California presently faces an unprecedented array of economic and political challenges. Among these, the current workers' compensation crisis represents one of our biggest problems.

Since 1995, more than 20 workers' compensation insurance companies have gone broke in this state because they under-priced their coverage and couldn't cover the cost of the claims they received. Collectively this group had almost a 30 percent market share.

Now their claims have been dumped into the California Insurance Guarantee Association (CIGA). Historically, this insolvency fund paid out about $50 million each year to cover the residual claims liabilities of bankrupt insurers. Since September 2000, this cash drain has ballooned to $75 million per month. The CIGA assessment on each California insurance policy has been doubled to 2 percent of premium in order to meet this demand. Further increases in the CIGA charge may be required.

In response to this reduction in market capacity, the State Compensation Insurance Fund (SCIF) dramatically increased its market share from 20 percent to 50 percent in a short period of time. Unfortunately, budget restrictions, the magnitude of its loss liabilities and a state hiring freeze prevented it from increasing its policyholder surplus or adding to staff to accommodate such rapid expansion. Service deteriorated, and SCIF's financial position has become very precarious. It has been forced to implement access restrictions to prevent further growth. SCIF is also engaged in legal actions, which attempt to bar the insurance commissioner from declaring it insolvent.

In spite of these developments, and the resulting dramatic rise in workers' compensation premiums, most insurance carriers continue to sit on the sidelines with little interest in expanding their writings in California. As medical and litigation costs continue their relentless, uncontrolled escalation, these insurers find it increasingly difficult to estimate their ultimate loss liability.

Companies are challenged to maintain sufficient policyholder surplus levels in an environment with such rapid premium growth. A.M. Best issues 20 ratings downgrades for each rating upgrade it releases. There is also a fear that California insurance carriers may be assessed, in proportion to its premium writings, to supplement the state fund's surplus.

On top of all this, California's workers' comp system remains badly broken. The fundamental causes of this problem have remained unchanged for years. Medical costs are not controlled, and litigation takes place at a rate that is four times the national average.

A political stalemate exists in Sacramento, which has effectively blocked meaningful reform efforts. In 2002, Gov. Gray Davis bowed to political pressure from organized labor, and championed a significant increase in the benefits payable to injured workers, which will add an estimated 22 percent to system costs by 2006.

No one is really certain how things will play out. At some point, premium levels will rise to prohibitive levels, forcing many businesses to leave the state or become willfully uninsured. Those that remain insured will be forced to pass these costs along to consumers, in the form of increased prices for the goods and services they provide. The problem may become so acute that widespread political pressure is finally brought to bear by the business community, triggering meaningful reforms.

Other doomsday scenarios imagine a meltdown of the system initiated by the financial failure of the State Fund. This could also lead, as it did in Texas, to rapid extensive reform by the Legislature.

There are certain measures that employers can take to position themselves favorably in this marketplace. Be sure premiums are paid on time, and comply with all important loss prevention recommendations. Failure to do so may leave you out in the cold. The State Fund will refuse to cover you if your current policy is cancelled for reasons "within your control."

Report new claims promptly, stay in touch with injured workers and insist on the full investigation of any claim, which you feel is fraudulent. Review all open losses quarterly.

Discuss the status of each claim and its estimated cost with the claims adjuster handling it. Be sure he or she has all pertinent information, and that there is a plan to resolve the case in a timely and cost-effective manner.

Claims from prior policy years will impact your premiums for three full years, commencing one year after policy expiration. Establish an early return to work program, offering light duty or modified work to those rejoining you following an industrial injury.

Other strategies may also reduce your workers' compensation costs. If you offer employee benefits coverage, consider adding a cafeteria plan. Contributions to section 125 plans allow employees to pay for their benefits with pre-tax dollars, and reduce the gross wages used to compute your work comp premiums.

You may save money by outsourcing certain aspects of your business and/or use the services of a temporary placement service to screen new employees before offering them a permanent position. In both cases, you are shifting the expense of providing workers' comp coverage to your vendor. At the same time you avoid paying the price for a serious hiring mistake.

Retain the services of a competent independent insurance broker. They will assist you by preparing a market submission, which will present your company in the most favorable light possible. An insurance broker is in a position to approach multiple markets on your behalf. The broker's volume, leverage and relationship with particular insurance companies can help you achieve a successful placement.

Now is the time for larger employers, with annual premiums in excess of $250,000, to consider risk sharing. There are a number of alternative approaches to the purchase of first dollar guaranteed cost coverage from an insurance company. These include retrospective rating plans, large deductible plans and participation in an insurance captive. In these arrangements, you pay for your own smaller predictable losses, and only purchase protection for catastrophic losses.

Since you share risk, the cost of these programs can be considerably less than conventional coverage. Knowledgeable insurance brokers can help you explore these alternatives.

Moore, CPCU, is a principal with Barney & Barney LLC. For information, call (858) 587-7557 or e-mail terrym@barneyandbarney.com.