What’s Ailing Workers Comp?

Anyone who has recently tried to purchase commercial insurance knows the surprise: Rates have skyrocketed. In simple terms, the commercial insurance industry is in the midst of what is called a “hard market,” meaning that the traditional competition-based price-cutting used by carriers to gain new business no longer exists. Instead, the focus is on raising rates to try to rebuild sagging profits.

What’s behind the skyrocketing rates? There are a number of causes, all of which have come together at nearly the same time. The first is a general “correction” in the market. That is, insurance markets always go through hard and soft cycles, regardless of other factors. During soft markets, insurers tend to undercut prices for competitive reasons. Then, when a market turns hard, they must not only make up the losses but move into profitable territory. After a sustained soft market of more than 10 years, a correction has been occurring these last couple of years.

Second, and one of the most important causes, has been the loss of investment returns for insurers. Insurance companies generate revenues from two sources. They bring in premiums that they hope will cover losses and provide an extra cushion of profit. They also invest the premiums and try to earn an investment profit. In reality, though, most insurance companies operate at a loss in underwriting and try to make it up in investments, allowing them to charge lower rates.

However, with losses in the stock market these last three years, insurers have seen a reduction in investment income, forcing them to shift to an objective underwriting process.

“Rates fell substantially through the 1990s, especially with the soaring stock market,” explains Joe Joyce, vice president of property and casualty for Keystone Insurers Group of Northumberland, Pa., which offers a specialized Fuel Oil Dealers Program.

“Companies were slashing rates and competing for marketshare,” agrees Steve Stewart, chairman of Stewart-Brimner Group of Ft. Wayne, Ind. “Nine-eleven was just the straw that broke the camel’s back.” Stewart-Brimner is an independent insurance agency, which has a speciality area in working with propane gas distributors and suppliers. “The insurance market, because of the weakening economy, had already begun to suffer,” Stewart states. “That is, companies were having a hard time ‘writing to a profit’ because of weak returns on the investment side.”

Third, fewer insurers in the industry means reduced price competition.

Fourth, a significant increase in losses, particularly those associated with 9/11, is hitting insurance companies hard. Post-9/11 claims on commercial insurers and reinsurance companies could reach as high as $70 billion, the highest for any incident in history, and a tough pill to swallow for the industry which only has about $300 billion in capital worldwide. (Hurricane Andrew, the largest prior single event insurance loss in U.S. history, was a $16 billion hit.)

A final cause is reduced capacity. That is, there has been more demand for insurance and less capacity available from reinsurers. Since 9/11, the market has contracted significantly, and the reinsurance market, which provides support to the insurance market, is also contracting.

In sum, there is a shortage of capacity, and the capacity that does exist costs more. When you have a hard market and decreased capacity, the amount of insurance that can be written decreases. After 9/11, reinsurance capacity dried up for insurers, which drove rates up even higher.

Workers’ Comp Insurance in Specific

The good news is that workers’ comp claims have been decreasing for almost a decade. During the 1990s, for example, the National Council on Compensation Insurance found that the number of claims decreased each year. Even more impressive is the fact that, during a five-year period in the mid-1990s, the most serious injuries decreased the most: Permanent total injury claims declined 36 percent, permanent partial injury claims were down 26 percent, temporary total injury claims dropped 9 percent, and medical only claims dropped 9 percent.

These trends continued into 2001, the most recent year for which statistics were available. According to the National Academy of Social Insurance, workers’ comp benefits dropped, for every $100 in wages, from $1.68 in 1992 to $1.03 in 2001. This is in line with Bureau of Labor Statistics data noting that workplace accidents resulting in lost work days declined from 3 per 100 workers in 1992 to 1.8 in 2001.

So why are your rates increasing rather than decreasing? Of course, if you’re bucking the trend by experiencing more accidents, that’s an obvious reason. However, if your accident experience has been holding steady or declining, the primary reasons are those noted above for commercial insurance rate increases.

The good news is that workers’ comp claims have been decreasing for almost a decade.

Again, a lot of factors have come into play in the last year or two, even before 9/11: At the Public Risk Management Association conference in June 2001, for example, presenters warned of huge commercial insurance premiums. Similarly, an ad for the Workers’ Compensation & Disability Conference published a month before the terrorist attacks noted, “The workers’ comp market, which is already spinning out of control, is also facing the added troubles of the impending recession.”

How long has the workers’ comp market been in trouble? A report published by Weiss Ratings found that insurance companies with at least 50 percent of their business coming from workers’ comp experienced an 86 percent decline in profits during the first nine months of 2000. Also during 2000, the failure rate of workers’ comp insurers was 12 times higher (7.7 percent) than the failure rate of all other commercial insurance companies (0.6 percent).

Besides the challenges facing commercial insurance in general, the workers comp insurance market has additional challenges unique to its niche. According to a report published by Liberty Mutual Insurance in 2002, medical inflation has been growing at between 8 percent and 20 percent a year since 1996, indemnity (wage replacement) inflation has been growing 7 percent to 10 percent a year, there has been a huge increase in the residual (uninsurable risk) market, and workers’ comp-related litigation has been spiraling upward.

