Risk managers should not be lulled into a false sense of security because workers' comp frequency is falling and insurers keep cutting premiums, according to one major carrier who urged buyers to stay focused on what they can always control–their own company's performance.

“You must be aware of what's going on with your own program and create management accountability–not just within your office, but throughout the organization. Make sure you have strong safety practices in place,” said John Santulli, senior vice president of marketing and field operations for PMA Insurance Group.

Even in a soft market, the best comp loss is “still one that doesn't occur,” he added during a panel on the state of the market here at the Workers' Compensation Educational Conference–part of the National Trends Program put together by National Underwriter.

In general, Mr. Santulli said risk managers could be content to “ride the wave. Things are pretty good right now. The environment is generally positive.”

However, he warned, “you have to be aware. Stay informed. Understand what's going on with the industry, know what's going on in the states where you have operations, and where the hot spots are.”

Mr. Santulli said workers' comp market conditions are at the “intersection of a lot of different forces,” including economic conditions, loss drivers and “what's happening in the overall property-casualty industry that may drive capacity into a line of business or take capacity out of a line of business.”

For example, “catastrophes a couple of years ago probably drove more industry capacity into the casualty lines, including workers' comp,” he noted.

However, regardless of whether the workers' comp insurance market is hard or soft, carriers will still underwrite individual risks, meaning that “your own performance is going to have an impact–whether you're in a preferred program, and what type of pricing and program design that you have available to you.”

Mr. Santulli noted there is always concern with regulatory issues and how they will impact carrier performance and profitability. He said legislative reforms could be impacted by court actions, and this could create new cost drivers and market pressure, influencing carrier behavior.

When insurance prices were high during the hard market, he said it was common to see deductibles of $350,000 to $500,000. Now, they are being pushed down to $250,000 and even $100,000, according to Mr. Santulli. But that could change in a hurry, he added.

Also, even though reforms in key states–such as California, Florida and New York–are driving down loss costs and rates, there are still some troubled areas around the country where buyers are not in a healthy market, he noted.

He also noted that prices cannot fall forever, even in the best of states. Carriers in their earnings releases are already starting to remark on the impact of pricing, competitive markets, decreases in premium, and struggles to land new business and keep good risks on the books.

“That's something that's starting to work its way into the psyche of carriers,” he said. “As a buyer of insurance, you have to be aware that pricing is becoming more and more of an issue and is going to impact, at some point, carrier behaviors.”

For now, however, it's a buyer's market for most risk managers when it comes to workers' comp, another panelist noted.

Harry Shuford, practice leader and chief economist with the National Council on Compensation Insurance, said financial results on the underwriting side showed that the loss ratio has been improving. Add in loss adjustment expense and dividends, he said, and for the first time in 12-to-14 years, “we actually are showing, on a calendar-year basis, an underwriting profit.” He added that 2006 was an outstanding year for underwriting on a calendar-year basis.

He voiced concern, however, over the trend for the future. “When underwriting is good, the conventional wisdom is the industry then decides to go and shoot itself in the foot with the underwriting cycle” by cutting prices too deeply to cover losses.

From a reserve adequacy perspective, the industry is in “pretty good shape–probably the best it's been in 15 years,” he said, with the tipping point coming in 2001, when the market began to harden.

The panelists all cited one huge issue threatening to undermine the industry's profitability and cost of risk for buyers–soaring medical care expenses for injured workers.

Maureen McCarthy, vice president of national market workers' comp claims with Liberty Mutual Group in Boston, said because medical costs are rising dramatically, risk managers must be aggressive in putting together the best loss control program possible.

She noted that at Liberty Mutual, “5 percent of our open claims account for about 42 percent of our outstanding medical dollars. That's an opportunity for incredible specialization.” The sooner such high-cost cases are recognized, she said, the better the chances of managing the losses.

Ms. McCarthy also recommended that risk managers “not be a passive recipient of reform, but be an active participant in making sure reforms are successful–starting with the crafting of the law and moving on to the promulgation of the regulations.”

Pamela Rippens, senior vice president of operations with Specialty Risk Services in Hartford, said reform offers opportunities and challenges for risk managers.

She said reforms in California, with $118 billion in premium, have had a significant impact on the workers' comp market. Some of they keys to success in California's reforms are:

o Use of utilization review regulations with evidence-based medicine since 2004.

o Tight control of outpatient facility fees and treatment limits.

o Aggressive use of certified medical providers that have been implemented by many employers.

Meanwhile, in Texas, she noted, reforms:

o Mandated a set of guidelines for both treatment and disability.

o Initiated cost savings by using certified Health Care Networks.

o Improved quality of care and helped injured workers return to employment as soon as medically able.

Calllout:

Even in a softening market, the best comp loss is “still one that doesn't occur,” says PMA Insurance Group.

Special Reports /

Risk Managers Warned To Keep On Top Of Their Comp Exposures

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