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.
Southwest Emphasizes Teamwork in Workers’ Comp Services
Subject matter expertise alone is not enough when workers’ compensation service providers want Southwest Airlines’ business.
They also need to set aside any inclination to compete with other workers’ comp companies that also provide services to the airline — even when their product offerings overlap.
And they need to adopt Southwest’s customer service culture that follows from The Golden Rule’s mandate to treat others as one wishes to be treated.
“We work really hard to foster our Southwest Airlines corporate culture and spirit into the vendors that we work with because we want our claims team, and the nurses that we have in our [workers’ comp] program, and all the [other service providers] involved, to feel like they are an extension of Southwest Airlines,” said Patti Colwell, Southwest’s workers’ comp program manager responsible for on-the-job injury care of the company’s 45,000 employees.
“At Southwest we live by The Golden Rule,” she continued. “We expect our employees to treat our paying passengers with kindness and respect so why would we expect our vendor partners to treat our employees with any less kindness and respect?”
Like many other employers, the service providers Southwest partners with include third-party administrators, managed-care companies, pharmacy-benefit managers, and attorneys.
In addition to workers’ comp expertise, Colwell looks for service providers capable of working as a team with other companies servicing her program.
There can be a tendency to compete, for example, when a TPA and a managed-care company both offer managed-care services, but under an “unbundled” arrangement, the TPA provides claims-adjusting services while the other company provides the managed-care products.
“We make it very clear they are not competing with each other for our program and we expect our data and information to be shared completely among the parties because that is the only way we will know what is going on and can come to solutions,” Colwell said.
“We also look for partners willing to be accountable for results and we do that with performance guarantees.”
“We expect our employees to treat our paying passengers with kindness and respect so why would we expect our vendor partners to treat our employees with any less kindness and respect?”
After seven years, though, Southwest recently discontinued its unbundled approach, or separating managed care and bill review services from their TPA’s services. Those services are now bundled together and provided by Sedgwick Claims Management Services Inc., Colwell said.
Even when an employer obtains a bundled product from a single source, however, there may be competing interests among a single provider’s own managers who oversee different services, she added.
“Oftentimes, which has been my experience in the past, we found even within the same company they may have competing objectives, so we still foster this team approach even when they are internal to the same organization to make sure we all have the same goals,” Colwell said.
To do that, Southwest brings together a program manager from her TPA’s claims-administration side and a program manager from the managed-care side, for both quarterly partnership meetings and monthly claims-review meetings. Other service providers also join the meetings, such as pharmacy-benefit-manager representatives
In addition to reviewing specific case files, the claims-review meetings improve communications between all the service providers and Southwest, and they provide an opportunity to spot trends needing corrective action.
“We try to find solutions to wrap claims up, but we also try to find trends that we need to address because our whole goal is to get our employees early diagnostics, get them the treatment they need, and to get them back to good health as soon as possible,” Colwell said.
One adverse trend revealed in such a meeting, for example, involved second shoulder surgeries performed on employees treated by a specific doctor.
“We had all the players at the claims review and we kept hearing the same thing over and over about second shoulder surgeries,” Colwell said. “The same doctor’s name kept coming up and it was obvious there was an issue.”
Further analysis revealed the doctor referred patients to a particular physical therapist who frequently prescribed home physical therapy after just a couple of office visits. But post-shoulder surgery therapy can be painful and injured workers were not following through with their prescribed routine.
Consequently, they suffered frozen shoulder issues requiring the second operation, Colwell said.
That occurred in a state that allowed the airline to direct injured employees to medical providers known to produce better medical and return-to-work outcomes.
Spotting and correcting the trend resulted from the relationships built through the meetings, Colwell said.
“You have to have the relationships in place to be able to act quickly and mitigate circumstances,” Colwell said.
Patti Colwell will speak on Nov. 20 at the National Workers’ Compensation and Disability Conference® & Expo in Las Vegas. She will be joined by Tron Emptage, chief claims officer at Progressive Medical Inc., and Julie Fortune, senior VP and chief claims officer for Arrowpoint Capital, to discuss “Approaches to Managing Nontraditional Claims Including Unions, Legacy Claims and Co-Morbidities.”
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.