The result: For every dollar collected in premiums, workers’ comp insurers are paying out $1.29, according to a report by Marsh Inc. Even though premiums increased an average 13.5 percent in 2001 and continued to rise in 2002, observers expect to see rates continue to increase next year also. Joyce anticipates a continued hard market for at least the next year or so, although it has recently been moderating to some degree.

What about the propane industry?

The most common workers’ comp claims for fuel oil dealers are the same as they are for any type of contractor – strains and sprains, especially to the lower back, according to R.V. Martin, CPCU, business specialist with Kilmer Insurance Co. of Wyalusing, Pa., an agency which has a specialty in providing insurance coverage to fuel oil dealers.

“Employees are hauling heavy hoses. They may also end up installing heavy stoves and other appliances. Also, of course, there are the typical auto-related injuries that occur in any company with a workforce that spends much of its day driving trucks,” Martin says.

Still, despite the fact that few workers’ comp claims arise from explosions or other fuel-related injuries, workers’ comp costs tend to be higher for dealers involved in the transportation of gasoline, according to Martin.

“It is difficult to find coverage for dealers who have a gasoline exposure in excess of 10 percent of the overall gallonage,” he says. “A lot of insurance carriers are concerned about the potential for explosion and hazardous cleanup costs associated with gasoline than they are with other distillates or LPG. As such, there are few carriers who provide this kind of coverage.”

What you can do

Given the hard market, what can you do to reduce workers’ comp insurance costs? First, focus on loss control initiatives. Keep your claims as low as possible by implementing effective safety and risk management initiatives. These days, insurers look for the best and “cleanest” accounts, those with low loss histories.

Second, look for agents, brokers, and/or carriers that specialize in your line of business. “There has always been a limited number of insurance carriers that has aggressively gone after the propane dealers,” explains Stewart.

Keystone offers a unique workers’ comp Safety Group Dividend Plan that allows participants to receive dividend payments of up to 25 percent of their workers’ comp premiums.

“This is designed specifically for fuel oil dealers,” states Joyce. “By aggregating the premium and loss experience of our overall book of business, the accounts in our Safety Group are also eligible to participate in the profits. We try to attract the best of the best into our Safety Group, and the dividend encourages them to be even more safety conscious.”

Membership is based on a number of factors, including past loss experience (accounts which have a three-year loss ratio of 35 percent or less) and the overall quality of the account (which Keystone determines with a pre-inspection that looks at their safety management, safety programs and safety practices).

Third, be prepared to provide a lot of information – information that your agents or brokers may not have requested in the past. Insurers are requiring a lot more details about the businesses they consider insuring.

“The current market is making it more difficult for some companies to get coverage,” notes Joyce. “Insurance carriers are closely scrutinizing accounts for their safety consciousness and their commitment to risk management and quality.”

Keep your claims as low as possible with effective safety and risk management initiatives.

Fourth, consider higher retentions. That is, it often makes sense to retain more risk when the cost of insurance increases and insure more risk when the cost of insurance decreases in order to optimize the cost of risk. In other words, it may be a good idea to consider raising deductibles in this current market.

Finally, negotiate contracts for no longer than a year. With prices this unstable, you would likely be hard-pressed to find an insurer willing to offer a contract longer than a year anyway.

According to the National Safety Council, workers’ comp costs total $120 billion a year. Interestingly, only about $20 billion of this is medical expenses. Fully half represent lost wages and productivity. (Other costs include administrative expenses and miscellaneous costs.)

The U.S. Bureau of Labor Statistics reports that about 9 percent of the U.S workforce files a WC claim during any given year, and the average lost-time WC case exceeds $20,000.

WC is expensive, and it is a wise employer that takes steps to gain control of this cost. Here are eight steps you can take to effectively manage a WC cost control initiative.

Four involve pre-incident strategies: Pre-Employment Screening, Insurance Assistance, WC Team and Safety Program. Four involve post-incident strategies: Incident Management, Physician Selection/Communication, Contact and Return to Work.

“Overall, we find that most of the bulk propane distributors with whom we do business represent a very good class of business,” reports Steve Stewart, chairman of the Stewart-Brimner Group of Ft. Wayne, Ind. “They are required to adhere to a lot of government regulations to begin with, so they tend to be well-trained and are extremely attentive to safety issues.”

Pre-Employment Screening: The first step is to screen job applicants so as to focus on hiring people who are most likely to work safely. Due to the detailed requirements of the Americans with Disabilities Act (ADA), however, employers can no longer arbitrarily refuse to hire certain individuals due to perceived health or other medical conditions or because they have had a history of filing WC claims with previous employers.

However, the ADA does allow employers to ask about injuries, illnesses, WC claims and potential job limitations after making a conditional offer of employment. You are also allowed to require applicants to take a medical exam (including a drug screen) at your expense after making a conditional offer of employment.

“One thing that members of our Safety Group do is engage in very careful employee screening practices,” reports Joe Joyce, vice president of property and casualty for Keystone Insurers Group, which offers a dividend program to fuel oil dealers who quality for its Safety Group.

