Musings on the State of Workers Compensation

Group captives have played a large role in allowing employers to self-insure their workers compensation risks, especially during hard markets. Recently, however, the workers compensation markets have experienced a sustained period of lower rates. 

As reported in "Workers Comp Rates Set To Decrease Again in 2019," an October 10, 2018, article by Louise Esola appearing in Business Insurance, "Many of the latest 2019 [state] filings follow midyear reductions for 2018, announced over the past several months, and an NCCI [National Council on Compensation Insurance] report released September 25 detailed a 5-year cumulative decrease of 19 percent in comp claim frequency." 

In the article, Trey Gillespie, assistant vice president of workers compensation for the Property Casualty Insurers Association of America, is quoted as saying, "Most states have experienced an ongoing decline in claims frequency while indemnity, severity, and medical severity have been relatively stable." The article also goes on to say that claims frequency has declined by 6 percent in both 2017 and 2018, up from a long-term average of 4 percent. 

The question most captive owners should be asking is "How likely is this trend to continue?" In today's market, workers compensation claims can have a life span approaching 50 years, so pricing mistakes today can take a very long time to materialize. 

Let's take a closer look at the current state of workers compensation.

Workers Compensation and InsurTech

In "Innovation and Productivity in Captive Insurers," a Captive.com article published in July 2018, we noted the impact of wearables and location data on workers compensation, as follows.

The advent of wearable technology combined with mobile data location will help reshape both workers compensation and liability insurance. Wearables can be used to prevent accidents in high-risk industries by ensuring workers are performing tasks in the correct manner. Combining them with mobile data location, which can pinpoint where employees or policyholders are, allows for better assessment of risk. 

A December 2018 Expert Commentary article on IRMI.com takes a closer look at how InsurTech is changing the face of the workers compensation market.

The article, titled "InsurTech: Revolution, Evolution, or Hype?,” written by Mark Walls of Safety National and Kimberly George of Sedgwick Claims Management Services, Inc., notes the following.

Machine learning is actually an application of [artificial intelligence].… Some third-party administrators and insurers are using this technology to quickly flag claims that could be in danger of an adverse development. The computer takes a claim, runs it against data on other claims, and can determine if it is likely to become severe. As soon as the machine learning model detects something different about a claim—something a human would not be able to identify as a potentially huge loss—it alerts the claims manager to intervene and manage it more carefully. The effect is to drive the outcomes of claims in a more positive way.

The authors conclude, "InsurTech can be used to detect when and how certain actions will likely lead to injuries, allowing humans to set up systems to prevent those conditions."

For captive insurers particularly, this technology has the capability to level the playing field between themselves and the larger, national insurers. However, captive owners need to become familiar with the technology and look for cost-effective ways to adopt it.  Those with a longer-term point of view will realize monies used today to employ this technology could have a substantial payoff down the road in decreased claims costs.

Managing Workers Compensation Costs

We also recommend captive owners writing workers compensation download a copy of a recently released benchmarking study from Rising Medical Solutions. The 2018 report, Workers' Compensation Benchmarking Study, updates 2013 data. The new 31-page report takes a critical look at ways to manage medical costs associated with workers compensation claims. According to the study, medical costs account for approximately 60 percent of the expense in a workers compensation claim. The report was commissioned specifically to investigate how participants in the industry are working to contain these costs.

The Executive Summary says, "During the 2018 study's focus group research, industry executives examined key issues influencing medical performance management. The fundamental question the study undertakes is how organizations turn the challenges identified into solutions and action."

It continues, "This Report summarizes the greatest impact opportunities and most potent strategies that payers may consider over the next 2 to 3 years. These actionable strategies were identified by industry executives through qualitative research and are based on their collective experiences, perspectives, insights, and opinions."

While we are not permitted to reprint the suggestions here, again we encourage captives writing workers compensation to request a copy of the report. It is possible your captive may already be employing some of the strategies recommended by the participants. At the very least, this report provides a template for benchmarking your organization's initiatives against the best practices identified by some of the greatest minds in the industry.

So, in closing, we consider ourselves to be cautiously optimistic that the current workers compensation pricing reductions are warranted and the long-term trends look positive. Having said that, we also caution captive owners to remain vigilant because a 50-year tail is a very long time in the insurance industry and surprises continue to occur.