Workers’ Comp Forecast for 2014
1. Predictive Analytics.
Using predictive analytics effectively is the holy grail for any large company.
If you are a staffing company, oil field service operation, or retailer working on tight margins, getting this right can mean the difference between a profitable year or needing to increase liability accruals to account for ever-increasing long tail development.
There is a need to not only develop models for making predictions but to be able to provide actionable information that can be used to quantify the cost/benefit of taking very specific actions. If this could be accomplished, insurers and large self-insured companies could efficiently allocate resources to the areas likely to provide the most meaningful benefit.
2. TRIA is Non-Renewed.
The Terrorism Risk Insurance Act (TRIA) or Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is scheduled to expire on Dec. 31. Even now, as we are without a decision, insurers are being exposed to unlimited terrorism-related workers’ compensation liability (based on an annual policy period).
TRIA has been in place since 2002, when Congress acted to ensure that there was a market-based solution for insurance losses arising out of terrorist acts. It is generally agreed that the sponsors of that Act suggested that it could one day be phased out, and throughout its life, the protection has been diminished. However, what remains are clear limits that comfort investors and others in the financial community.
While the Act remains unrenewed, it is the witching hour for insurers. Consequently, insurers are in the process of preparing their position with respect to the issue.
3. Loss Costs in California Deteriorate.
When California Gov. Edmund “Jerry” Brown signed the workers’ compensation reform legislation into law Sept. 18, he said that it would reverse a four-year trend of rate increases. According to the data made available to us, the insurance market clearly disagrees.
As a matter of fact, California is the state producing the highest rate increases. Possibly, the reform medicine is slow acting and good news for employers in California is on its way.
The problem in California is not a new one. At one point, the state insurance fund was writing more than 50 percent of the workers’ compensation market. That
is the fund that was created to be the market of last resort as it is a government enterprise.
What is clear is it is becoming more common for insurers to place limitations on the amount of California workers’ compensation they will write. The concern is that in the current environment it is simply impossible to be profitable. It is a subtle movement to avoid a head-on clash with regulators.
4. IRS Focuses on Insurers and Captives.
The uniqueness and secret to success for the insurance industry is its favorable tax treatment. Money comes in, expected future losses are deducted and cash is available for investment and growth. The big difference is that expenses do not need to be paid but only accrued to reduce taxable income. That leaves more cash for investment.
There has been discussion about scrutiny of taxation for insurance companies and captives, the alternative risk tool of choice. Captives are on the short list for IRS auditors and if captives are not properly structured, there is more risk that those captives will now be challenged.
5. Trial Attorneys to Target Non-Subscription.
Approximately one-third of the employers in Texas are non-subscribers. Why? Because it makes sense. It saves on frictional costs, quickly provides benefits to employees who are injured and eliminates much of the soft fraud. It has been so successful that Oklahoma enacted its own reform effort, and Tennessee is considering legislative initiatives to enhance opportunities for non-subscription.
Even without a survey, we can safely assume that the majority of plaintiff’s attorneys are not big fans of non-subscription. Benefits for non-subscription are paid out via the Employee Retirement Income Security Act. There is no need for a legal process. There is no waiting period. There are clear definitions that are subject to arbitration.
In contrast, workers’ compensation commonly requires a legal process. Should an attorney become involved in a case where there is an injury within the course of employment, the attorney’s share, although not as large as in a tort case, is for all intents and purposes no-fault. For legal firms, workers’ compensation is high volume, low risk and considerable reward.
Consequently, we would think that should non-subscription become popular in Oklahoma and be signed into law in Tennessee that it may become a target of the bar.
6. Medicare Set Asides Become Increasingly Difficult.
MSAs, as they are called, are a complicated thing. In general, money is set aside to pay benefits for costs that otherwise would be funded by Medicare. It applies only to certain classes of individuals. With an aging workforce, it has become a big and expensive issue for insurance companies.
The problem is that claims can’t be settled quickly and efficiently as government sign-off is required. The impact has been a substantial increase in large claims severity. Further, it has helped to create longer tail development. What this means is that all companies will end up with longer periods of loss development in the form of greater IBNR (Incurred but not reported losses). It translates into more collateral, higher costs and higher liability accruals.
7. Bond Yields Plummet.
Nothing has had a greater impact on the insurance market than the change in bond yields post-2008. It required underwriters to make a profit underwriting. That changed the dynamics of the marketplace and the way the big insurers look at their business.
While it is hard to imagine, it is possible that rates of return on bonds could get much lower. Should there be a European meltdown, recession in Asia or the refusal of China and others to continue to fund our deficits, rates will fall. Should this happen there will be no escaping the need for rate adjustments across all lines of insurance as the dynamics of the current market will be left smoldering once again.
