What does 2010 have in store for the workers' compensationmarket? The sector can be considered a mix of good and bad news.Aggregate costs for claims remain low, but with ample capacity inthe marketplace and continued difficulties in the national economy,including construction and manufacturing, pricing remains weak.Positively, sector fundamentals are solid and in balance, nothinglike what we saw at the end of the last decade. In short, claimsare down, but so are premiums; the net result is modestly decreasedprofitability.

The state of the U.S. economy plays a significant role inthe workers' compensation market, as does the national employmentlandscape. Experience shows us that a similar environment has beenin place for several years now. Claims frequency has been down forthe last 4 years. With an abundance of layoffs, a situation inwhich seniority rules, the age of the average worker continues toincrease.

Reason dictates that this older, more experienced and morecapable class of workers is less likely to be injured on the jobsite, particularly in occupations where the potential forsignificant injury and loss are the greatest (i.e., constructionand similar “heavy” industries).

The negative side of increasing worker age is that the averageseverity of claims also has increased over the last 4 to 5 years.For example, a slip-and-fall injury for an older employee couldresult in a claim significantly higher than the same incident filedby a 20-something counterpart. Still, the frequency of claims isproving more of a cost driver than claims severity, so loss trendsare favorable.

Additionally, there are few emerging trends in lossmitigation/cost reduction strategies. This is perhapsunderstandable given the reduced pressure on claims and payout. Ifeconomic downturns of the past serve as a model, we mightanticipate more contentious claimants, such as those assertingfraud; although so far the industry has not seen any significanttrend in that direction.

Regardless, at 30 percent, workers' compensation remains asignificant component of any company's total cost of risk,including retained risks, according to the latest benchmark studyreported by Conning Research & Consulting.

Importance of state funds

Individual states regulate the insurance industry across a broadrange of sectors and coverages, and obviously play a pivotal rolein workers' compensation. In the past, several states, notablyCalifornia and Texas, have had competitive (voluntary) state funds.In some cases, aggressive agents have been placing standard andpreferred–not depressed–risks in state funds when they offer betterpricing. Overall, state funds are estimated to comprise one-fourthof the total workers' compensation marketplace, with about half thestates, predominantly in the Midwest, Southeast and New England,maintaining workers' compensation funds.

Although many economically challenged states lack the necessarysurpluses to underwrite such endeavors, expect to see an emergingcompetitiveness of individual state funds, especially as theeconomy improves. Another recent study from Conning reported thatwhile distinctions among a number of parameters (loss ratio,expense ratio, dividend ratio, etc.) exist, profitability(operating ratio) was similar for state funds and privateperformance.

State programs promote initiatives in injury prevention, findingways to limit the severity of injuries that do occur andencouraging wellness by thwarting chronic diseases among the agingwork force. Some states have applied loss prevention programs thatinclude financial goals and rewards. In this way, state fundsreinforce many of the private insurance industry's cost containmentgoals. At present, state funds should be viewed as a threat toprivate insurance and, as of now, a form of healthycompetition.

“Pay-as-you-go” matures

Due to economic challenges and the desire to contain costs, theemergence of the “pay-as-you-go” option is gaining momentum amongmore carriers, agents and insureds. The end-year reconciliation ofprojected-versus-actual premiums earned always has been acumbersome exercise for carriers and employers. Neither party wantssurprises or unexpected obligations. Pay-as-you-go originally wasinnovated and developed by administrative service organizations andprofessional employment organizations that were handlingoutsourcing of jobs and/or payroll functions for businesses.

Now, driven by economic concerns and advances in technology,more businesses are choosing pay-as-you-go as a means to improvedexpense projection and maximization of cash flow, the lifeblood ofany business. Instead of estimating employee levels and jobclassifications for an entire year and having to pay a significantportion of total costs upfront, businesses can calculate actualpremiums at each of its pay periods, as is done when withholdingtaxes and similar deductions. Job gains or losses, changing jobclassifications, or fluctuations in overtime are all easilyhandled.

These advantages–real-time expense, no surprises–more thanoffset the extra administrative work. Additionally, new technologysolutions like Web-based reporting are making pay-as-you-go moreattractive and convenient for all sizes of employers, not just thenatural target audience of large companies or seasonal businesses.Employers can post and submit required information electronically,in harmony with agencies' or carriers' online client portals. It isan opportunity for retail agents, as it leads to improved customersatisfaction and retention of insureds.

Larger deductibles gaining favor

With lowered exposures due in part to reduced business activityand an older worker pool, and the corresponding reduction in claimsexperience, larger or more sophisticated businesses are opting totake on larger policy deductibles. As with any other class ofinsurance, the premium credits associated with such programs aresubject to change and negotiation depending on current marketconditions, regulatory climate, and the nature and size of theinsured account and loss experience. In particular, largerdeductibles for workers' compensation fit well as a foray intoself-insurance for organizations with strong capitalization andfinancial planning and formal risk management programs.

Like other forms of self-insurance, the most meaningful benefitof a large deductible program for insureds is to reduce costs, asthe fixed premium for a large deductible program is substantiallyless than that for first-dollar insurance. Larger deductibles areobviously attractive to underwriters. The insured is taking ongreater risk, but one with limits. The insured also benefits froman increased focus on losses. The direct impact of losses and therelated expenses on an insured's bottom line are clearly seen andunderstood. These programs create a strong incentive for insuredsto develop and implement effective safety and loss-controlprograms, and thus fit in with the agent's role in helping clientsdevelop strong loss prevention programs in all areas ofcoverage.

Larger deductibles can be an excellent selling tool withsophisticated clients. As with pay-as-you-go, large deductibleprograms demonstrate how the insurance industry is working moreclosely with insureds, helping us adjust and better manage thechanging economic conditions.

What to expect

In 2010, the industry can expect the workers' compensationmarketplace to follow the recent levels and behavior in claimsloss, pricing and capacity. Following one of the worst years atholding the line in prices, rates may stiffen a percentage point ortwo. Still, the economy is likely to grow slowly, if at all, andthere is plenty of capacity in the marketplace. Certainly, thehealthcare expense component of claims will continue to bearscrutiny, and undoubtedly be affected by any large-scale changes inour nation's health care delivery system, such as Congressionalpassage of healthcare reform. As indicated earlier, state funds andtheir accompanying regulatory environment bear watching aswell.

Roofs do get blown off buildings, and employees do filediscrimination charges. However, for most business clients, theseare rare to null events in their insurance lifetimes. On the otherhand, workers' compensation may be one of the areas in which youinteract most regularly with your clients and, as noted earlier, itis a large component of most businesses' total cost of risk amongproperty-casualty exposures.

Savings and service go hand in hand, the latter strengthened bythe availability of technology-enabled programs like pay-as-you-go.In this way, workers' compensation can be an excellent practicebuilder for other coverage lines, as well as relatedinsurance-investment products