With the workers' compensation system back in trouble again, Nancy Froude argues in favour
of market-correcting discipline.

While some business issues like the collapse of the dot.com world continue to make front page headlines, others like the workers' compensation implosion are relegated to small news bits in the business pages.

Maybe it's because much of the story appears to be old news. People seem to know that the workers' comp system is in trouble again, but one must wonder if they know why this should be. Further, many of the industry-authored workers' compensation articles are simply history lessons – good at recapping what has caused the house to crumble, but bad at offering practical or concrete solutions.

One thing is for sure. Whether it's the dot.com sector or insurance industry, a ‘growth at all costs' strategy is no longer considered an acceptable business model.

Recent past: buyer's market

  • Workers' compensation rates have plummeted since reforms in the early 1990s. We are now experiencing commodity pricing for a program that is key to the well-being and profitability of your business.

  • When workers' compensation became a profitable line, insurers flooded the market.

  • Stiff competition led to a price war and a surge in availability.

  • Insurers offered deep discounts – dividends, schedule credits, etc.

  • Lured into a false sense of security, risk managers changed programs and carriers. Many abandoned self-insurance for traditional insurance programs.

    Today, costs are rising, combined ratios continue to deteriorate and supply is shrinking. For the majority of workers' compensation insurers now, combined ratios are well past the profit zone into the 1.30s. What is happening?

  • Medical costs are rising.

  • Discounts are trending down.

  • Severity is trending up.

  • The benefit enhancement movement is gathering steam, again.

  • Insurance availability for tough class codes is tightening, and this is complicated by recent consolidations. The lion's share of the workers' comp line is held by a handful of large carriers and reinsurers are down from 100 in 1989 to fewer than 40 today.

    Now there is also a power shift from buyer to seller, and rates are climbing in many areas. The only way to avoid cracks in the future is to build a solid foundation by breaking the vicious price cycle and seek services based on a platform of quality and value.

    The price cycle goes like this: Reform creates attractive market conditions and profit opportunities for carriers – supply surges and price wars begin – consequently, clients look for bargains, and there is insurer turnover – which causes service inefficiencies and higher costs – but because up-front prices are low, employers experience a sense of ‘false security' – which leads to deteriorating results and climbing experience modification factors – this causes insurer unprofitability and leads to supply constriction – and, you guessed it, price increases.

    The sum of this cycle of course is major employer pain. Employers who are proactive now may minimise their pain later.

    Concrete solutions
    Many of us in the industry have been through the cycle more than once, and believe it or not, we have learned from the past. While there are differences this time, once again it is clear that buying services from a carrier or third party administrator (TPA) based solely on price is a mistake.

    Likewise, if you're a TPA or carrier, selling or gaining market share based only on price also is a mistake, and you too will feel pain.

    Risk managers could be well advised to follow these steps:

  • assess your past experience, including the strengths and weaknesses of your philosophy and approach to managing your workers' compensation program. You may need to ‘rehab' your program, looking at all its components from reporting to underwriting to claims best practices;

  • redouble prevention initiatives and your focus on employee health and safety. Preventing injuries is still the number one objective;

  • work your experience modification factor down. The past tells us that long-term savings are possible only through the reduction of frequency and severity of losses. Therefore, an integrated program of prevention, prompt care and response, same-day reporting, specialty managed care and return to work is most effective;

  • the reduction of frequency and severity can only occur through proactive accident prevention, claims management and managed care;

  • work with a TPA or carrier that channels injured workers into a network of occupational physicians and specialists experienced in workers' compensation. Use of a specialised network will influence claims severity and directly lower your average cost per claim. A recent review of ManagedComp claims channelled through its primary occupational provider network show average savings of $1,000 per claim against those who went ‘out of network';

  • work with a full service partner that works smart and is an expert in claims, case management and managed care. Resist the urge to unbundle. Look beyond the obvious – look beyond price – focus on long term outcomes;

  • make sure that your transitional duty or return to work program is meaningful ecause your second objective is to get injured workers back to work as soon as possible. According to the NCCI, approximately one in four claims results in lost time, yet occupational physicians think that only between 5% and 10% of all workplaces injuries warrant lost time;

  • partner with a results-driven insurer or consider self-insuring along with the services of a TPA with common goals. If self-insurance is not an alternative for your company, cost-sensitive and large deductible options can be attractive, offering lower premiums to those who are willing to assume some share of the risk;

  • look for a partner with advanced technology and a vision for the future as many large carriers are struggling to integrate claim and service functions using antiquated legacy systems. Whether it's first report of loss or case management status, you need both real time and analytical data to measure results; and

  • finally, keep score. Prudent employers and risk managers track the results of their workers' comp programs quarterly. ManagedComp has developed a scorecard to make it easy and meaningful for its brokers and customers.

    Moving to quality
    Rest assured that the price or ‘acquisition at all costs' strategy is not unique to the insurance industry. Phone companies, supermarkets and airlines all vie for customers based on price. But when you think of quality, what names come to mind? You certainly know who the quality players are in this industry. It's time to clear the rubble and rebuild the workers' comp system. Both buyers and sellers need to apply a market-correcting discipline – one that puts quality over price.