BOOCS Program Could Lower Obesity-Related Injury Risk
Employers seeking to improve their employees’ health and reduce illnesses and injuries may want to look to a Japanese model. By instituting a unique health education program started in that country, health risks among obese workers were significantly reduced — up to 15 years later.
The program used a new method of health education among workers in the 1990s. A follow-up study published recently in the Journal of Occupational and Environmental Medicine may hold promise for an alternative to traditional methods to help improve the well-being of the workforce.
“The results indicate a mortality benefit by participation in [the Brain-Oriented Obesity Control System] program,” the study said. “For prevention of metabolic syndrome, effective measures are strongly needed in the future, and it is suggested that [the] BOOCS program will contribute to them as a new approach for health promotion.”
The follow-up study results were released as the prevalence of obese workers continues to increase. According to the study, the increase amounts to “25.1 percent for males and 23.9 percent for females in the United States as a body mass index of 30 or higher in 2003 to 2009, and 28.5 percent for males and 11.6 percent for females in Japan as a BMI of 25 or higher in 2011.”
Along with the increase in BMI is a higher risk of metabolic syndrome, which increases the risk of cardiovascular disease, especially heart failure, as well as diabetes. Metabolic syndrome is defined as a disorder of energy utilization and storage, diagnosed by a co-occurrence of three out of five conditions, including abdominal obesity, elevated blood pressure, elevated fasting plasma glucose, high serum triglycerides, and low high-density cholesterol levels.
“Hazard ratios were calculated with survival curves drawn to evaluate the mortality effects by the program participation,” according to the report. “The results support a protective effect on mortality by participating in [the] BOOCS program.”
Traditional approaches to behavior modification typically begin with prohibitions against unhealthy behaviors such as eating high-caloric foods, drinking alcohol, and smoking. Because of its strictness, this method “frequently results in the rebound of body weight and the appearance of [a] guilty conscience,” the report said.
BOOCS “begins with no prohibition,” the report said. It “is a unique method prioritizing the recovery from fatigue, in particular, ‘brain fatigue,’ and it eventually induces better lifestyle modification and improvement of body weight and serum lipids.”
The program includes two principles and three rules as a basis for “effective and active guidance.” The principles are “do not prohibit or order yourself as possible” and “do something pleasant for yourself.” The rules include:
- Do not practice what you dislike even if it is good for your health.
- Do not prohibit what you like even if it is bad for your health.
- Do only what you like among good things and matters for your health.
The Japanese inventor of the program has said the approach “is quite useful for making the participants fully aware of the fundamentals of health promotion and disease prevention, which leads them to modify their health behavior,” according to the study. “He also insists that prohibitive and compulsive instructions are ineffective for behavior modification, and, in particular, those people who understand [the] significance of health would result in failure through such methods and fall into vicious circle such as rebounding body weight.”
The authors do not speculate on why the program works and say more research is needed. However, they point to the study results as proof that it is effective.
Public service employees working for a municipal government in Japan were introduced to a health service organization in 1992, which included health exams, seminars and guidance, and insurance programs. The BOOCS portion of the service included 10 one-day and two-day seminars annually with lectures on health care by physicians and practical exercises by professionals such as a physical instructor, a dietician, and a psychologist.
The initial study and 15-year follow-up research into an obesity program among Japanese workers included three groups. Workers who participated in the Brain-Oriented Obesity Control System were called the intervention subjects. Among the nonparticipants, comparative obese controls were those who had a body mass index of at least 25 or health problems related to obesity while reference subjects were the remainder. In the follow-up study 15 years later, the researchers identified participants who were deceased and their causes of death.
“Compared with comparative obese controls, hazard ratios for all causes were significantly lower in participants [of the BOOCS program] at 0.54,” the report said. “The “significant mortality changes” persisted during the follow-up period. “One of the reasons for such preventive effects of [the] BOOCS program may be related to improvement of obesity during follow-up.”
The authors noted that among male participants in the BOOCS program, BMIs decreased in the first five years of the study by 1 percent to 5 percent compared to both groups of nonparticipants. “These data coincide with the previous reports that both all-cause and cancer mortality were associated with obesity,” the report said. “These effects brought by [the] BOOCS program may result in the protective effect for mortality in this study.”
The results were not seen to the same extent among females. The authors speculated that it could be due to sociological factors, saying traditional gender roles remain and many women leave the workforce upon marriage or childbirth.
In conclusion, “the standardized mortality rates for all causes and all neoplasms in comparison with the general population were statistically lower among participants [in the BOOCS program] and reference subjects, which may be due to the healthy worker effect,” the study said.
A Modern Claims Philosophy: Proactive and Integrated
According to some experts, “The best claim is the one that never happens.”
But is that even remotely realistic?
Experienced risk professionals know that in the real world, claims and losses are inevitable. After all, it’s called Risk Management, not Risk Avoidance.
