Workers’ Compensation:
A Three-Headed Dragon for Employers
Workers’ Compensation insurance has become a hot topic, as several
recent changes have made this business expense more costly and cumbersome.
Companies are facing three primary challenges:
1. HARD MARKET – higher pricing from insurance
carriers
2. INCREASED (NCCI) RATES – percentage growth varies by state
3. EXPERIENCE MODIFIER RULE CHANGES – adjustments in the primary-
excess split point could increase
experience modifiers & related costs
HARD MARKET
For the last 8 years, most businesses have experienced a
‘soft market’, with decreasing insurance rates and increased capacity. In that
marketplace combined ratios reached a 10-year high of 117% in 2011, their worst
level in 10 years. With significantly less profitability, insurers have reacted
to reverse this trend by increasing pricing and reducing available capacity.
David H. Long the CEO of Liberty Mutual, one of the largest providers
of workers’ compensation in the world, said that the national rate “increases
in the second quarter [of 2012] were in line with increases seen in the first
quarter – up about 9 percent.” He also added that “much more is needed for us
and the industry to become profitable in that line [workers’ compensation].”
Similarly, a survey conducted by the Towers Watson Group found that the ongoing
commercial insurance price increase is the largest in eight years, with
workers’ compensation and commercial property experiencing the largest price
adjustments.
INCREASED (NCCI) RATES
The vast majority of states have approved significant Workers’
Compensation rate increases for 2013. For example, the construction industry
rate increase for my home state of Arizona is 6.4%, with an overall increase of
4%. Similarly, Colorado will see a 5.2% overall increase, while Florida and
Iowa will experience increases of 6.1% and 7.9% respectively.
EXPERIENCE MODIFIER RULE CHANGES
As you have likely heard from your broker or risk manager, NCCI
has changed the experience rating formula – thus potentially altering employers’
experience modifiers (also known as an E-mod or Ex-mod) and directly affecting
workers’ compensation premiums. The primary-excess split point, which is the claim
amount at which the burden is lessened in regards to your E-mod, will be
increased over a three year transition period. Beginning in 2013, it will move
from $5,000 to $10,000, and then increase incrementally to $13,500 in 2014, and
$15,000 in 2015. The key rationale for this change pertains to claims inflation
and the fact that NCCI did not previously shift the split point to mirror
actual claims data. It has been over two decades since the last split point
update, whereas the cost of claims has more than tripled during that time
frame.
How this will affect your organization depends on whether
you have an above or below average number of losses under the split point. If
the majority of your claims are less than $5,000 (the current split point) you
will likely see a decreased E-mod. Conversely, if many of your claims are
greater than $5,000 you should expect an increased E-mod. In a nut-shell, this
new rule change will result in a wider range of E-mods, extrapolating them from
the average (1.0). Experience modifiers greater than 1.0 (aka – debit mods)
will likely increase, causing higher premiums. Conversely, experience modifiers
less than 1.0 (aka – credit mods) will likely decrease, causing lower premiums.
CONCLUSION
In summary, the Workers’ Compensation market is hardening
considerably. With the additional impact of increased NCCI rates in many
states, and E-mod rule changes, challenges will persist for the foreseeable
future. The only way to secure protection from this three-headed dragon that is
Workers’ Compensation is to have a plan to reduce and control claims exposures,
thus minimizing the effect of these new rules and rates. Now is the time to have a proactive strategy
with a team, of either in-house or outside experts that will keep a strong
focus on safety, claims management and your return to work programs.
J. Michael
Schmidt, CRM, CIC, CLCS is a Certified Risk Manager and Insurance Broker for
Hub International Insurance and can be reached at michael.schmidt@hubinternational.com or on Twitter: @SafeWorkProgram
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