The workers’ compensation insurance marketplace has beenrelatively tranquil over the last 5 to 10 years. During thisperiod, legislative reforms in California and Florida precipitatedrate decreases of up to 60 percent. Though not as dramatic, mostother states have experienced decreased work comp costs along withan intensely competitive insurance marketplace. As we head into2012, it appears the cycle is turning back toward increased costsand reduced capacity.

Insurance companies’ profits have eroded in the work comp arenafor several years. Premiums are down due to the economicsuppression and high unemployment rate, especially with theirconstruction clients. Medical costs continue to explode as costcontainment strategies are losing their punch. Adding to the mix ofadverse conditions, investment income is down and multi-lineinsurance companies have been hammered by one of the worst years indecades for catastrophic property losses.

Insurance company sales representatives are out on the streetsinforming agents that the protracted period of matching theircompetitors’ pricing and taking on high loss ratio accounts iscoming to a close. You will even see some insurance companies dumpsizable chunks of their workers’ compensation business. We haveseen this before, and this trend can accelerate rapidly—if notovernight.

Related: Read the article by Caroline McDonald "ERMNeeded for Growing Construction Sector."

Agents who repeatedly asked, "When is this market going toharden up?" are about to get their answer.

However, a hardening market simply changes one set of challengesfor another. The fear of being embarrassed or losing an account dueto what appeared to be insane pricing will be replaced by the fearof finding a home for some if not many of their clients. Inaddition, agents with less than 10 years’ experience in theindustry may have never had to explain a significant rate increaseto their clients.

The beginning stages of a hardening trend will be to "round upthe usual suspects." The initial salvo will be directed towardclients 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. Theywill set strict standards for staying with or writing accounts with3- to 5-year loss ratios over a certain level. In most cases, noamount of whining or gnashing of teeth will sway thesedecisions.

Many employers and their agents have allowedthe soft and competitive marketplace to save them from ineffectiveor nonexistent loss prevention or mitigation practices. It didn’tseem to matter if an employer’s loss experience was poor becausethere was always another insurance company ready to take on therisk, often at a lower price. The story of 2012 will be the numberof employers who experience an awakening and understanding thatthey have to pay their dues for past complacency.

It may be late, but it is still necessary for agents to takeaction. They should take the following steps:

1. Conduct an assessment of their client base and identifypotentially vulnerable accounts
2. Engage with expected target accounts and inform them of thechallenges ahead
3. Assess and put an action plan in place for target accounts
4. Focus on how clients can better manage medical costs, theprimary cost driver in the system
5. Engage with their carrier representatives and gain clarity ontheir plans for 2012.

Related: Read the article "While Carriers CraveMarket Turn, Factors May Constrain Rates" by Mark E.Ruquet.

Rates are going up and accounts are going to be non-renewed, butagents can reduce the rate increases and save some renewals bybeing proactive. Insurance companies will want to see substantivechanges with an employer’s business practices and risk profile, notjust a song and dance. Action plans need to be specific andmeasurable. Responsibilities must be assigned and timelines put inplace.

Agents and employers must address the criticalissue of exploding medical costs. You may ask, "What can agents andemployers do to reduce medical costs in the work comp system?" Thesimple answer is plenty.

The first step is for employers stop abdicating allresponsibility to the insurance company to "handle the claim" afteran injury occurs. Employers need to carefully select their medicalproviders and either channel or "soft" channel their injuredemployees to them. They need to communicate with both the medicalproviders and the injured employee to support and achieve anexpected duration of recovery.

Employers must become better informed on the inappropriateprescriptions of narcotics to injured employees. They need to haveconversations with medical providers to understand theirprescribing protocols and monitoring programs. Reducing narcoticuse will go a long way toward reducing the overall medical cost ofthe injury.

Some may say, "Isn’t it the job of the insurance company tocontrol medical costs and reduce the use of narcotics?" Insurancecompanies, third party administrators and others are tackling theproblem and working diligently to reverse the trend, but opioidabuse is such a crisis that all stakeholders must participate.Again, employers should not abdicate responsibility to get informedand engaged on this critical and troublesome trend.

Related: Read Chad Hemenway's article "RIMSBenchmark Survey: Average Renewal Premiums are Up."

In addition, management and supervisors must make every effortto return injured employees to work as soon as medicallyappropriate and accommodate modified, transitional duty. Theabsence of a return-to-work program may be reason enough for aninsurance company to non-renew an account in a hard market. It istougher to return injured employees to work during a down economybecause many employers don’t have enough work for healthyemployees. However, the longer an employee is off work, the greaterthe medical costs and the greater the risk of a largesettlement.

It is long past time for agents and employers to reverse theircomplacent reliance on the marketplace to solve their injuryproblems. We are entering a stage where the marketplace ispreparing to separate the "wheat from the chaff." We don’t know thelength or depth of this hardening trend. However, we know fromhistorical trends and cycles that employers who have establishedthe most effective workplace safety and injury management practiceswill suffer the least.

Increasing medical and pharmacy costs, erosion of legislativereforms and waning effectiveness of cost containment strategies arethe primary trends driving the changes in the marketplace. It mayappear these trends were inevitable and outside the scope ofemployer interventions. However, employers must take ownership andparticipate in reversing these trends. Employers who simply reliedon the marketplace to save them during the good times will sufferthe most during this reversal of the marketplace.