WC Rates on Downward Trend
Workers’ compensation rates are finally beginning to reverse an upwards trend. Fifteen out of 20 rate and advisory loss cost filings submitted by the National Council on Compensation Insurance (NCCI) so far this year have displayed decreases. Nine out of 10 filings submitted in the risk assigned market have also reflected decreasing rates.
“It really is a fascinating dynamic,” said Eric Silverstein, risk management leader at Lockton’s Dallas office. “We’re getting close to a tipping point where, if you look at the number of states that have passed through rate decreases, it’s getting close to a majority.”
Those decreases, however, may not translate into lower prices for employers right away.
“At our annual conference, we use certain buzzwords. A couple years ago, we said the numbers were ‘conflicted.’ Last year we called them ‘encouraging.’ This year they are ‘balanced,’” said Peter Burton, senior executive for state relations at NCCI.
Rate changes in NCCI-rated states range from an increase of 6.8 percent in D.C. to a decrease of 10.4 percent in Kansas. While a handful have posted increases or no change at all, the majority will propose rate reductions going into 2015.
“Florida just went down 2.4 percent. Oklahoma has significant reform and was down about 15 percent,” Silverstein said. “So it will vary by state and by class code within each state as well.”
“However, that doesn’t necessarily reflect into price decreases for all buyers,” he said. “Insurers have a certain amount of flexibility in their underwriting process, and they won’t necessarily use that filed rate, depending on what the particular state regulations are.”
The price that companies ultimately end up paying will be determined by their respective risk profiles. Those with positive profiles will reap the benefits of the decreased rates, while those with poor risk profiles could end up paying more.
Regulators, Silverstein said, file their rates based on results from preceding years, but insurers will ultimately price their products to anticipate future fluctuations as well.
Nonetheless, the rate decreases are encouraging signs of a softening and more competitive workers’ comp marketplace.
Economic and Market Forces
The improving economy is partly to thank. Rising employment means bigger payrolls and bigger premiums. $42 million in workers’ comp premiums have been written this cycle, which runs from July 1 to the end of next June, according to Burton.
“This is the third year in a row it’s gone up,” he said.
Good underwriting results have also contributed, as well as a decline in injury rates. According to the Bureau of Labor Statistics, “No private industry sector experienced an increase in the rate of injuries and illnesses in 2012.” The injury and illness incidence rate for 2012 was about 3.4 cases per 100 full-time workers, which “continues the pattern of statistically significant declines that, with the exception of 2011, occurred annually for the last decade.” According to Burton, some states have seen injury rates fall by as much as 58 percent.
“The frequency of loss is down,” Silverstein said. “We experienced that with our clients, and it’s now being recognized by the rating agencies.” As the economy improves, however, frequency could potentially climb up again alongside rising employment rates.
Medical and indemnity cost increases are also slowing down, contributing to the trend. Medical costs have risen an average of three percent, down from seven percent increases in past years; indemnity payments have risen only two percent, down from consistent five percent increases over the past 10 years.
The growing popularity of closed formularies could also be contributing to reduced medical costs, Silverstein said. Closed formularies deny coverage for any drugs not included in the program, such as brand name prescriptions for which cheaper, generic versions exist. Early results from states that have adopted them show reduced costs associated with prescription drugs.
“We have another 16 filings to go, and they could be different,” Burton said. “Every state is its own microcosm. But predominantly we are seeing decreases.”
Non–NCCI rated states are witnessing the same trend.
In April, the Pennsylvania Department of Insurance and Labor & Industry announced a 5.15 percent workers’ compensation rate reduction.
Pennsylvania Insurance Commissioner Michael Consedine said in a press release, “As a result of this action, we estimate that Pennsylvania employers will experience annual savings in workers’ compensation insurance costs of approximately $140 million.”
This is the third time the state has reduced rates since 2012, saving approximately $410 million for employers. Consedine called this a “very positive trend.”
In California, the Workers’ Compensation Insurance Rating Bureau (WCIRB) governing committee voted on Sept. 4 to reduce the rates originally recommended in its mid-August Pure Premium Rate Filing. The vote was based on the WCIRB Actuarial Committee’s review of new insurer experience complied in late June which shows “lower than anticipated loss development in the second quarter and some moderation in the 2013 indemnity claim frequency growth,” according to a statement from the Bureau.
The amendment to the filing proposes premium rates that average $2.77 per $100 of payroll, down from $2.86 per $100 that was recommended in August. Even with the decrease, however, the new rate is $0.20, or 7.9 percent higher than the overall industry average of $2.57 as of July 1, 2014.
Some states will see much more significant decreases. Oregon’s base rate, for example, will decrease by an average of 5.3 percent next year, on top of a 7.6 percent decline in 2014. Employers will pay an average of only $1.27 per $100 of payroll in 2015, seven cents down from 2014.
As Okla. Insurance Commissioner John D. Doak said, “When employers pay less for workers’ compensation insurance, they can more easily grow their business, hire additional workers and expand local economies.” Over the past two years, Oklahoma has decreased its loss cost levels by about 22 percent.
7 Dangerous Natural Catastrophe Risks
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A New Dawn in Civil Construction Underwriting
Pennsylvania school children know the tunnels on the Pennsylvania Turnpike by name — Blue Mountain, Kittatinny, Tuscarora, and Allegheny.
