Managing workers' compensation exposures can mean higher profits for insurers, says Marcia DeWitt.

None other than Warren Buffet recently described the state of reinsurance this way: "Like Hell... easy to enter and almost impossible to exit."

And Buffet is more than likely not alone in his sentiments. With the sustained drop in the US stock market, the fall of the European equities markets, the lasting impact of September 11 and the threat of war, the reinsurance industry is looking more and more like it is destined for an eternity in financial Hell.

All of the contributing factors - some of which are known, and all of which are out of the reinsurer's realm of control - make it difficult to see how managing exposures creates significant savings. There are no easy answers. But there are solutions for companies willing to take proactive approaches - approaches that can pull them out of the abyss and into the light.

The road to salvation is paved with taking control of existing exposures in workers' compensation.

A proactive approach
One of the worst scenarios that reinsurers are facing today is the inability to control their existing workers' compensation exposures. Actually, it is a combination of both inability and frustration. Inability in that many reinsurers don't have the knowledge or resources on hand to cover their exposures, but also frustration because few realize the savings that can be generated from the workers' compensation book. In the grim situation facing reinsurers, it is no longer possible to ignore workers' compensation; instead, a long hard look and then the implementation of a proactive plan is needed in order to cover exposures and add real dollars to the bottom line.

The National Council of Compensation Insurers (NCCI) recently observed that US workers' compensation liability is underfunded by $41bn. This reality is having a significantly negative impact on primary carriers and reinsurers. The best way to manage exposures is to underwrite risks appropriately and plan for some variance from the average. However, when the trends vary significantly (negatively) from the projections, proactive measures must be taken to mitigate the negative results. How does one do that?

There are three key steps that will make the difference in covering workers' compensation exposures during this difficult period:

  • quickly assess the reserve accuracy of the existing book(s) of liability;

  • develop an action plan on an individual case and bulk basis to close and contain liability; and

  • substantially reduce the ultimate development by closing and containing existing claims.

    These are straightforward actions that are too often overlooked. Why? Because there is pervasive belief in the industry that loss development cannot be substantially impacted. But in fact it is very possible to markedly improve the loss development with a proactive approach implemented by the right team of people.

    The $41bn underfunded workers' compensation liability cited by the NCCI - and tabs similar to it all across the globe - will come due if the action steps above are not followed. Begun today, a proactive approach could reduce liability by 30%-50% over the course of the next one to three years.

    Even in a state like California, which arguably has the worst loss development in the US workers' compensation field, claims can be positively impacted by this approach.

    In a recent pilot project in California conducted by GuilfordPare, over 300 claims that had legal representation, significant medical injuries, penalties and several other complicating factors were either closed or contained in a 60-day aggressive process. These claims were settled for less than the outstanding reserves and in a quicker time period so as to positively improve loss development.

    It is clear that marked improvement can be made in a short period of time. Let's examine each step more closely in order to see how reinsurers can better manage exposures in workers' compensation.

    1. Quickly assess the reserve accuracy of the existing book(s) of liability.

    A file review of a statistically valid sample of claims from the existing book of business can give excellent insight as to the accuracy of the case reserves. The statistically valid sample, while random in nature should include all accident years in question and claims from the very small to the very large in total incurred dollars.

    Once the statistically valid sample has been reviewed on a case-by-case basis, an assessment is performed comparing the change of the total incurred of the sample and projecting that change to the entire book of business. The benefit is that the customer really sees the case reserve potential of the entire book of business. The analysis establishes the reality of what ultimately could be paid and the potential for saving, if the total book of claims is proactively managed.

    2. Develop an action plan on an individual case and bulk basis to close and contain liability.

    An action plan is needed for every open case, especially those cases that are significantly impacting loss development. The action plans should spell out time-sensitive steps that must be accomplished in order to limit the liability on the open case by closing or containing the case.

    As for impact on the bulk reserves, there will also be specific groups of claims that should be attacked as a group. These cases should be identified and attacked as a group for the purposes of closure or containment. Examples would be the closure of all medical-only claims within 90 days of receipt, asbestos claims in a certain state, or occupational disease claims arising from a specific facility or insured.

    3. Substantially reduce the ultimate development by closing and containing existing claims.

    The ultimate development of claims will be substantially reduced if those cases are closed or contained earlier in the life of the claim. Whatever process is undertaken in step one and two above, the carrier or reinsurer must involve their actuarial department in the process. Actuarial involvement is important to achieve the desired outcomes. There will be a definite change to the traditional claim pay out patterns once a proactive approach to closing or containing cases is taken. Accelerating that pay out pattern could set off alarms if everyone is not in agreement that the accelerated payments will cap future loss development.

    If carriers and reinsurers fail to manage their exposures pertaining to workers' compensation, they are charting a course to spend an eternity in Buffet's "reinsurance Hell." But if they take charge and maintain a proactive posture, they will be far ahead of the competition and much closer to obtaining the keys to the golden city: a heftier bottom line.

    By Marcia DeWitt
    Marcia DeWitt is President and CEO of GuilfordPare, a national leader in workers' compensation consulting and disability management. The firm's mission is to improve the balance sheets of Fortune 500 organisations, insurance companies and reinsurance companies.

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