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.
6 Workers’ Comp Risks on the Road
The Embedded Risk Engineer
Not long ago, concepts such as solar panels, nanotechnology, battery-powered electric vehicles and “green” buildings were more pipe dream than reality. Today, with those trends a growing part of the global marketplace, insurers need ongoing, in-depth, real-time data for optimal underwriting in order to give buyers proper coverage and accurate pricing.
As one leader of Aspen Insurance’s loss control risk engineering team, Troy Bickerstaff knows better than most the value of staying ahead of the curve when it comes to emerging trends and their potential impact on insurance buyers.
“Our underwriters at Aspen Insurance are plugged into what’s happening with today’s exciting technology developments,” Bickerstaff said. “By using specialized, dedicated risk engineers to deliver unparalleled support to our underwriting teams, we can meet emerging marketplace needs. For insureds in these areas, the result is the best possible approach to risk management, insurance programs and pricing.”
“We evaluate all possible hazards, including the insured’s quality management system, their safety and quality standards, their recall process – anything and everything that goes into their product. Then, we advise the underwriters during the application process.”
– Troy Bickerstaff, Assistant Vice President and Loss Control Manager, Aspen Insurance
Aspen Insurance utilizes a concept by which an underwriting team includes an embedded engineer who works closely with the team’s underwriters and clients. This dedicated professional focuses on supporting the team in meeting the specific needs of a client and continually advises on the evolution of emerging risks associated within the team’s industry vertical.
Bickerstaff explained that Aspen Insurance’s risk engineering approach differs from other carriers that typically offer a centralized loss control/engineering department, primarily because they provide a general approach to support of underwriting.
“The difference in the various approaches to risk engineering is similar to specialization in medicine. If you need open-heart surgery, would you want a general surgeon or a cardiothoracic surgeon?” he asked. “Similarly, if your business faces specialized risks, you need the deep expertise of underwriters and engineers well-versed in the nuances of your industry.”
Bickerstaff and his colleagues support the underwriting teams across Aspen Insurance in four key ways:
Evaluating individual risk
To best understand a potential insured’s risk portfolio, the Aspen Insurance team reviews each new submission along with an applicant’s website, history of product recall and compliance with industry standards, in addition to certifications to assess what types of exposures may emerge. Bickerstaff noted that Aspen Insurance’s claims team is also involved in this process, including in respect of all risk engineering communications with the underwriting team. This tight collaboration between underwriting, engineering and claims is a key differentiator for Aspen US Insurance in the market.
If a new technology is part of a coverage application submission, Bickerstaff will also launch an engineering review of the risk, delivering valuable information to the underwriters, who in turn can utilize the data to help insureds find ways to improve their products and potentially reduce expensive product liability exposures, and possibly even claims.
When a company looking to import foreign-made tires applied for coverage, Bickerstaff created a document outlining all the major “key points for casualty,” including factors such as improper curing, use of over-aged rubber and contaminants in the tire itself. Underwriters then used that report with the potential insured, helping them avoid any potential pitfalls in importing foreign-made tires.
“We evaluate all possible hazards, including the insured’s quality management system, their safety and quality standards, their recall process – anything and everything that goes into their product,” he said. “Then, we advise the underwriters during the application process.”
Conducting a class of risk consultation
Based on underwriting submission trends or individual risks, the risk engineering team often identifies red flags with certain exposures and prepare detailed “guide sheets” outlining key information about the overall risk to support the analysis of underwriting teams.
Bickerstaff created two such guide sheets related to electric vehicles, an emerging, popular alternative to gas-powered vehicles. One guide sheet detailed specific fire hazards associated with electric vehicles (higher voltage, weight distribution and battery blockage), while the other focused on specific fire hazards associated with the lithium ion (Li-Ion) batteries used to power electric vehicles, including ways to mitigate associated risks. Both guide sheets proved helpful to companies looking for coverage who manufactured both Li-Ion batteries and electric cars.
“We undertake a very detailed analysis for insureds in which we typically outline the kinds of claims that could happen, the severity, and what measures an insured would need to have in place to proactively minimize claims scenarios. This additional level of risk analysis is something insureds really value and appreciate.”
Evaluating long-term exposures
As a natural extension of the risk consultation effort, Bickerstaff also conducts long-term research and keeps abreast of different types of exposures through monitoring various media and publications, attending lectures and maintaining research contacts on the academic level. Insureds use Bickerstaff’s research to strengthen their loss control efforts, thereby potentially reducing claims and, as a result, keep overall costs down.
“For areas such as nanotechnology or ‘green’ buildings, we conduct research and create guide sheets,” he said. “But we also constantly stay abreast of the long-term aspects of the risks in those areas, keeping up with industry changes and the evolution of specific technologies”.
Providing added risk management expertise directly to insureds
Finally, the risk engineering group provides additional support for insureds via a face-to-face policyholder consultation at the insured’s location, if necessary.
Bickerstaff visited a commercial lawnmower manufacturer and identified several cost-saving enhancement opportunities: guidance on contractual wordings, recommendations for strengthening the weldment inspection program and education on managing increased liability exposures due to the use of temporary workers during the company’s peak manufacturing season. As a result, with that added data, the insured was able to reduce costs and potential claims.
“Among the many advantages we offer to insureds, a key benefit we offer is to ensure that our underwriting is based on the underwriters’ full knowledge of the risk, including access to the best available, most accurate data about the unique exposures relevant to the industry, technology, or niche,” Bickerstaff said, adding that the engineering team’s expertise helps underwriters deliver the best possible outcome, but even more importantly, Aspen Insurance’s specialized, integrated risk engineering strategy ultimately benefits the insured.
“The difference in the various approaches to risk engineering is similar to specialization in medicine. If you need open-heart surgery, would you want a general surgeon or a cardiothoracic surgeon? Similarly, if your business faces specialized risks, you need the deep expertise of underwriters and engineers well-versed in the nuances of your industry.”
“Insureds can feel comfortable and confident they are buying a high-quality, value-added, fairly priced product to meet their specific needs,” he said. “With many of these new, emerging risks, that is a critical benefit to them and a competitive advantage for us.”
To learn more about how Aspen Insurance’s loss control risk engineering and underwriting teams can support your organization, contact your broker.
Troy Bickerstaff, Assistant Vice President and Loss Control Manager at Aspen Insurance, can be reached at firstname.lastname@example.org.
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.
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.