San Francisco owes much of its allure to the Golden Gate Bridge. The Delaware Memorial Bridge commemorates our fallen soldiers.
Our public sector infrastructure is much more than its function as a path for trucks and automobiles. It is part of our national and regional identity.
Yet it’s widely known that much of our infrastructure is inadequate. Given the number of structures designated as substandard, the task ahead is substantial.
The Civil Construction projects that can meet these challenges, however, carry a unique set of risks compared to other forms of construction.
“The bottom line is that there is always risk in a Civil Construction project. If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance.”
– Paul Hampshire, Vice President – Civil Construction, LIU
The good news is that recent developments in construction standards and risk management techniques provide a solid foundation for the type and risk allocation of Civil Construction projects they are underwriting. Carriers need to be able to adequately assess the client and design and construction teams that are involved.
For Builder’s Risk Programs, a successful approach prioritizes a focus on four key factors. These factors are looked at not only during the underwriting phase of the project but also in the all-important site construction phase, under the umbrella of a Risk Management Program, or RMP.
Four key factors
Four key factors that LIU focuses on in underwriting and providing risk management services on a Civil Construction project include:
1. Resource knowledge and experience: When creating a coverage plan, carriers work to understand who is delivering the project and how well suited key staff members are to addressing the project’s technical and management challenges. Research has shown that the knowledge and experience of those key players, combined with their ability to communicate effectively, is a big factor in the project’s success.
“We look to understand who is delivering a project, their expertise and experience in delivering projects of similar technical complexity in similar working conditions, even down to looking at the resumés of people in key positions,” said Paul Hampshire, Houston-based Vice President with Liberty International Underwriters.
2. Ground conditions and water: Soil and rock composition, the influence of ground and surface water, and foundation stability are key additional considerations in the construction of bridges, tunnels, and transit systems. If a suitable level of relevant ground (geotechnical) investigation and study has not been undertaken, or the results of such work not clearly interpreted, then it’s a red flag to underwriters, who would then question whether the project risk profile has been adequately evaluated and risks clearly and transparently allocated via suitable contract conditions.
“As we all know, ground is very rarely a homogenous element within Civil Construction projects,” LIU’s Hampshire said.
“It tends to vary from any proposed geotechnical baseline specification with the consequential potential for changes in behavior during construction. We need to understand who has assessed the condition of the ground, its behavior and design parameters when compared with a particular method of construction, and all importantly, who has been allocated the ground risk in a project and the upfront mechanisms for contractual ground risk sharing, if applicable,” he said.
Knowing how much water is associated with the in-situ ground conditions as well as the intensity, distribution and adequate accommodation (both in the temporary as well as in the permanent project configurations) of rainfall for a site location and topography are also key. Tunneling projects, for example, can be hampered by the presence of too much or unforeseen quantities of groundwater.
“In major tunneling infrastructure projects, the influence of in-situ groundwater pressures and /or water inflows is a major factor when considering the choice of excavation method and sequence as well as tunnel lining design requirements,” LIU’s Hampshire said.
According to a recent article in Risk & Insurance, tunneling under a body of water is one of the most challenging risk engineering feats. Adequate drainage layouts and their installation sequence for highway projects and, in particular, the protection of sub-grade works are also important. “But under all circumstances, we need to understand how the water conditions have been evaluated,” Hampshire said.
3. Technical Challenges: This risk factor encompasses the assessment of the technical novelty or prototypical nature of the project (or more often, specific elements of it) and how well the previously demonstrated experience of both the design and construction teams aligns with the project’s technical requirements and the form of contract determined for the project. The client can choose the team, but savvy underwriters will conduct their own assessment to see how well-suited the team is to technical demands of the project.
4. Evaluation of Time and Cost: With limited information generally provided, we need to be able to verify as best as possible the adequacy of both the time and cost elements of the project. Our belief is simply that projects that are insufficient in either one or both of these elements potentially pose an increased risk, as the construction consortium tries to compensate for these deficiencies during construction.
Small diameter Tunnel Boring Machine designed for mixed ground conditions and water pressures in excess of 2.5 bar.
In the 1990s and early years of this millennium, a series of high-profile tunnel failures across the globe resulted in major losses for Civil Construction underwriters and their insureds.
In the early 2000s, both the tunnel and insurance industries worked together to create new standards for high-risk tunneling projects.
A Code of Practice for the Risk Management of Tunnel Works (TCoP) is increasingly relied on by project managers and underwriters to define the best practices in tunnel construction projects. This process ideally starts at project inception (conceptual design stage or equivalent) and continues to the hand-over of the completed project.
LIU’s Hampshire said alongside TCoP, the project-specific Geotechnical Baseline Report and its interpretation and reference within the project contract conditions gives the underwriter greater clarity as to who recognizes and carries the ground risk and how it’s allocated.
“The bottom line is that there is always risk in a Civil Construction project,” Hampshire said. “Is the risk transparently allocated or is it buried? If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance,” Hampshire said.
Paul Hampshire can be reached at Paul.Hampshire@libertyiu.com.
To learn more about how Liberty International Underwriters can help you conduct a Civil Construction risk assessment before your next project, contact your broker.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.