By Bruce Zaccanti, a Chicago-based principal in the Insurance and Actuarial Advisory Services practice of the Financial Services Office of Ernst & Young LLP
Previous experience has taught insurers and employers to expect "domino effect" of insurance
claims escalation--increases in both the frequency and severity (the total cost, including medical, indemnity and expenses) of claims during a recession. The Insurance Information Institute reports that, although frequency is down 4 percent, severity has increased by 3 percent since the start of the current recession in late 2007.
That severity of losses grows faster in a weak employment market than in periods of economic expansion and higher employment. As workers recognize that their jobs may be in jeopardy, the reporting of losses, increased requests for permanent disability and requests for extensions in claims duration will likely swell. Carriers will also face more demands and payments for legal services and permanent partial disability awards.
Significant growth in workers' comp claims, along with claims leakage, are troublesome issues for insurers, even in a strong economy. Escalation in claims, particularly complex, long-tail losses, adds costs and reduces margins, leading to rate increases and the need for carriers to put up additional capital.
While employers will gradually resume hiring, there will be fewer positions available. In addition, a significant number of the jobs that are restored or created will be sourced outside of the United States. This job shortage will limit the ability of insurance carriers and third-party claims administrators to make effective use of what has historically been one of the most efficient tools in controlling overall claims duration and expense--early return-to-work programs.
NO QUICK CURES
There are no quick cures or miracle tools to attack spikes in workers' comp claims frequency and severity specifically. Instead, the times call for employers and insurers to strengthen their best practices in all aspects of workers' comp claims management, particularly in four key areas:
Occupational versus nonocccupational injuries. With an aging domestic workforce, it will be ever more important to identify occupational versus nonoccupational injuries. Companies will need to investigate reported occupational claims very aggressively to assess the validity of each case. This should reduce the potential for increased claims frequency and severity to develop quickly.
Preventive human resources best practices. As young workers join the workforce and older workers decide to postpone their retirement, it will be more important than ever for companies to improve pre-employment screening, job design, employee wellness and conditioning, ergonomics, use of personal protective equipment and safety training. This up-front investment will be critical in controlling the frequency and severity of future claims.
Tort reform. It is necessary to ensure that tort reform recognizes advances in outpatient and ambulatory surgery, which have resulted in decreased disability permanence and severity. Despite these advances, there has been no adjustment to the permanent disability impairment benefits awarded for occupational injuries.
Data-driven workers' comp management. Finally, companies that take a data-driven approach to their workers' comp programs can find opportunities to cut costs and improve effectiveness.
Data mining can identify and mitigate claims fraud from claimants, medical providers, legal providers and other claims-related vendors. Predictive modeling, which utilizes both internal claims data and external demographic and socioeconomic data, can prove useful in developing more robust underwriting methodology to identify, classify, price and select risks across regions and industries.
COMBATTING CLAIMS ESCALATION
Insurers and employers should take a disciplined approach to combating claims escalation. This means carefully monitoring claims data, understanding changing employee behavior, assessing the effectiveness of claims management capabilities, particularly among third-party providers, and working with employers to mitigate the frequency and severity of claims.
Employers and their insurers must recognize that the workplace is the frontline in dealing with claims escalation and, of course, claims fraud. Then they must implement specific tactics to defend themselves, such as:
--Taking opportunities to use return-to-work or modified duty to mitigate the frequency and severity of large-exposure workers' comp claims.
--Requiring detailed audits of the third-party or claims administrators to ensure they are focusing productively on medical case management, cost containment, recovery, fraud detection and pursuit, vendor management, and accurate case reserving and excess reporting.
--Developing dedicated claims teams to ensure that adjusters know the client's industry and exposures, medical providers, attorneys, nurse case-management professionals and medical networks by geography.
--Using incentive-based contracts with administrators to provide incentives for optimal claims handling.
As the recession moderates, property/casualty carriers will seek to increase product pricing and improve returns in their investment portfolios. However, they will also be faced with rising Workers' Compensation (WC) claims that will add to their current and future liabilities.
October 1, 2009
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