MELAS

Inadequate pricing, a struggling economy, rising medical inflation and a growing residual market continue to drive up workers' comp premiums. With little hope for change in the immediate future, employers and insurers must work together to curtail rising costs and claims.

For most employers workers' compensation is by far their biggest casualty challenge. For every $1,000 in revenue, U.S. employers spend an average of $2.45 to manage casualty risks for workers' comp, auto and general liability exposures, according to a recent report by Marsh Inc., the New York-based risk and insurance services firm.

Workers' comp accounts for 62 cents of every dollar spent to manage casualty exposures, according to the Casualty Cost of Risk 2003 survey. That makes it the largest component of the primary casualty insurance dollar.

According to Boston-based Liberty Mutual, a leading provider of workers' comp insurance, premiums increased an average of 13.5 percent in 2001, and rose again in 2002--a trend that is expected to continue in the next year or so. Considering those statistics, a crisis in the workers' comp market is a significant concern for many employers and their insurance carriers.

While claims frequency remains relatively low for many employers, higher premiums, largely due to carriers' reserve deficiencies and poor investment returns, rising medical inflation and growth of the residual market--or market of last resort--have many employers concerned and looking for answers.

"Workers' comp is struggling as a line of business," says Robert P. Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York. "For the sixth consecutive year, the workers' comp combined ratio--a measure of profitability--has deteriorated, meaning premium income is no longer in line with claims costs."

The discounting of workers' comp premiums in the early 1990s, due to increased competition, combined with decreasing investment income on behalf of insurance carriers, has led to significant reserve inadequacies in the industry. As a result, employers are seeing significant increases in workers' comp costs.

Reserves Lacking

"The industry is now underreserved by about $20 billion in workers' comp claims," says Jim Roberts, president of AIG's Specialty Workers' Compensation Division in Parsippany, N.J. "Carriers are going to have to work those costs into the system in some way or another. While price increases in the last year and a half have helped carriers, there's still a ways to go. The good news is that the double-digit rate increases many employers have seen recently are going to be tailing off as carriers continue to address their reserve deficiencies."

Another primary cost driver of workers' comp costs is medical inflation. Beginning in the late '80s, reforms were enacted in many states to curb growing workers' comp claim costs. "Today, the post-reform downward trend in costs has leveled out, and claims costs and medical inflation are rising in many states," says Hartwig of the III. The medical malpractice crisis, double-digit health care premium increases, higher usage of medical services, the cost of new technology, rising prescription drug costs all play a role in increasing medical inflation.

Structural Problems

"Unfortunately, neither of these two issues--reserve deficiencies and rising medical inflation--can be addressed directly by the insured," says Roberts. "No matter how hard an insured works to lower their experience rating or cost of claims, these are structural problems that simply cannot be fixed by the individual employer."

As costs continue to rise, more employers are entering assigned risk pools--also known as the residual market--which insure companies that cannot find coverage in the traditional workers' comp market. These pools are now growing as the market hardens and carriers become more selective about the risks they insure, the Insurance Information Institute said.

The National Council on Compensation Insurance (NCCI), which operates pools in 38 states, reported a 90 percent increase in residual market premiums over the first nine months of 2001, compared with the previous year.

Terror--The "Largest Unknown"

The largest unknown for employers and insurers alike is the effect of potential terrorism risks on the workers' comp market. "The threat of additional terrorism occurrences is real," says Roberts. "While federal legislation provides some cushion for insurers in the event of a major catastrophe, the outcome of such an event is unpredictable."

The Terrorism Risk Insurance Act (TRIA) passed last November stipulates that private insurers and the federal government share the risk of future losses from terrorism over a three-year period. In accordance with the law, a separate charge is now being added to workers' comp policies to cover terrorism and insurers must notify policyholders of the amount they're being charged for the coverage.

Prior to Sept. 11, 2001, there was no specific charge for terrorism on workers' comp policies because they are all inclusive. Workers' comp claims as a result of the attacks on the World Trade Center came to about $2 billion, or 5 percent of total 9/11 losses, according to the III. As a result, workers' comp is now specifically included in TRIA legislation.

Following the passage of TRIA, the NCCI began developing an endorsement to workers' comp and employers' liability policies that will notify policyholders of additional premium charges for terrorism coverage. The NCCI also began adapting existing modeling techniques to determine the impact of potential terrorist events on workers' comp insurance and filed catastrophe loads in the states it regulates. There is significant concern about the equity of pricing for terrorism coverage and how prices will be determined. Will a rural employer, for example, pay the same terrorism risk load as an employer in an urban area?

"Insurance carriers have become very cognizant of the potential for a huge catastrophic exposure for insureds with large concentrations of employees in locations that are deemed to have the highest potential as a target for a terrorist event--such as "trophy buildings" and other prominent structures--and are writing policies with increased scrutiny," says Tim Brady, managing director, casualty practice at Marsh. "In addition, underwriters are recognizing that in large structures, such as very large office buildings and complexes, they have an aggregation of multiple employers with hundreds of employees-a serious issue that needs to be addressed in addition to pricing concerns," he says.

