ compensation rates, cutting by 16% the base charge that businesses pay to insure their employees against on-the-job injuries.

State insurance officials optimistically predict that the action will translate into a one-time savings approaching $800 million for the 530,000 California employers buying workers’ compensation coverage. That would come out to roughly $1,500 per employer, although the real impact would vary dramatically from firm to firm.

Insurance Commissioner John Garamendi, in an interview, said he is taking the action to heat up price competition among workers’ compensation insurers in advance of next year’s deregulation of the state’s rate system.

Garamendi, whose four-year term expires in January, said he wants the deregulated market to begin at a “starting point” where premiums are “as low as possible.”

The 16% reduction marks the third cut in the so-called minimum rate for workers’ compensation insurance in 15 months. The series of cutbacks stems from a big drop in worker injury claims since 1991.

Back then, employers blamed workers’ compensation costs for driving businesses from California, creating an explosive issue that prompted a succession of legislative reforms, including a major package last year.

For the insurance industry, the rate cut was larger than expected. Garamendi said previously he was considering lowering the rate in the range of 10% to 15%, and an advisory agency representing the industry recommended a 9.2% cutback.

It’s not clear, however, how the rate cut will play out in the insurance market once it takes effect on Oct. 1 or, for that matter, what next year’s deregulation will do. While insurers will be free to lower rates, they will not be required to do so, and no one is sure how sharp the price competition will become.

In addition, employers judged to be poor insurance risks because of safety problems would be likely to continue paying high insurance rates and enjoy little, if any, benefit from price competition. In fact, critics have argued that deregulation will lead to higher premiums for many small employers.

Still, Garamendi, an unsuccessful Democratic gubernatorial candidate this year now believed to be in line for a Clinton Administration post, said state legislative reforms and a related crackdown on fraud by his department, other agencies and insurance companies have yielded savings warranting lower insurance premiums.

After peaking at $7 billion in 1991, the amount paid out by insurers to cover injured workers’ medical and rehabilitation expenses and to replace lost wages fell to an estimated $4.6 billion last year.

Many experts attribute much of the decline in claims to the stagnant state economy, arguing that workers often defer workers’ compensation claims during a recession because they are afraid of losing their jobs. They note that workers’ compensation claims began to rise again in the second quarter of this year, when the economy apparently improved, but Garamendi brushed off the increase as an aberration.

The current minimum rate system, established before 1920 when officials were worried about predatory pricing, sets a floor on how low premiums can be set.

As a result, employers--particularly those with good safety records--often pay more for workers’ compensation coverage than they would in a more competitive market. To lower rates, the state Legislature voted last year to scrap the minimum rate and spur price competition among insurers.