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.
An Overlooked Risk?
The 2012 National Survey on Drug Use and Health, conducted by the Substance Abuse and Mental Health Services Administration (SAMHSA), found the rate of binge drinking among people ages 65 and older was 8.2 percent, the rate of heavy drinking was 2 percent, and the rate of current illicit drug use among adults ages 50 to 64 has increased during the past decade.
“According to SAMHSA experts the baby boomer generation contains a higher percentage of illicit drugs users than any other age group because boomers were the first generation to participate in widespread use of a variety of recreational drugs, the first generation to have prescription medications readily available to them, and the last generation to grow up with a strong stigma against seeking substance abuse treatment,” said Kevin Glennon, vice president, clinical education and quality assurance, One Call Care Management.
Baby boomers’ formative years played out during a period of broad experimentation with and acceptance of illicit drugs. Now they’re entering a phase of life where any children they have are likely grown and independent and retirement is on the horizon, which could translate to fewer responsibilities both at home and at work. That freedom may make it easier for boomers to pick up old habits, only this time with prescription medications.
The national drug use survey estimates that the number of adults age 50 and older who will need alcohol or drug treatment will increase from 2.8 million in 2002-2006, to 5.7 million by 2020. Currently, 4 million older adults need substance use treatment, including 0.4 million for illicit drugs, 3.2 million for alcohol, and 0.4 million needing treatment for both.
“Today, many boomers are turning to prescription opioids as their drug of choice. Baby boomers do not view this as an issue requiring intervention, and as such are extremely guarded when treatment options are discussed,” Glennon said.
Employers and workers’ comp payers should not overlook these factors if they have an older worker on prescribed painkillers for a work-related injury or illness.
“After a certain period of time the patient will begin to develop a resistance to [the opioid] and it stops controlling the pain effectively,” said Bill Spiers, vice president of risk control services, Lockton. “Because the healing time is slower, just by nature of the effects of aging on the body — they regenerate tissues slower — it extends that period of time. So what ends up happening is the person — and this happens typically with soft tissue injuries — will experience slower pain improvement, and so the medical professional will look for solutions.”
Pharmacy benefit management is one go-to way to keep an eye out for red flags and monitor physician prescribing patterns, but employers can take a more proactive approach by setting up a workplace support system.
One factor that can contribute to an older worker’s propensity to abuse a substance is the psychological component. Some boomers certainly look forward to retirement with excitement, but others fear losing a sense of purpose or relevance. That disconnectedness lends itself to loneliness and depression, both of which can contribute to the development of an addiction.
“Today, many boomers are turning to prescription opioids as their drug of choice. Baby boomers do not view this as an issue requiring intervention, and as such are extremely guarded when treatment options are discussed,” — Kevin Glennon, vice president, clinical education and quality assurance, One Call Care Management
“There are two reasons why injured workers have problems with their claim; when they get injured, they’re either angry or afraid. And those cause workers to shut down and not want to get treatment or cooperate,” Spiers said. Lockton trains ‘injury counselors’ to work one-on-one with patients, providing the type of support that the workers might be lacking from their own social network.
“The injury counselor tries to develop a friendship so they stay in touch. Not everyone has strong family or social ties around them, so they need someone that follows up with them and stays on top of them,” Spiers said. “Things like depression can exacerbate that claim, one technique that employers use to keep that person motivated to work though their pain is to keep them engaged in the workplace, which they do through close communication.”
Employers can also make extra efforts to keep injured workers — especially those nearing retirement age — engaged in activities both in and outside of the workplace through wellness initiatives. Encouraging exercise can help an injured worker grown stronger both physically and mentally, Spiers said.
Providing a support network and establishing a channel of communication may in fact be the best that employers can do, since a red flag isn’t raised on every case where a medication is abused.
“Addiction or abuse, regardless of the drug of choice is often very hard to detect,” Glennon said. “There are functional alcoholics that work and function with no signs of intoxication, the same holds true with prescription drug use or abuse.”
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact email@example.com.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.