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Workers' Comp Prices Increasing as Market Hardens

Employers are exiting workers' comp guaranteed-cost policies that have fixed costs and taking on greater risk by purchasing loss-sensitive plans with lower premiums but higher deductibles, market experts say.

August 2, 2012
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Workers' compensation insurance prices are increasing, substantially in some cases, and policy offerings are diminishing as insurers seek to address unprofitable combined ratios amid rising indemnity and medical costs.

Liberty Mutual Group Inc., for example, said in a conference call last week that on average it secured a 9 percent overall rate increase for workers' comp policies that were sold during the second quarter of 2012 compared with the same period last year.

For middle-market accounts that purchased guaranteed-cost policies during the quarter, Liberty obtained a 12.1 percent increase on average, David H. Long, the Boston-based insurer's president and CEO, said during the call with analysts to discuss second-quarter results. Liberty is one of the nation's biggest workers' comp insurers.

"Some markets are being very aggressive pushing higher than that," said Kent D. Edgecombe, area president in Ridgeland, Mississippi, for Arthur J. Gallagher Risk Management Services Inc.

Meanwhile, employers are exiting workers' comp guaranteed-cost policies that have fixed costs and taking on greater risk by purchasing loss-sensitive plans with lower premiums but higher deductibles, market experts say.

Companies are doing so because workers' comp insurers are shrinking their offerings or raising policy prices, particularly for guaranteed-cost coverage, experts say.

The loss-sensitive plans increase employers' responsibility for claims management, because such plans often come with higher deductibles that hold them accountable.

But "loss-sensitive programs are not for every company," said Julie Burgess, senior vice president and unit manager in national accounts for broker Lockton Cos. L.L.C. in Kansas City, Missouri.

One reason is that workers' comp insurers underwriting for a large-deductible policy scrutinize the employer's income statement and balance sheet to make sure policyholders can provide the collateral insurers require from an employer to secure potential losses within the deductible, Burgess said.

"They are valuing those financials so they can avoid taking credit risk," Burgess said. "Therefore, if you take on $100,000 deductible, you are going to have to collateralize the expected losses within that $100,000."

Regardless of the costs and the increased scrutiny, more employers are making the move to loss-sensitive work comp coverage.

With "guaranteed costs for larger insureds, the price is either going up or the availability is starting to shrink," said Drew Jones, senior vice president for risk management services for Pennsylvania Manufacturers' Assn. Insurance Co., a Blue Bell, Pennsylvania-based underwriter specializing in workers comp.

"And hence people are either returning to loss-sensitive or considering loss-sensitive (insurance programs) if the rate increases have been more than they budgeted for" or unacceptable, Jones said.

The move is mostly, but not entirely, affecting midsize policyholders, said Paul Braun, managing director of casualty claims for Aon Global Risk Consulting in Los Angeles.

Some larger employers that purchased guaranteed-cost policies the past few years during the soft insurance market cycle, when the price of such coverage was "cheap," also are shifting back to loss-sensitive programs, Burgess said.

"The market (had) been so soft that I have multimillion-dollar work comp accounts that have been guaranteed-cost. But they, too, are transitioning," Burgess said.

Shifting between guaranteed-cost and loss-sensitive workers' comp coverage is common when insurance market cycles firm or soften, experts said.

But before employers switch, Braun said, they should understand that under a loss-sensitive arrangement they will be responsible for an array of new decisions, such as whether to unbundle their claims management by contracting with a third-party administrator. Under a guaranteed-cost plan, policyholders turn over most of such claims-handling decisions to their insurers.

Employers also must be sure they are "operationally ready" for the responsibilities of taking on greater risk through a loss-sensitive policy, said Kevin Finn, vice president of national accounts at The Hartford Financial Services Group Inc. in Hartford, Connecticut.

Greater cooperation across the entire corporation is necessary, Finn said. For example, a company's finance department or treasury would be more involved in meeting the insurer's collateral requirements, while operations managers may have to take on greater roles in reducing subsequent losses the employer would retain.

Over the long term, employers can realize savings with a loss-sensitive workers comp plan that requires them to play a more direct role in managing their claims instead of transferring all their workers' comp risk to insurers, said Kevin Wick, a managing director for the Actuarial Insurance and Management Solutions Group of PricewaterhouseCoopers L.L.P. in Seattle.

But there will be fluctuations in claims costs, with the potential for some large losses to occur before the long-term savings materialize, he said.

There also are substantial loss-control considerations, such as whether an employer has the in-house staff or ability to pay for claims analysis that helps them understand certain issues, such as which business units are generating the greatest losses, Wick said.

"If you go self-insured with some notion that you are automatically going to have savings, that is naïve," Wick said. "You have to focus on controlling your costs throughout the organization."

Others agree that analyzing losses is a first step.

"The first thing you really have to look at is where are your losses," said PMA's Jones. Then employers should conduct a cost-benefit analysis to determine their total cost of risk under various work comp programs, he added.

Employers evaluating the shift also must look at their loss trends and experience modification factors to see which direction they are heading, Gallagher's Edgecombe said.

"A lot of folks that buy guaranteed cost ... kind of lose track of the fact that their open claims are going up," Edgecombe said. "And when you are on a deductible program, you are going to be continuing to write checks."

Roberto Ceniceros writes for Business Insurance, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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