California Apparel News

Sam Kim thinks he has a solution for the California apparel industry’s workers’ compensation woes.

Kim, who serves as president of the Korean American Garment Industry Association, and his fellow KAGIA members are forming their own insurance company in an effort to lower the premiums companies pay out each year.

Under California state law, business owners are required to insure their workers in case of injury or death while on the job. Apparel-business owners—from manufacturers, such as Kim, to contractors and suppliers—have been laboring under staggering workers’ compensation costs, which have risen by about 69 percent over the past three years.

“It’s an emergency situation because some apparel-business owners are getting increases that they haven’t been planning for at all, and some are getting increases in some cases that are doubling their prior rate, so it’s really a crisis of proportion,” said Joe Rodriguez, executive director of the Garment Contractors Association of Southern California Inc. in Los Angeles. “Many of them don’t think that anything can be done in time to make a difference.”

In addition, many are concerned that the California Insurance Guarantee Association, set up by the state to pay out workers’ compensation obligations when other insurance companies go out of business, will not be able to make payments. The association recently needed an emergency infusion of capital to keep giving payments to injured workers.

That is why Kim’s organization has opted to take matters into its own hands. After listening to advice from insurance experts, KAGIA’s board members came to a unanimous decision last week to provide the association’s 600 members with its own insurance coverage. Now, plans to reinsure its policy with CNA, a subsidiary of Chicagobased CNA Financial Corp., are underway.

Kim said the association’s move to seek its own workers’ compensation coverage comes after years of struggling to pay premiums while keeping business operations in motion.

“We’re taking these measures because our association as a whole is paying $10 million in premiums a year,” he said.

KAGIA’s members pay an average of $6 to $12 for premiums per $100 of payroll. Now the association’s members can expect to see a 10 percent to 25 percent cut in premium costs, which will save them about $2.5 million per year.

Forming a captive insurance program is not an entirely new concept. Large corporations such as Sears, Roebuck & Co. and The Boeing Co. have been writing their own insurance policies for years because their ratios of workers’ claims to employees are low.

A captive insurance plan can be formed by a business or a group of businesses in an association that has set up a reserve fund. KAGIA’s reserve fund will start out at $1.4 million.

In a captive insurance plan, each participant is a risk sharer. If the number of workers’ claims is higher than anticipated, the association will ask members to make additional contributions to the fund.

“It’s been a rough road up to this point,” Kim explained. “We are all surprised that a major insurance carrier would allow us do this, especially with all of the labor- law regulations making it more difficult for business owners to operate their business. It took a lot of convincing on our part. Now one of the biggest challenges will be to find ways to control the number of claims each year and keep a close eye on what could be fraudulent cases.”

Kim said there are several advantages to offering insurance coverage at a lower cost to KAGIA members. For one, employers are likely to put forth their own contributions in an effort to keep the premiums low. Also, many companies will create safer work environments to reduce insurance payouts to workers. Another advantage, Kim said, is many employers who work with their employees on a daily basis will have a good sense of which claims are serious and which are frivolous.

Whether KAGIA’s plan to cut insurance costs will work is based entirely on how the association manages its reserves, said Bill White, chief executive officer and president of Alliance Insurance Services in Canoga Park, Calif.

“All insurance companies have reserves for claims,” Kim said. “So if we have more reserves, we can charge less for insurance and keep all of our members happy.”

Call for reform

California Governor Gray Davis’ latest call for reforms includes containment of medical costs, expedited care for injured workers, prompt payment of health-care providers and reduction of legal conflict between employees. The proposed reforms have been met with skepticism throughout the apparel industry. And earlier this month, State Insurance Commissioner John Garamendi addressed the issue of workers’ compensation during a meeting of business owners at the University of California, Los Angeles. According to Garamendi, all of the insurance “middlemen” would have to take a smaller cut in order to maintain an affordable state workers’ compensation system.

Insurance carriers attribute California’s high premiums costs to escalating attorneys fees and the millions of dollars lost each year to fraudulent claims. (The state’s maximum disability benefit is $602 per week, compared with $400 per week in New York, according to New York’s Workers Compensation Board.) The buildup has been in motion since the mid-1990s, when the state deregulated the workers’ compensation insurance industry. Deregulation led insurers to compete with each other and price their coverage below their insurance costs to gain market share.

As a result, several insurance carriers have gone out of business or have left the state. At least 18 carriers have shuttered in California during the past two years, including Legion, HIH Superior National, Great States, Reliance, Pacific Rim and Calcomp, according to Alliance Insurance Carriers’ White.

There is a growing interest in captive insurance programs now because there are fewer insurance companies, he said, adding that he remains skeptical of the concept.

“Companies establish captive insurance programs because their goal is to get their prices down and keep them down, but what it really does is create an open-end liability,” he said. “If you have people who don’t know what they’re doing, it’s going to cost your company a lot of money.”

Still, several factors make captive insurance programs appealing, White noted. For one, such programs could persuade businesses to remain in the area. A combination of minimum-wage increases and workers’ compensation may get manufacturers to think twice about producing domestically in the future, he said.

Currently, Alliance Insurance carries workers’ compensation insurance policies for more than 200 businesses, including apparel manufacturers, cutters, dyers and sewers. But the past few years have been difficult for many apparel businesses, said White, who noted his company has seen more than half of its businesses close or leave the state.

“Most of the small guys are gone, and only the larger companies are able to survive,” he said.

Exploring options

The Los Angeles apparel industry is considering options to alleviate the high costs of insurance, including hiring temporary companies to avoid paying workers’ compensation coverage. Some apparel-business owners said they have been able to manage costs by keeping workplace accidents at a minimum—a tactic that can increase employers’ insurance ratings and help mitigate insurance costs. Other companies are urging employees to register for supplemental insurance such as that offered by American Family Life Assurance Company, which makes immediate payments to injured workers until they are able to receive disability benefits.

White believes KAGIA will be able to keep premium prices down to some extent, but, he said, the cost of the insurance will be the cost of the claims.

“If their claims are low, then their premiums will be low,” he said.

KAGIA plans to offer its insurance to every business owner in the Los Angeles apparel industry.

“We plan to let agents know that they can offer our policy to apparel-business owners,” Kim said.