The Soaring Costs of Workers' Comp
Despite rigorous efforts to control costs and prevent accidents, employers still are seeing staggering premium increases. Here's why the costs keep climbing, and what some companies are doing about it.
Despite its efforts--shopping around for the best and cheapest insurance,demonstrating to insurers its commitment to curbing costs--the 6,600-employeecompany saw the price tag skyrocket. Even after a deductible increase, theinsurance tab doubled, says Paul Moss, the firm’s vice president for globalhealth, safety, and environment. "In this kind of marketplace, you can do allthe right things and still not see a reflection in your rates, and that’spretty scary."
Dade Behring’s experience is a warning--workers’ compensation insurancepremiums will soar when policies come up for renewal, and there’s not much youcan do about it. Even rigid accident-prevention and cost-control programs maynot help much. While Dade Behring’s whopping increase may be unusual, thecompany is one of a growing number of firms that are experiencing huge jumps inworkers’ comp insurance premiums. Base rates, which are used by insurers todetermine premiums, are rising in a number of states, with some seeingdouble-digit increases: Hawaii, 15.8 percent; South Carolina, 20.3 percent; andFlorida, 21.5 percent.Dade Behring employed a comprehensive arsenal to keepcosts in line. It included the usual solutions such as workplace accidentprevention, effective claims management, and returning employees to work as soonas medically possible. The company has instituted intensive ergonomics andsafety programs and aggressively manages claims filed by injured employees.Other companies such as International Truck and Engine Corporation havedeveloped impressive employee health and safety and medical case managementprograms.
Why is the workers’ compensation system straining to sustainitself?
So why the big cost increases? Why is the workers’ compensation system,which was designed to provide medical care and wage replacement for workers whosuffer work-related injuries or illnesses, or death, straining to sustainitself? The answer lies in a convergence of factors: rising claim costs,deregulated pricing, harder-to-obtain reinsurance, and the specter of workplaceterrorism. And there’s no relief in sight, says Robert Steggert, vicepresident of casualty claims for Marriott International, Inc.
Not long ago, mandatory insurance was a routine business cost. But risingpremiums and claims costs are spurring employers to invest even more money tocontrol costs, says Sara Taylor, president of Structured Health Resources Inc.,a Chicago disability-management consulting firm. "Employers are recognizingthat they have to be actively involved to look out for their best interest,"she says. At the same time, insurers are expecting employers to be more thanpremium payers. Taylor says they want partners.
Dade Behring, which has been through several mergers and acquisitions inrecent years, seems like the ideal partner. A comprehensive workers’compensation effort brought company costs down 600 percent from 1999 to 2001.Its workplace-safety efforts during the same period resulted in a 200 percentreduction in lost workdays and, recently, two consecutive months of zero lostworkdays due to occupational incidents.
International Truck and Engine, a manufacturer in Warrenville, Illinois,undertook a "very aggressive" safety program that reduced the frequency ofoccupational incidents among its 17,000 employees by 20 percent from 2001 to2002, says Dr. William Bunn, vice president of health, safety, and productivity.But the safety and case-management initiatives have simply kept insurancepremiums from going up even more, Bunn says. In 2002, the premium increased 18percent, to $2.3 million. Meanwhile, the cost of its self-insurance--80 percentof its workers’ compensation program--dropped 27 percent, from $3.2 millionin 2001 to $2.1 million in 2002. "We lose some control over increasing costswhen we use external insurance," Bunn says. In locations where the company hasgone from insurance to self-insurance, he adds, costs have generally dropped bya third.
Insurers in distress"Workers’ compensation is in a period offinancial distress," says Peter Burton, senior division executive for staterelations for the National Council on Compensation Insurance, Inc. Insurers paidout an estimated $1.27 in claims in 2001 for every dollar they collected fromemployers, according to NCCI data. This business insurance line is veryunprofitable, Burton says, and insurer insolvencies are becoming more common.
Since 2000, premiums have risen, Burton says. Individual employers’premiums are based on such factors as the state the employer is located in andthe employer’s industry, amount of payroll, and frequency and severity offiled claims. Average premiums in the 37 states from which NCCI collects policydata increased about 5 percent for 2001 and about 11 percent for the first halfof 2002.
