It's no secret that Workers' Compensation is a challenging lineof business, to say the least—carrying an annual industry combinedratio well into unprofitable territory (117.2 in 2011— the highestin the last decade and the highest among all major insurancelines).

As the overall insurance market hardens, Workers' Comp is amongthe lines consistently seeing the largest rate increases. But foryears, this line has been severely underpriced—and so the industryis far from digging itself out of that hole, despite the recentrate hikes. Nevertheless, Workers' Comp premiums for privatecarriers and state funds increased to $35.67 billion in 2011—a 13.3 percent jump from 2010 and thefirst increase since 2006, according to SNL Financial.

PC360-NU turned to experts in the field to find outwhat the insurance industry is doing to improve results for a linewith so many complexities and ever-evolving cost drivers, from anaging workforce to narcotics abuse to outright fraud.

Russell Johnston, Casualty ProductLine Executive, U.S. and Canada, AIG

Speaking to overall market conditions, Russ Johnston, casualtyproduct line executive at AIG, says “Workers' Comp is producing areturn on equity in the low single digits—well below what theindustry seeks to get. For anyone, that is not an acceptablelong-term result.”

AIG saw Workers' Comp rates improve 8.9 percent in Q3 of 2012.And while rates have been going up for the last two years, theystill have a long way to go to get to where they need to be,Johnston notes.

To be successful in Workers' Comp, it's important to be pickywhen it comes to risk, he says: The market is “highly regulated interms of price, so in order to navigate it, you have to beselective.”

AIG does not forbid Workers' Comp underwriting in any particularstate. “There are good underwriting risks in any geography,” headds.

To get a better handle on loss drivers, and then to “bake thisdata into the claims-adjudication process,” AIG recently enlistedthe Johns Hopkins Bloomberg School of Public Health to analyze 10years of Workers' Comp records: 2.3 million patient files and over20 million medical invoices.

An early look at the data (which has beensubmitted for peer review by academic journals) reveals “how muchopioid management is a loss driver,” says Johnston. High doses ofopioids are being doled out, to the detriment of insureds'long-term health and driving substantial insurer costs.

A decade ago, Johnston notes, indemnity used to be the bigdriver of costs. Now, it's medical costs—and to help controlexpenses, AIG takes “aggressive action” to get workers “the rightcare at the right point in time.” As a key part of thismedical-cost-control strategy, AIG employs over 250 doctors andnurses. “In order to have a constructive outcome with injuredclaimants, you need to have real clinicians,” he notes. When claimsare reported, the insurer recognizes certain signs of big-costproblems and deploys these doctors and nurses where they are neededmost.

Marguerite Dixen,President,
& Scott Babcock, VP of CustomerRelations and Loss Control Third CoastUnderwriters

Third Coast Underwriters opened for business on July 1, 2010with a plan to specialize in traditionally hard-to-insure Workers'Comp risks that require customized solutions. Key to its strategyis expertise and commitment to the niche lines of business itwrites. “You can't dabble in the classes we work in,” says ScottBabcock, vice president of customer relations and loss control.

Third Coast, whose average account size is $350,000 in premium,handles such employer classes as construction, energy,longshoremen, garbage haulers, recyclers and scrap-metaloperations. The company models each class to identify loss sourcesto cut down on frequency. “There are going to be high-severitylosses. You can't help that. But you can cut down on how often theyhappen,” Babcock says.

Asked about where the opportunities lie for a new market entrantsuch as Third Coast, President Marguerite Dixen says more Workers'Comp generalists are shedding high-risk accounts as markets harden.She also sees more mono-line opportunities: multi-line carrierswilling to carve out the Workers' Comp component of coveragepackages for Third Coast to write. “We've gone from asking forbusiness to getting calls daily,” says Dixen, adding that thecompany's premiums have tripled since it beganoperations.

Commenting on current pricing, Dixen says some insurercompetition “remains irresponsible” with regard to rate: “We're notpricing ourselves into the market. It's more about a cultural fitwith our customers. Our clients recognize the need to improveoutcomes rather than pay a cheaper premium.”

Click here to read a Q&A with Gary Thompson, Executive VP,Commercial Markets, The Hartford