RISKVUE ARCHIVE | FEATURE STORIES

Workers’ Comp Underwriting Trends

by David Blessing and Tom McLaughlin

At the end of the last decade, most companies were not focusing on making changes to their workers compensation programs. Prices had been decreasing or were flat for many years, and coverage was easy to come by. Now, the workers compensation market is beginning to change. Risk managers will see the following underwriting trends during the next few years.

Trend 1: The Market Appears to Be Shifting

During the 1990s, workers compensation pricing conditions were the softest that almost anyone can remember. The popularity of guaranteed cost programs exploded, and many risk managers were able to remove liabilities from their balance sheet at attractive prices. If the last six months are any indication, however, the market appears to be firming.

The NCCI reported an industry pure loss ratio of 71.2 percent for the third quarter of 1999, compared to 59.1 percent in 1997. When these statistics were announced, NCCI president and CEO Bill Schrempf stated, “Free market competition, declining reserves, and a growing challenge to existing benefit levels across the country continue to place pressure on the market.”

Workers compensation pricing has not yet fully responded to industry pressures. Currently, both reinsurers and carriers, after reporting less than ideal bottom-line results, are evaluating and changing their underwriting and pricing practices.

Trend 2: Increasing Use of Alternative Programs

The changing market has renewed the interest of many companies to take on larger retentions rather than purchase first dollar workers compensation coverage. Large dollar deductible programs and other alternative risk financing mechanisms will be more widely used in the early 2000s.

Perhaps a company’s goal for alternative rating plans will be to find the right level of risk to retain. Previous trends in workers compensation pricing had sometimes fluctuated between the extremes—from standard premium plans to high excess-of-deductible layers and back to guaranteed cost. In the new millennium, risk managers may find middle excess layers and moderate aggregate limits more appropriate win-win solutions to all or nothing risk positions.

As organizations retain greater levels of risk, the need to manage that exposure becomes paramount. Using captive insurance subsidiaries may become more prevalent in the years ahead. In addition to potential tax benefits, captive arrangements offer substantial flexibility to meet changing risk financing needs. As a separate corporate entity, a wholly owned captive also enhances an organization’s management perspective.

Trend 3: Integrated Disability Management Programs Are More Common

Integrated disability management programs are more commonly explored and used today by all sizes and types of companies. Market conditions are allowing for a different perspective to finally take hold, not just with risk managers but also with CFOs and benefits managers.

These programs typically include two distinct components: a workers compensation contract combined with a short-term and long-term disability program. When implemented effectively and for the right organization, risk managers can expect to see improved claim results, administrative efficiencies, consolidated reporting, improved return-to-work outcomes, and elimination of claims double-dipping into one or the other program.

Many companies are taking a comprehensive approach to their workers compensation program. This means applying best practices and the program’s core concepts—such as incident prevention, illness and injury treatment, and return to work—to all health related incidents that affect employee productivity. Due to advances in technology, underwriters and risk managers have access to merged data that is necessary to fully understand employee exposures.

Underwriting in a New Century

These underwriting trends may take a few years to become clearly visible to all risk managers. Today, the only clear trend is that change is happening. In the new workers compensation marketplace, successful programs will result when risk managers work closely with all areas of their organization to understand the unique exposures and develop a partnership to manage all employee-related risks. 

ABOUT THE AUTHORS

David Blessing is a regional financial manager for Liberty Mutual’s National Market West Region, Chicago, IL. Tom McLaughlin is a project leader in Liberty Mutual’s Underwriting Technical Services Department, Boston, MA.

Copyright 2000 - Liberty Directions and Liberty Mutual Insurance Company. Reprinted with permission.

riskVue | The webzine for risk management professionals
June 2000