"I see increases in losses and insurance costs as far as the eye can see,"says Bruce C. Wood, assistant general counsel for the American InsuranceAssociation. "It’s only a question of how much costs are going to go up."
Even though it’s shocking to see insurance bills soar, Burton says workers’compensation is still more affordable than it used to be. Employers spent $56billion for the nation’s oldest form of social insurance in 2000, according tothe National Academy of Social Insurance in Washington, D.C. But the collectiveemployer price tag was $61 billion in 1993, the academy reports. Viewed anotherway, the cost of workers’ compensation per $100 of payroll was $1.25 in 2000,down 39 percent from its 1990 apex of $2.18.
"Prices are going up, but not fast enough to take into account the seriousunder-pricing in previous years," says John Burton, an industry expert atRutgers University and editor and publisher of Workers’ Compensation PolicyReview.Premiums began to come down in the mid-1990s, as new state laws cut costsand deregulated rates, which greatly expanded what insurers could charge forpremiums. By the late 1990s, with insurers competing for market share as claimcosts were declining, workers’ compensation insurance became "terribly cheap"for employers, he says. It also became a more profitable business for insurersthan at any time in the previous 30 to 40 years.
Declining claim frequency also helped keep costs down. Workers were filingfewer workers’ compensation claims partly because employers were being safer,Burton says. Also, new laws in some states put limits on what was compensable.
In Oregon, for example, legislative changes made in the late 1980s and early1990s reduced claim frequency by 25 percent. But, Burton warns, "You can goonly so far when trying to reduce eligibility for workers’ compensationbenefits without the possibility of opening tort suits."
The number of filed claims dropped about 36 percent during the 1990s in the37 states where NCCI collects information. This enabled insurers to make moneyeven as the cost of the average lost-time claim rose, says NCCI’s PeterBurton. But preliminary evidence shows that claim frequency is now beginning tolevel off, he says, even as the cost of the average claim continues to climb.
Wage replacement and medical costsThere are two factors behind therising cost of workers’ comp claims. Wage-replacement costs rose roughly 6.6percent annually from 1996 through 2001, according to NCCI. And medical costsjumped 11.5 percent in 2001, after a steady climb of about 7.5 percent from 1996through 2000. Meanwhile, reinsurance--the financial backup for insurancecompanies--has been harder to obtain and afford, Wood says. Because insurancecompanies are legally required to pay all losses and have been having adifficult time getting affordable reinsurance, they have to collect additionalmoney from employers. "Workers’ compensation insurers really have nowhere torun and nowhere to hide," Wood says.
He says that the Terrorism Risk Insurance Act of 2002 is intended toresuscitate the reinsurance market. Signed into law by President Bush inNovember, the bill provides temporary financial security of $100 billionannually to insurance companies in the event of terrorist attacks.
Lobbyists pushed for the bill after September 11--the largest catastrophicworkers’ compensation loss in history. Rising workers’ compensation costshad already made the insurance industry vulnerable, says Burton of NCCI. The terrorist attacksmade matters worse. According to NCCI, workers’ compensation insurers canexpect to pay up to $2 billion for 9/11 claims, not including claims for cleanupand mental distress.
Since 9/11, insurers also have new underwriting criteria, Wood says.Insurers, for example, are evaluating an employer’s geographic location and industrygroup.
"Workers’ compensation carriers are betting their companies that therewill not be another sizable terrorist attack," Wood notes. And so are self-insurerslike Marriott. The 145,000-employee hotel giant expects to pay $10 million forworkers’ compensation claims arising from 9/11. Two employees died helpingguests out of Marriott’s 22-story World Trade Center Hotel, which was totallydestroyed. Another 146 employees who worked at that hotel and the nearbyMarriott Financial Center Hotel filed workers’ compensation claims related tothe event, Steggert says.
Twelve employees who were not even working on 9/11 filed workers’compensation claims for mental stress. The fact that one of these claims wasconsidered by a judge to be compensable when the employee was not even on thejob was "really shocking."
Marriott got a 25 percent increase in reinsurance costs for the 2002insurance year. Because it has concentrations of employees in large buildings,Marriott has been affected by new underwriting approaches since the terroristattacks.
In short, Marriott is already employing all the best practices to keep costsunder control. Now, like Dade Behring, all it can do is wait for cost pressuresto subside.
Workforce, February 2003, pp. 42-48 -- Subscribe Now!