Traditional Loss Costs Drop

"Fortunately, most employers have done a very good job of reducing [traditional] loss costs over the past several years, and have seen positive results," says Roberts of AIG. "Claim frequency has been going down for the past 30 years, largely due to better ergonomics and technological advances in the workplace, social awareness that lost-time claims hurt productivity and the implementation of safety programs and accident reduction efforts."

According to the U.S. Department of Labor, injury rates are now at the lowest level since the agency began reporting this information in the early '70s. In 2001, a total of 5.2 million injuries and illnesses were reported in private industry workplaces, of which about 2.6 million were lost workday cases, which required recuperation away from work or restricted duties on the job.

In most cases, employers can use their positive claims experience to their advantage. "While many of these cost issues are beyond their control, employers need to return to the basics," says Hartwig of the Ill. "It's as simple as looking at where losses are coming from and trying to eliminate accidents or injuries before they occur. In addition, for every dollar invested in workplace safety, an employer should see a $2 to $3 return on investment."

Document Management Vital

Brian Melas, Liberty Mutual's senior vice president, commercial markets, stresses that employers can keep their costs in check through a safe workplace. If an employer can prove that it takes workplace safety seriously, its loss experience will speak for itself, and ultimately, affect pricing.

"Underwriters are looking more carefully at submissions today," he says. "They need more information about risks up front in order to determine whether to write a policy. As a result, it's important for an employer to make their submission as attractive as possible to the insurer. If you've had injured workers in the past, demonstrate how quickly you got employees back to work ... This shows commitment on behalf of the employer, which the carrier will take into careful consideration."

AIG's Roberts agrees. "One of the critical things employers need to do is outline anything they feel they've done that changes their historical loss experience," he says. "For example, an employer that typically had 25 claims per year for the past two to three years, but over the past six to eight months has taken concrete steps to reduce loss through an accident prevention program, should clearly articulate that to their carrier.

In addition, many carriers are working with their insureds to improve their loss experience and implement safety measures.

Bruce Kaufenberger, assistant vice president, underwriting services at The St. Paul Companies in St. Paul, Minn., notes that, "We're re-engaging our loss control department across our inventory of clients, helping our insureds implement safety procedures and focus on hazards in the workplace; especially those that create re-occurring losses. While we realize that loss control is a difficult sell in today's tough economic times, we believe now is exactly the time companies should be focusing on safety, especially as insurance costs continue to escalate."

Having a good claims management system in place is also essential. "An effective claims management system can cut 10 percent or more of your claims costs," says Vincent Armentano, vice president, workers' comp at Travelers Property Casualty Corp., Hartford, Conn. "No matter how you manage your loss costs, you need to make sure you have good, solid claims execution, which will greatly reduce your costs."

RELATED ARTICLE: Top 10 Causes of Workplace Injuries

As employers struggle to gain control of their workers' compensation claims and costs, Liberty Mutual has released its second annual Workplace Safety index to motivate and guide employers in the quest for reducing accidents in the workplace.

According to the 2002 Safety Index, the 10 leading causes of disabling workplace injuries account for 86 percent of the estimated $40 billion in wage and medical payments made to workers injured on the job in 1999 (the last year for which data is available).

Liberty Mutual identified the leading causes of disabling injuries and their associated direct casts using its own data and Findings from the Bureau of Labor Statistics and the National Academy of Social Insurance.

The direct cost of workplace injuries-payments to injured workers and their medical care providers-rose 3.6 percent, to $40.1 billion in 2002, up from $38.7 billion in the insurer's 2001 Safety Index. The total financial impact of both direct and indirect costs-lost productivity, overtime and training is estimated to be as much as $240 billion, according to the report

Each injury's indirect costs are far larger than its direct costs Liberty Mutual's 2001 Executive Survey of Workplace Safety reported that companies faced between $2 and $5 of indirect cost for each $1 of direct costs

Overexertion and repetitive motion are the leading causes of ergonomic-related workplace injuries, according to the report.

Findings from the 2002 Safety Index closely match results from Liberty Mutual's 2001 Index. Having two years of similar data will encourage risk managers and safety directors to use the report to focus their safety resources on the major causes of workplace injury, benchmark their current performance and reduce injuries, notes the report.

According to the 2002 Safety Index, the leading causes of disabling workplace injuries that resulted in employees missing 5 or more days of work in 1999 include:

* Overexertion

* Falling

* Bodily reaction

* Falling to lower level

* Being struck by an object

* Repetitive motion

* Highway accidents

* Striking an object

* Caught in or crushed by equipment

* Exposure to temperature extremes

Mindy W. Toran can be reached at mrtoran@comcast.net

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