Filed Under:Markets, Workers Compensation

Buyers, Don’t Get Too Comfortable With Low Workers' Comp Prices

A number of issues, including regulation, medical and insurer costs are high on the radar this year for workers’ compensation experts, one who warned that buyers most likely will be looking at price hikes in 2012.

Mark Walls, assistant vice president, claims with Safety National in St. Louis, Mo., observed that of a number of workers’ comp areas he is watching this year, legislative issues in two states—California and Illinois—are at the forefront, and cover opposite ends of the spectrum.

In Illinois, he said there has been discussion about workers’ comp reform, with a bill introduced at the end of the last legislative session. “They tried to put through a bill before the new legislature was seated and it didn’t get done,” he said. “It’s on their radar.”

Illinois realized it has some of the highest workers’ comp costs in the nation, he said, and the state also has a huge deficit. “They know the only way they are going to fix that is to get some more tax revenue in the state. To do that they have to add jobs, but their workers’ comp statutes get in the way of that,” Mr. Walls explained, noting that Illinois is looking at workers’ comp reforms to lower costs to employers.

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Meanwhile, “On the flip side,” he said, “is California. No one knows what is going to happen in California, but there’s a lot of fear out there.”

Top 10 U.S. Workers' Comp Insurers, 2009Workers’ comp reforms put in place by Arnold Schwarzenegger when he took office as governor “had a very significant impact on reducing costs to the employers in the state.” he said.

The concern, however, is that every year after he took office, there have been “multiple bills that have made it through the legislature, to significantly erode those reforms—and Schwarzenegger has vetoed it every year.  So there’s no question those bills are going to come through again,” Mr. Walls said.

The question that remains, he said, is what Gov. Jerry Brown will do when those bills are introduced. “Gov. Brown didn’t talk at all about workers’ comp during the election. He’s focused on creating jobs, which is great, that’s what they need to do. But everybody’s a little scared about what will happen when these bills come through—what’s he going to do?”

He pointed out that passing legislation that increases employers workers’ comp costs, goes against California’s goal of creating jobs in the state.

Anthony Phillips, vice president, chief risk officer & chief actuary with Accident Fund Holdings, Inc., headquartered in Lansing, Mich., noted that the issues in workers’ comp are “pretty significant right now—a merging of several storms.” These include the economy, market conditions and the poor investment market.

He noted that businesses, which are coming out of the down economy, will be facing accelerating workers’ comp prices, probably in 2012, which will in turn raise premiums.

Mr. Walls, who manages The Work Comp Analysis Group on LinkedIn, with more than 7,500 members and 50-75 new members each week, said that rulings in the larger states can cause a ripple effect.

“If Illinois were to change its workers’ comp laws to really lower to the cost to the employer, that’s the type of thing that can push a trend around. If they see the results of Illinois getting that done, you’ll see other states on the high end of the cost curve trying to address the same thing,” he noted.

California could also have an impact if legislation gets passed there. “That’s the fear of the unknown. No one knows what will happen, but they’re afraid of what could happen and it could be devastating for employers,” Mr. Walls said. “Any employer that has operations in California is watching that very closely.” Higher costs for employers, he added, could have a ripple-effect which would be passed on to consumers.

Speaking about trends, “For several years, frequency has been declining—mostly attributable to loss control measures and training,” he said. “But it really is starting to look like we’ve hit the floor as far as frequency rate declining and it’s starting to see an up-tick in frequency.”

One reason for this, he said, is that the rate of injuries can only be driven down so far. “You reach a point where the loss control gets so sophisticated and there’s so much sensitivity to loss prevention, but you can’t prevent all loss. So sooner or later you’re going to level off.”

Mr. Walls noted that part of that up-tick in frequency has to do with the slow rebound from the economy. During a recession there often is a drop in rate of frequency, “because the workers that are retained tend to be your more experienced, better trained workforce,” he said.

Once the economy starts to improve and new workers are added, however, the opposite effect can be seen. “Now you’re bringing in workers who are less experienced, less trained and a lot of times de-conditioned from the workforce,” Mr. Walls said. “You may be hiring people who have been unemployed for a period of time, so they are often not conditioned properly. You bring them into a manual labor job and they tend to be a little more prone to injury.”

