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
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?
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.
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:
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.