The hardening market for workers' compensation cover is focusing risk managers' and insurers' minds.
After years of declining prices in a feeding-frenzy market, risk managers and workers' compensation insurers have realised that inadequate rates – and the unacceptable financial results that they produce – cannot continue.
The end of the 1990s saw a return to combined ratios exceeding 120% for workers' compensation, a repeat of the results of the late 1980s when the line was frequently described as being in a state of crisis. A hardening market is now replacing the days of intense price competition, when many insurers cut prices below cost to maintain market share and when risk managers saw average premium decreases of 7% per year.
New market conditions require risk managers and insurers once again to focus on the basics – controlling the true cost drivers of workers' compensation through effective underwriting, superior loss prevention and aggressive claims and managed care (see figure 1). Understanding trends in each of these areas will help risk managers effectively manage risk in the new workers' compensation market.
The workers' compensation market of the late 1980s was a crisis for both insurance buyers and writers. Prices rose dramatically in response to rapidly increasing loss costs, particularly medical inflation. At the same time, benefits expanded in reaction to increased reliance on the workers' compensation system, and the residual market grew quickly, placing a huge burden on the voluntary market. As a result, workers' compensation insurers saw profitability deteriorate quickly as rate increases within the highly regulated system did not keep pace with rising costs.
The early to mid-1990s saw an improvement. The cost of workers' compensation began to fall in response to deregulation of prices, effective state reforms, slower growth in claim costs, decline in claim frequency, and aggressive adoption of managed care tools and techniques.
Improving results led – once again – to intense price competition. Pricing discounts sprang from the overcapacity in the industry, as an abundance of capital chased a relatively stable demand. This intense price competition led to declining financial performance for many insurers.
The past 18 months have seen a gradual hardening of the market. In a softer workers' compensation market, with employers enjoying rock-bottom pricing, the core disciplines of risk management sometimes deteriorated.
Today's harder workers' compensation market is returning risk managers and insurers to solid underwriting, loss prevention, and claims and managed care practices. Understanding trends in each of these areas will help risk managers deliver solid results in this new market.
At the end of the last decade, most companies did not have an incentive to update their workers' compensation programs. Prices had been decreasing or flat for many years, and coverage was easy to come by. Today, however, workers' compensation has changed. Risk managers are noticing the following underwriting trends:
As recognition of the real cost of employee absence has grown, there has been an increasing demand for programs that comprehensively manage this issue. Integrated disability management programs will continue to expanded to manage federally mandated Family Medical Leave Act and sick time.
Loss prevention trends
Most companies want to eliminate injuries and provide their employees with a safe working environment. The common goal is to prevent the human and financial costs of workplace accidents. The hardening market is placing even greater emphasis on workplace safety.
Several emerging loss prevention trends include:
In addition, Liberty Mutual provides its middle market policyholders with detailed reports that track loss performance, outline ways to improve that performance and compare the company's loss results to the aggregate performance of other Liberty Mutual policyholders with the same standard industry code.
To some degree, older employees are less likely to take risk. In addition, they tend to work with lower physical stress and more efficiently. However, if an injury does occur, the extent might be greater and the length of disability longer. Employers will need to plan safety and health services to meet the needs of an older workforce.
At the same time as the workforce is aging, new employees entering that workforce are given responsibility at an accelerated pace, causing them to change jobs more often. One recent study showed that employees are 40% more likely to be injured in the first year of a job. Accordingly, training programs will play an even greater part in employers' safety programs.
Claims and managed care
Risk managers are experiencing changes in claims and managed care as insurers leverage technology, medical inflation grows, and the protection of medical privacy becomes an issue. Four of the major trends in claims and managed care are:
The hardening workers' compensation market provides risk managers with many challenges and opportunities. Successful risk managers will partner with insurers to develop risk management programs based on the realities of the new market. The most successful of these programs will leverage trends in underwriting, loss prevention and claims and managed care.