With the rebound in the economy, he said, an up-tick in claims activity can be expected, because that’s the nature of the workforce coming in. In fact, he noted, the most recent data shows “it’s starting to up-tick, which goes against a trend of several years of frequency decline.”

Another issue risk managers should take note of, he said, is rising rate increases for workers’ comp. “The soft market, as they call it, has been in place for a long time, much longer than past market cycles, and it’s been perpetuated by the economy,” he said.

While all the signs were there to “flip this market cycle years ago,” he observed, the economy kept rates down with a combination of employers not having the money to consider rate increases and other factors. “Often the triggers of rate increases are insolvencies and those haven’t happened—yet. But the writing is on the wall that there have to be rate increases,” Mr. Walls said.

The combined ratio for the workers’ comp industry in many states has been above 100 percent for the last two to three years, he noted, adding, “That’s just not sustainable. Carriers can’t keep losing money and stay in business. This isn’t like the 1980s, when carriers were making so much on their investment income that they could write business at a loss and make it up on the float.”

Bottom line, he said, the hard market is on its way. “In workers’ comp it has to come. You’re seeing some of the big players, like Chartis and Liberty Mutual pulling back, saying ‘rates are too low, we’re going to cut back our writings.’ When you start to see the big players do that, you know it’s got to turn,” Mr. Walls said.

Mr. Phillips observed that the economy has had an obvious impact on return to work issues. “We’re also struggling with increases in medical utilization. We’re finding that because durations are extending out, I think tied to that is support by medical procedures, so we’re seeing a heavier utilization of medical services.”

While this is driving the overall severity, “it’s being driven by a death by 1,000 cuts,” he said. “We’re not seeing any difference on larger claims.”

In California, recent court rulings have made the situation worse, “because they have opened up the ability for claimants to file for more types of medical conditions,” Mr. Phillips said.

What workers’ comp carriers are dealing with, he noted, is “unprecedented different loss development trends. The past trends are not playing out in the current environment,” he said.

The biggest difference from historical is the medical, which he said is “now a bigger part of the workers’ comp loss than historically.”

The problem with the workers’ comp industry, he added, is it is not as equipped to deal with, “the new world of medical treatments, the procedures that doctors are using—I think a lot of the workers’ comp claims practices have been developed from historical practices, which may have worked five or six years ago, but do not work to combat the new medical situation.”

Currently, he said, “there are more procedures, the utilization has become much more complex, the billing, everything about medical is becoming more complex, which is driving costs up.”

Looking at specific industries, Mr. Phillips said, “We’re definitely seeing a reduction in construction and manufacturing industries in the workforce. Within those, we’re definitely seeing higher duration costs in those areas, because the people who have been injured have nowhere to go back to work. Much of that business is permanently gone.”

Added to this on the loss side, he said, is an aging and a more obese workforce. “So you have those factors merging on top of the other things, compounding the trends.”

All this is costing more for insurers and eventually will cost more to employers, he said, adding that insurers haven’t necessarily passed on those costs to employers yet.

“Because of market conditions, pricing is now extremely low,” he said, meaning that risk managers are currently getting good prices. However, he added, they may be looking at rate increases before too long.

“As a risk, we like to think we have a good understanding what it’s going to cost us to write workers’ comp, but we can’t the price out in the industry right now to cover our costs with any kind of minimal break-even perspective,” he said.

To deal with this, he said, “What we and some other carriers have been doing is really focusing on risk selection. Insurers recognize they have to write on risk selection, meaning they won’t be able to write nearly the volume as in the past.”

Risk managers, currently enjoying favorable pricing, will be affected by this, he said. Businesses coming out of the down economy will be seeing accelerating workers’ comp prices, probably in 2012, which will in turn raise premiums.

“Those coming up for renewal in the later part of the year could be looking at some increases,” Mr. Phillips said. While risk managers may be able to absorb the costs for awhile, he added, they may need to seek some alternative programs—such as larger deductibles or shifting their focus to different products within the workers’ comp line. Some may pursue captive insurance.

As well as the market, the economy and the cost of workers’ comp, Mr. Phillips said, the last portion of the storm is the poor investment market—relative to historical trends.

“Workers’ comp, because it’s a long-tail line, usually draws on investment income to offset some of the workers’ comp losses. That level of investment income is lower, compounding profitability issues,” he said, adding that risk managers need to understand the loss trends and why their pricing will be going up.

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