And while no one likes losses, there are rich lessons to be gleaned from the claims management process. Through careful tracking and analysis of losses, risk professionals spot gaps in their risk control programs and identify new or emerging risks.
Aspen Insurance embraces this philosophy by viewing the data and expertise of their claims operation as a valuable asset. Unlike more traditional carriers, Aspen Insurance integrates their claims professionals into all of their client work – from the initial risk assessment and underwriting process through ongoing risk management consulting and loss control.
This proactive and integrated approach results in meaningful reductions to the frequency and severity of client losses. But when the inevitable does happen, Aspen Insurance claims professionals utilize their established understanding of client risks and operations to produce some truly amazing solutions.
“I worked at several of the most well known and respected insurance companies in my many years as a claims executive. But few of them utilize an approach that is as innovative as Aspen Insurance,” said Stephen Perrella, senior vice president, casualty claims, at Aspen Insurance.
“We do a lot of trending and data analysis to provide as much information as possible to our clients. Our analytics can help clients improve upon their own risk management procedures.”
— Stephen Perrella, Senior Vice President, Casualty Claims, Aspen Insurance
Utilizing claims expertise to improve underwriting
Acting as adviser and advocate, Aspen integrates the entire process under a coverage coordinator who ensures that the underwriters, claims and insureds agree on consistent, clear definitions and protocols. With claims professionals involved in the initial account review and the development of form language, Aspen’s underwriters have a full sense of risks so they can provide more specific and meaningful coverage, and identify risks and exclusions that the underwriter might not consider during a routine underwriting process.
“Most insurers don’t ever want to talk about claims and underwriting in the same sentence,” said Perrella. “That archaic view can potentially hurt the insurance company as well as their business partners.”
Aspen Insurance considered a company working on a large bridge refurbishment project on the West Coast as a potential insured, posing the array of generally anticipated construction-related risks. During underwriting, its claims managers discovered there was a large oil storage facility underneath the bridge. If a worker didn’t properly tether his or her tools, or a piece of steel fell onto a tank and fractured it, the consequences would be severe. Shutting down a widely used waterway channel for an oil cleanup would be devastating. The business interruption claims alone would be astronomical.
“We narrowed the opportunity for possible claims that the underwriter was unaware existed at the outset,” said Perrella.
Risk management improved
Claims professionals help Aspen Insurance’s clients with their risk management programs. When data analysis reveals high numbers of claims in a particular area, Aspen readily shares that information with the client. The Aspen team then works with the client to determine if there are better ways to handle certain processes.
“We do a lot of trending and data analysis to provide as much information as possible to our clients,” said Perrella. “Our analytics can help clients improve upon their own risk management procedures.”
For a large restaurant-and-entertainment group with locations in New York and Las Vegas, Aspen’s consultative approach has been critical. After meeting with risk managers and using analytics to study trends in the client’s portfolio, Aspen learned that the sheer size and volume of customers at each location led to disparate profiles of patron injuries.
Specifically, the organization had a high number of glass-related incidents across its multiple venues. So Aspen’s claims and underwriting professionals helped the organization implement new reporting protocols and risk-prevention strategies that led to a significant drop in glass-related claims over the following two years. Where one location would experience a disproportionate level of security assault or slip & fall claims, the possible genesis for those claims was discussed with the insured and corrective steps explored in response. Aspen’s proactive management of the account and working relationship with its principals led the organization to make changes that not only lowered the company’s exposures, but also kept patrons safer.
World-class claims management
Despite expert planning and careful prevention, losses and claims are inevitable. With Aspen’s claims department involved from the earliest stages of risk assessment, the department has developed world-class claims-processing capability.
“When a claim does arrive, everyone knows exactly how to operate,” said Perrella. “By understanding the perspectives of both the underwriters and the actuaries, our claims folks have grown to be better business people.
“We have dramatically reduced the potential for any problematic communication breakdown between our claims team, broker and the client,” said Perrella.
A fire ripped through an office building rendering it unusable by its seven tenants. An investigation revealed that an employee of the client intentionally set the fire. The client had not purchased business interruption insurance, and instead only had coverage for the physical damage to the building.
The Aspen claims team researched a way to assist the client in filing a third-party claim through secondary insurance that covered the business interruption portion of the loss. The attention, knowledge and creativity of the claims team saved the client from possible insurmountable losses.
Modernize your carrier relationship
Aspen Insurance’s claims philosophy is a great example of how this carrier’s innovative perspective is redefining the underwriter-client relationship. Learn more about how Aspen Insurance can benefit your risk management program at http://www.aspen.co/insurance/.
Stephen Perrella, Senior Vice President, Casualty, can be reached at Stephen.email@example.com.
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Aspen Insurance. The editorial staff of Risk & Insurance had no role in its preparation.