The workers’ compensation insurance marketplace has been relatively tranquil over the last 5 to 10 years. During this period, legislative reforms in California and Florida precipitated rate decreases of up to 60 percent. Though not as dramatic, most other states have experienced decreased work comp costs along with an intensely competitive insurance marketplace. As we head into 2012, it appears the cycle is turning back toward increased costs and reduced capacity.
Insurance companies’ profits have eroded in the work comp arena for several years. Premiums are down due to the economic suppression and high unemployment rate, especially with their construction clients. Medical costs continue to explode as cost containment strategies are losing their punch. Adding to the mix of adverse conditions, investment income is down and multi-line insurance companies have been hammered by one of the worst years in decades for catastrophic property losses.
Insurance company sales representatives are out on the streets informing agents that the protracted period of matching their competitors’ pricing and taking on high loss ratio accounts is coming to a close. You will even see some insurance companies dump sizable chunks of their workers’ compensation business. We have seen this before, and this trend can accelerate rapidly—if not overnight.
Agents who repeatedly asked, "When is this market going to harden up?" are about to get their answer.
However, a hardening market simply changes one set of challenges for another. The fear of being embarrassed or losing an account due to what appeared to be insane pricing will be replaced by the fear of finding a home for some if not many of their clients. In addition, agents with less than 10 years’ experience in the industry may have never had to explain a significant rate increase to their clients.
The beginning stages of a hardening trend will be to "round up the usual suspects." The initial salvo will be directed toward clients in high-risk industries and those with adverse loss ratios. Insurance companies, usually at the behest of their reinsurers, will non-renew and stop writing selected classes of business. They will set strict standards for staying with or writing accounts with 3- to 5-year loss ratios over a certain level. In most cases, no amount of whining or gnashing of teeth will sway these decisions.
Many employers and their agents have allowed the soft and competitive marketplace to save them from ineffective or nonexistent loss prevention or mitigation practices. It didn’t seem to matter if an employer’s loss experience was poor because there was always another insurance company ready to take on the risk, often at a lower price. The story of 2012 will be the number of employers who experience an awakening and understanding that they have to pay their dues for past complacency.
It may be late, but it is still necessary for agents to take action. They should take the following steps:
- Conduct an assessment of their client base and identify potentially vulnerable accounts
- Engage with expected target accounts and inform them of the challenges ahead
- Assess and put an action plan in place for target accounts
- Focus on how clients can better manage medical costs, the primary cost driver in the system
- Engage with their carrier representatives and gain clarity on their plans for 2012.
Rates are going up and accounts are going to be non-renewed, but agents can reduce the rate increases and save some renewals by being proactive. Insurance companies will want to see substantive changes with an employer’s business practices and risk profile, not just a song and dance. Action plans need to be specific and measurable. Responsibilities must be assigned and timelines put in place.
Agents and employers must address the critical issue of exploding medical costs. You may ask, "What can agents and employers do to reduce medical costs in the work comp system?" The simple answer is plenty.
The first step is for employers stop abdicating all responsibility to the insurance company to "handle the claim" after an injury occurs. Employers need to carefully select their medical providers and either channel or "soft" channel their injured employees to them. They need to communicate with both the medical providers and the injured employee to support and achieve an expected duration of recovery.
Employers must become better informed on the inappropriate prescriptions of narcotics to injured employees. They need to have conversations with medical providers to understand their prescribing protocols and monitoring programs. Reducing narcotic use will go a long way toward reducing the overall medical cost of the injury.
Some may say, "Isn’t it the job of the insurance company to control medical costs and reduce the use of narcotics?" Insurance companies, third party administrators and others are tackling the problem and working diligently to reverse the trend, but opioid abuse is such a crisis that all stakeholders must participate. Again, employers should not abdicate responsibility to get informed and engaged on this critical and troublesome trend.
In addition, management and supervisors must make every effort to return injured employees to work as soon as medically appropriate and accommodate modified, transitional duty. The absence of a return-to-work program may be reason enough for an insurance company to non-renew an account in a hard market. It is tougher to return injured employees to work during a down economy because many employers don’t have enough work for healthy employees. However, the longer an employee is off work, the greater the medical costs and the greater the risk of a large settlement.
It is long past time for agents and employers to reverse their complacent reliance on the marketplace to solve their injury problems. We are entering a stage where the marketplace is preparing to separate the "wheat from the chaff." We don’t know the length or depth of this hardening trend. However, we know from historical trends and cycles that employers who have established the most effective workplace safety and injury management practices will suffer the least.
Increasing medical and pharmacy costs, erosion of legislative reforms and waning effectiveness of cost containment strategies are the primary trends driving the changes in the marketplace. It may appear these trends were inevitable and outside the scope of employer interventions. However, employers must take ownership and participate in reversing these trends. Employers who simply relied on the marketplace to save them during the good times will suffer the most during this reversal of the marketplace.