Workers’ compensation continues to be a huge challenge for the insurance industry. While certain states like California are suffering more than others, countrywide results are mediocre.
One of the key metrics in the insurance industry is the Combined Ratio. It basically measures underwriting profit and is calculated by adding losses and expenses and dividing by total premiums. If the ratio is more than 100, there is an underwriting loss. If the ratio is less than 100, there is an underwriting profit. Most insurance companies want to write to at least a 95 percent Combined Ratio, and 90 percent or better is ideal.
Nationally, the combined ratio in 2012 was 109 percent, which was down from 115 percent in 2011 and 2010. The figures for 2013 are not final yet, but it is anticipated to be similar. It doesn’t take a rocket scientist to figure out the insurance industry needs rate in this line of coverage. So what does this mean to workers’ compensation rates in 2014?
If underwriters want a 10 percent return on capital, they need to underwrite to a combined ratio of 92 percent to 93 percent. In simple terms, that means they need to move the needle about 17 points to 18 points. Unfortunately for the insurance industry and fortunately for the insurance buying public, this is not that easy to do. A substantial amount of surplus (currently at an all-time high) remains in the industry and a company that tries to get the entire rate back in one year would lose a lot of business.
Base rate increases of approximately five to 10 percent are expected. Recognize that net-rate changes will also be affected by the Experience Modification Factor and other credits applied by the underwriter.
Underwriters generally have latitude to adjust the base rate plus or minus 25 percent to 40 percent based on how they feel about the company’s account. This underscores the importance of a thoughtfully completed submission to the underwriting community that extols the virtues of the firm, why it is a good risk, and why the company deserves significant credits. It is important to also understand the company’s experience modification and project the 2014 mod. Certain factors in the experience modification equation have changed in recent years and this has adversely affected some employers. Experience Modifications are usually published 30 days to 90 days prior to policy expiration; however, a competent broker can project a company’s mod confidently five months out or earlier if there are few or no open claims.
Recognize that this discussion involves average rates. There are hundreds of Workers Compensation class codes and each code is evaluated separately and has its own rate. Some class codes are going up as much as 25 percent or more, while others have actually decreased.
It is prudent to begin discussions with the underwriter early. Find out what their current base rates are compared to the ones on the company’s policy. Ask about the types of credits to expect to see and determine if the underwriter will be submitting another rate filing before renewal.
Additionally, remember that in the long run, the only way to lower workers’ compensation costs is to lower the frequency and severity of the claims that drive those costs. It is critical to create a culture of safety.
- Have an effective and compliant safety program.
- The safety culture needs to be supported by senior management and supervisory employees responsible for implementing it need to be rated and evaluated on their efforts in this area.
- Develop post-accident best practices. The way a claim is handled and managed in the first 24 hours to 48 hours can make a huge impact on the ultimate result.
Start the renewal process early. Discuss marketing with the company’s broker and engage the underwriter as well, if appropriate. Work with the right insurance company—one that offers risk control services and proactive claims management in addition to a policy and reactive service.