Proactive Underwriters Can Bolster WC

How do economic changes affect underwriting decisions for workers' compensation? You want a real answer–not the pre-packaged “increase your pricing, avoid these classes, and get complete information” you hear too often.

The National Council on Compensation Insurance announced a combined ratio of 121 in calendar year 2001, up three points from 2000–the sixth-straight year of deterioration. Sept. 11 is a factor, but not entirely to blame, as less than two points of the calendar year 2001 combined ratio on a net basis is attributable to terrorism-related claims.

Do the current economic events spell more decline in this line, and what can you as underwriters do about it?

Some of the factors affecting workers' comp capacity are insurers withdrawing from certain markets, lack of reinsurance, and high underwriting losses. But there are a number of other economic drivers to consider.

Medical costs are increasing and, as a result, workers' comp severity claims are rising.

Reinsurers responded to the terrorism events of Sept. 11 by pulling away from accounts that might face a catastrophic workers' comp exposure. Consequently, many large accounts could only find coverage, at a logical price, in the residual markets.

The assigned risk premium in workers' comp has increased 75 percent in 2002 over 2001. This flooding of the residual market causes a domino effect on the loss ratio, the underwriting ability, and the expenses of this shared market source. There has been a 96 percent increase in accounts $200,000 and over placed in the residual markets.

In light of the unpleasant surprises at public companies like Enron and WorldCom, insurers invested in those stocks were also hit with huge losses. The result might be an inability to offer insurance to companies rehiring when the economy fully recovers from this mini-recession.

We can expect more consolidations and more insolvencies this year. This will create a problem of missing or inaccurate data as accounts are transferred to new carriers. This affects the experience rating modifiers, the loss history provided to the new carrier, and the rating information sent to NCCI for adequate rate monitoring. In other words, the premium you charge may not be adequate for the risk you have.

The unemployed are filing workers' comp claims, hoping to replace the severance package they did not get with a workers' comp settlement. There is also concern that the exclusive remedy provision of workers' comp will be deteriorated by suits brought against the employer and awarded by the courts.

Ergonomic standards are bound to come at some point from the U.S. Occupational Safety andHealth Administration, causing further economic havoc.

Clearly, the economic environment affects workers' comp results. For every risk factor, there should be some type of control, and so there is (see accompanying table). However, some of the controls necessary are out of our hands, and you may decide that the possible losses are too great to risk waiting.

Here is some advice on improving your carrier's bottom line:

Medical expenses are increasing for everyone, but these costs can be limited by proactive, effective claims management programs. Claims professionals know when the indicators point toward catastrophic proportions, and they know the special handling that is involved.

There is a great deal of data that proves that these programs work. As an underwriter trying to run a profitable book of business, know what resources your company has, and feel confident that they are doing their job, just like you are doing yours.

Insurance must be made available, and if the residual market system crashes, the states will force each workers' comp insurer to write everything that comes in the door. It is up to each of us to protect this system. However, there is little that we can do if we cannot write risks vulnerable to terrorism losses, and the government has not agreed to share these losses with the industry.

Legislation in Congress is pending to create a federal terrorism reinsurance program of some sort. In the meantime, there are companies that are writing risks with this exposure. Tell your customers about captives, risk retention groups, and excess and surplus companies that might offer this coverage.

To protect your carrier, do not quote anything that does not have complete information. It is not your job to express sympathy to the account that has been victim to this anomaly. It is your job to earn your profitability bonus at the end of the year and make professional decisions.

Some form of perceived mistreatment has wounded most of us, and being laid off is one of the worst. It does not, however, give anyone the right to fraudulently submit a workers' comp claim. Find out if your claims unit has the ability to sniff these criminals out. You can then be confident writing workers' comp policies in a period of rising unemployment.

In the midst of negative economic factors, there is always a ray of hope. Robotics and technological advances have decreased the number of frequency claims seen in back strains, cuts, and contusions. Advances in ergonomic design, cordless tools, workplace safety classes, and power-assisted processes have had a positive effect as well. As an underwriter, look for accounts that have sound loss control technology and industrial health programs in place. This type of insured can balance an account that may have a severity issue.

The incredible thing about an underwriters job is that it is never boring if you understand that all aspects of life–economic, social and local–affect your profitability. The position demands brainpower.

Barbara Reardon is the chief executive officer of Educating Underwriters in Batavia, Ill. She can be reached at Reardon@educatingunderwriters.com

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 19, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Proactive Underwriters Can Bolster WC

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