Facing the Road Ahead
There are both new and evolving challenges facing workers’ comp practitioners in the coming years. But there is also an increasing level of sophistication among those who are working to meet those challenges.
Top carriers came together for a meeting of the minds on Wednesday for a session entitled “Workers’ Comp Insurance Exposed: Views from the Industry’s Leading Carriers.”
The session, led by Eric Silverstein, senior vice president and risk management leader for Lockton Cos., included participation from Russell Johnston, casualty president for the Americas Region with AIG Inc.; Debbie Michel, executive vice president, commercial markets with Liberty Mutual Insurance and president of Helmsman Management Services; and Sean D. Martin, vice president with The Travelers Cos.
One development carriers are encouraged by is an increase in employers exploring benefits integration, bringing together disability, health care and workers’ comp.
“The challenge is that many customers look at it in a bifurcated way,” said Johnston. A more unified approach can help employers address the issues that affect outcomes across the spectrum, which are of increasing concern for employers as ongoing economic woes continue to force older employees to work as long as they’re physically able.
A more holistic approach can help improve outcomes from both the occupational and the non-occupational sides by working to improve the overall health of the employee population.
“If you have a healthy employee, regardless of age,” said Johnston, “you’re going to have a better outcome.”
The potential to positively affect outcomes and cut costs across the whole of an employee population can also provide substance for workers’ comp professionals trying to make the business case for wellness investments such as on-site gyms or an on-site nutritionist, Johnston said.
Going forward, there are plenty of positives to build from, panelists said. Currently, 22 states have filed for rate decreases.
“If there’s any point in time where I think the industry has been exceptionally good at risk selection and pricing, it’s today,” said Johnston. And employers that have been diligent about managing their risk profiles can expect significant improvement.
Still, there’s a great deal of room for improvement, as evidenced by California’s ongoing challenges. Despite the most recent round of reforms, California is still plagued by dramatic increases in injury frequency and severity, and by crushing backlogs in the independent medical review process.
The uncertain fate of TRIA’s renewal is still on the radar for employers as well as carriers, but panelists said they are cautiously optimistic.
They are somewhat more concerned about other looming threats such as physician capacity and hospital consolidation, the Affordable Care Act, and cost shifting into the workers’ comp space, said Martin.
Carriers are also closely watching the development of interest in workers’ comp alternatives.
The formation of ARAWC – the Association for Responsible Alternatives to Workers’ Compensation – by many large companies is a clear sign that there is interest in an expansion of alternatives to state workers’ compensation systems, such as the nonsubscriber system in Texas and the recently enacted Oklahoma option, to other states.
In the end, said Michel, it will be up to states to find the “balance between doing the right thing for the economy and doing the right thing for the injured worker.”
Program Business Administrators Outpace Market
The financial performance of commercial property/casualty insurance program administrators continues to outpace the performance of the overall property casualty insurance markets, according to the Target Markets Program Administrators Association.
The TMPAA’s latest annual survey revealed that program business premium revenues increased by 9.8 percent reaching $30.1 billion in 2013, up from $27.4 billion in 2012.
That’s compared to a 4.6 percent increase in direct premiums written for the overall commercial lines marketplace.
“Carriers are attracted to program administrators for several reasons, the biggest being the segment’s ability to outperform the general marketplace through focused underwriting and deep understanding of the industries being served by expert underwriters,” said David Springer, group president and COO of NIP Group, who also serves as president of the TMPAA.
“Additionally, it is a more efficient distribution model for a carrier as they can ‘pick up’ volume through a single source rather than building distribution in a class over time,” he said.
Chris Pesce, president of Maritime Program Group and a member of the TMPAA Advisory Board, said the success of the program business is driven by “two specific reasons.”
“Firstly, there’s a record amount of capacity in the market that needs to get deployed,” he said.
“Carriers have the capacity and desire to grow and expand but often lack the distribution. The PA model allows the carrier to quickly gain traction in a niche industry segment for which they had no prior experience.
“Through the PA, they get immediate penetration with the retail distribution that’s driving that class of business without having to incur the expense of finding them one over one.
“For example, a commercial auto underwriter isn’t likely to succeed as a yacht underwriter.” – Chris Pesce, president of Maritime Program Group and a member of the TMPAA Advisory Board
“Secondly, the PAs typically engage in a niche class for which they develop a deep expertise and often a personal passion.
“From an underwriting perspective, this leads to a much more intimate knowledge of that class and understanding of how to underwrite the class profitably. This is hard for the carrier to replicate using staff underwriters that have no specific passion or expertise directly in the class of business they’re underwriting.
“For example, a commercial auto underwriter isn’t likely to succeed as a yacht underwriter,” Pesce said.
“In addition, the overall acquisition cost of utilizing a PA is more attractive than trying to build a profitable portfolio organically when contemplating the cost of building the retail distribution, underwriting talent and systems support. If a PA brings all of that to the table, it’s a compelling model for the carrier to consider.”
However, a number of challenges were also identified by the study, including technology, which was highlighted by both administrators and carriers as one of the top issues facing the program space.
“Technology, when deployed effectively, can be a game-changer,” Springer said, but he noted program underwriting operations “can be expensive to run and interaction with carrier systems can be very manual.”
“Deployment of technologies that can gather and move information into and out of our agency management, rating, policywriting and CRM solutions can generate big expense savings over time, which help program administrators reach their full potential.”
“The required experience and skills,” he said, “are as unique as the niches the programs serve and finding the right talent — or growing it — can be difficult.” – David Springer, group president and COO of NIP Group, and president of the TMPAA
Pricing is another challenge.
“With so much capacity in the market and cheap reinsurance that’s overly abundant, there will be continued pricing pressure in all directions,” Pesce said.
“Unfortunately, the market entrants that have capacity to deploy will inevitably buy their way into the desired market share at pricing that is often unsustainable until the results catch up to the portfolio, which often takes years, not months.
“This all means continued downward pressure on pricing for the foreseeable future,” he said.
The survey highlighted a number of talent recruitment and training differences between insurers and brokers, especially as related to professional certifications.
And, according to the study, hiring and retaining qualified personnel in the program space continues to be a major challenge — with administrators saying they are boosting training programs to better support the needs of both new and experienced underwriters.
“Nearly half of the administrators polled do not require their applicants to have professional designations,” according to the study. “Thirty-six percent say they prefer underwriters with professional designations and will pay more, while 21 percent prefer underwriters to have professional designations, but will not pay more.
“In the case of insurers, half of those polled prefer underwriters with professional designations and are willing to pay more. Thirty-seven percent of the respondents do not require their applicants to have professional designations, while 13 percent prefer underwriters with professional designations, but will not pay extra.”
Springer said “scale and funding” could explain that difference of opinion.
“It is interesting that positions with expertise in program administrator shops are some of the hardest to find good candidates for but most program administrators don’t have the resources that a carrier does when engaging in recruitment or even formalized training programs to grow future talent.
“That is one of the driving forces behind the investment our association has made in Target University — where we endeavor to make available education to program administrator teams and the carriers and vendors that serve them.
“The required experience and skills,” he said, “are as unique as the niches the programs serve and finding the right talent — or growing it — can be difficult.”
3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.