“We have a very comprehensive hiring process that involves a lot of paperwork, background checks and extensive interviews,” reports Michael DiGiorgio, director of transportation and safety for Paraco Gas Corp. of Purchase, N.Y. Part of the background check includes past workers’ comp claims. “The interviews help us learn about the applicants, their families, and their attitudes toward work,” he notes. Some interviews can last for an hour.

Insurance Assistance: “Most workers’ comp specialty carriers have very fine loss control departments and can render a tremendous amount of assistance to propane dealers,” states Stewart.

Keystone Insurers Group, for example, offers loss control and claims services that include facility surveys, assistance in setting up safety and training programs, a video library of loss prevention and loss reduction programs, a “Drive Alive”Award Program to recognize accident-free drivers, and a professional truck driver defensive driving course. “These are very popular programs, and fuel oil dealers are increasingly taking advantage of these types of services, especially in light of the hard market,” states Joyce.

WC Team: Employers who achieve the greatest success in managing WC costs formally create WC teams and involve employees in WC cost management issues. No one person can ever achieve significant WC results. Success requires a group with a common goal.

Safety Program: While all eight elements of a successful WC cost management program are important, arguments can be made that the two most important are the safety program (in the pre-incident phase) and the return-to-work program (in the post-incident phase).

The more you can do to reduce accidents, injuries and illnesses in the first place, the fewer WC cases you will need to manage later.

“Members of our Safety Group are very active with safety committees and employee involvement in these committees,” reports Joyce. “This tends to create a sense of commitment to safety and pride in safety performance among employees.” R.V. Martin, CPCU, business specialist with Kilmer Insurance Co. in Wyalusing, Pa., adds: “We find that our best fuel oil dealers in terms of safety performance are those who schedule safety meetings at least once a month.”

Prior to taking over his current position, Joe Rose, president of Propane Plus in Rehoboth, Mass., was the safety, training and regulatory compliance manager for a major marketer in the Northeast. He learned about the importance of safety there. “We have regular safety meetings, and every meeting has a component related to workers’ comp, such as eye protection, back protection and personal protective equipment (PPE),” he states. “We are also very diligent in making sure employees are following safety rules, such as wearing the proper PPE.”

The company’s commitment has paid off. Propane Plus has not had a lost-time WC claim in the last five years. “All we’ve had are a few minor cuts and burns,” he reports.

Safety involves accountability, according to DiGiorgio. “Since safety is our number one priority, managers are held accountable for safety,” he notes. “With the employees, we focus on their behavior.”

In fact, Paraco has implemented a behavior-based safety program — identifying behaviors that lead to accidents and helping employees create new behaviors. “We have found that employees really do want to work in a safe environment, and they also care about their own and each other’s safety,” he adds.

Incident Management: The very first requirement following an injury is to provide proper treatment to the injured employee. Beyond this, it is important to make sure the employee receives follow-up treatment, conduct an accident investigation to determine root causes, and then implement steps to prevent similar incidents. That is, after an injured employees receives proper treatment, a team should identify the root causes of the incident. These are not always obvious from the accident reports. The team should then take action based on the recommendations to prevent a similar incident. The team should also address unsafe acts and unsafe conditions related to near misses. “We always look for the root causes of accidents that occur so we can take appropriate countermeasures,” DiGiorgio says.

Physician Selection and Communication: Working with occupational physicians is another integral strategy to managing WC costs. Occupational physicians not only have more experience in treating occupational injuries, but also understand the benefits (to employees and employers) of getting employees back to work as quickly as medically possible. When employees are seriously injured, they should usually go to an emergency room first, then be referred to appropriate specialists. You should maintain a broad list of approved physicians from which employees can select.

“When an employee is injured, we fax a job description to the physician, so he or she knows exactly what the employee does,” states DiGiorgio. For example, the employee may just tell the physician that he is a truck driver. This doesn’t tell the physician that he is responsible for lifting tanks of different sizes and weights, carrying 50-pound toolboxes, installing appliances, and so on. “Without this information, a physician may return an employee to work before he has recovered sufficiently to begin work again, and the employee may reinjure himself,” he notes.

Contact: Until about 15 years ago, it was almost unheard of for employers to make contact with employees who were at home recuperating from work-related injuries or illnesses, believing that was the job of the insurance company and the claims representative.

It has since become evident, though, that employees who fail to receive personal contact from employers, particularly their first-line supervisors, not only take longer to heal, but quickly begin to feel alienated, frightened, and/or angry about their employment status. Such attitudes can easily lead to longer recuperation periods, increased WC costs and, in many instances, decisions on the part of employees to seek outside legal help . Personal contact with injured employees is a very important piece of getting them back to work, and supervisors should be diligent in this effort.

Return to Work: As with employee contact, return to work strategies were foreign to most employers until the early 1980s. It was thought that employees should stay at home until they were fully able to return to work. Research consistently shows that, the sooner an employee gets back to work, the quicker the chance of recovery.

“Our best fuel oil dealer clients have formal light-duty, return-to-work programs, where employees who are off work due to injuries can return to less strenuous jobs as they are recuperating,” notes Martin. “Examples include light janitorial work, office filing, etc.”