WC Insurers Struggle To Produce Profits

The combined ratio for the workers' comp line (including state funds) through 2003–the most recent year available–is 107.8, according to A.M. Best data. While it was a 4.4 percentage point improvement over 2002 and a 13.1 percentage point improvement over 2001, workers' comp writers still spent about $1.08 on claims and expenses for every premium dollar they collected.

Even though investment gains brought the operating ratio for workers' comp down in 2003 to an improved 97.8, compared with 110.4 in 2002 and 108.1 in 2001, the industry overall made less than three cents in profits per premium dollar–a paltry return for the amount of risk it had to cover.

The enormity of the industry's challenge is compounded by regulatory requirements. Workers' comp is among the most heavily regulated commercial insurance lines. Compensation systems and coverages vary by state. Court decisions and state statutes take into account issues like claim settlements, benefits paid to injured workers, dispute resolutions, and payments for various degrees of impairment and disabilities.

Medical care costs for injured workers taking time off from work rose by an average 9 percent from 1996-to-2002–almost three times the 3.9 percent increase from 1991-to-1995, according to the National Council on Compensation Insurance.

The ranks of workers' comp carriers, including state funds, have dwindled over the past five years. In 1999, 826 companies wrote workers' comp. By 2003 (the most recent year available), the number had dwindled to 718–a 14.5 percent decrease.

To survive profitably in this unforgiving competitive environment while managing their regulatory data reporting and data analytics functions, insurers must choose between developing in-house technology systems and reporting capabilities, or outsourcing their data analytics and regulatory reporting functions by partnering with a trusted vendor.

The advantages of outsourcing are many. While the vendor undertakes the labor-intensive, behind-the-scenes functions, the insurer can play to its strengths–concentrating resources on writing policies and coverages profitably. By choosing a competent outside solutions provider, insurers can reduce expenses, streamline data workflows, enhance productivity and leverage economies of scale.

Carriers must carefully weigh four key areas of expertise before committing to an external solutions provider.

o Database and Analytics Expertise:

A sophisticated, flexible database is key to workers' comp transactional reporting. Insurers can use such a system as a one-stop mechanism for reporting data from their policy-administration, claims-processing and injury-reporting systems.

Single-flow data-stream management allows insurers to report policy and claims data as those transactions occur, using a common transactional format that enables them to integrate data directly from their policy and claims-processing systems with the vendor's systems.

For state regulatory reporting, the vendor must capture all insurer-defined and required data fields and extract the carrier's data to meet necessary requirements, as well as its injury and proof-of-coverage reporting obligations.

For the insurer's own strategic analysis, the vendor must be able to identify additional data elements the carrier wants to capture, so the breadth and depth of the collected data strengthens the validity and accuracy of analysis.

An expert vendor should be able to add value to an insurer's analysis by transferring the carrier's historical data to its own database, thereby eliminating the need for the insurer to maintain parallel or legacy systems and incur infrastructure costs.

The ability to use real-time data is crucial for an insurer to develop sound actuarial and management reports, make strategic plans for improved operations, and better monitor profitability. With real-time data, the vendor, for example, should be able to help the insurer review its risk concentration, perform a return-to-work analysis or conduct a cost-of-injury study.

o Injury Reporting Services Expertise:

An injured worker returns to work sooner when the insurer orders medical treatment immediately upon receiving the first notice of injury. However, reporting workers' comp data to all jurisdictions where an insurer writes business and keeping up with each jurisdiction's changing requirements is a time-consuming, resource-intensive task.

An expert vendor should be able to submit, on an insurer's behalf, first report of injury, subsequent report of injury and medical reports to state industrial accident boards in electronic format to those that accept it, or print paper first report of injury reports for submission to boards without electronic receipt capability.

o Behind-the-Scenes Expertise:

The time and expense of managing and updating reporting systems in response to changing workers' comp data-reporting requirements can be extremely expensive. A competent vendor with advanced technology systems and experience can accurately submit transactional reports in all jurisdictions the insurer does business in.

The vendor must also make regulatory reporting transparent, freeing the insurer from maintaining separate internal systems or expending resources on this function.

o Medical Care Cost Containment Expertise:

The spike in workers' comp medical care costs has been steeper than the health care industry as a whole. Since 1995, the rate of increase has been more than twice that of the medical Consumer Price Index. Annual average medical costs for the line increased 8.1 percent from 1996 to 2002–over twice the 3.8 percent medical CPI for the same period.

Partnering with expert health care predictive modeling and injury claims information companies, insurers can ensure greater efficiency in administering medical care while ensuring equitable handling of the medical and occupational situations of claimants.

Predictive modelers use medical and pharmacy claims information to assess health status, evaluate health care costs, identify opportunities for improving care, adjust or negotiate payments based on the disease, and predict future cost.

Adjusters often make subjective decisions on payments for injuries to individual workers when they lack historical information on prior claim settlement patterns or an adequate understanding of injuries, treatments, complications and preexisting medical conditions. For the same injury, payment offers by two different adjusters may vary by as much as 15-to-20 percent higher or lower than what it should be.

Insurers should consider tapping into the expertise of quality vendors that can automate the physical injury claims process, provide information for actively tracking the disposition of individual cases, evaluate medical and occupational status, improve claims-handling productivity, and develop appropriate return-to-work plans.

Outsourcing essential front- and back-office functions are decisions that insurers must not take lightly, but only after objective and careful cost-benefit analyses.

Done right, insurers that choose a trusted partner with both technology and business savvy can expect significant return on investment in cost savings, enhanced productivity, streamlined workflow and operational efficiency.

Insurers seeking to compete with the best of the best on more equal footing must carefully consider their needs for storing, analyzing and reporting data and then decide whether to build, buy or partner with best-of-breed information service companies.

Arthur Cadorine is a principal at Workers' Compensation Information Services, a division of the Insurance Services Office in Jersey City, N.J.

Insurers must choose between developing in-house tech systems and reporting capabilities, or outsourcing data analytics and regulatory reporting functions to a trusted partner.

"Done right, insurers that choose a trusted partner with both technology and business savvy can expect significant return on investment in cost savings, enhanced productivity, streamlined workflow and operational efficiency."

Arthur Cadorine