Hang on to your wallets
Employers are already seeing the tip of a very nasty iceberg as the insurance industry feels itself reelin' and rockin' on a number of different fronts, all adding up to the perfect storm:
- Combined ratios for Workers Comp are hitting upwards of 112 percent. This means the insurance industry isn't making any profits on Workers' Comp this year as every dollar coming in is going out at $1.09. This is worse than 2011, when it was $1.02 going out.
- The Workers Comp combined ratio hit 118% in 2010, the worst since 122 percent in 2000, and 2011 is expected to finish even higher. This means insurance companies not only didn't make any profits on Workers' Comp last year, but the ship is taking on water faster than they can bail it out. For every dollar of premium they receive, it is being spent out at $1.18. Which is even worse than 2009, when it was $1.10 going out.
- For the first time in decades we are seeing more employee injuries, with an upswing in the severity of claims. This has caused a surge in medical costs and an alarming trend towards injured employees staying out of work longer as more employers abandon return-to-work programs due to the financial constraints as a result of a poor economy.
- Investment yields have plummeted. Treasury yields once hovering around 5% back in 2007 are now below 1 percent or even lower, which means insurance company underwriting losses cannot be offset by investment income.
- Insurance companies are seeing return on equity drop to 7.5 percent from a high of 15.9 percent in 1979. And the shareholders, and your 401k, aren't happy about that.
Okay, now for the bad news
In 2011, the global insurance community was hammered by three of the top 11 natural catastrophes of all time; the New Zealand earthquakes, the tornadoes that ravished our nation's mid-section, and the staggering Japanese undersea earthquake and subsequent tsunamis. And the financial aftershocks-insurance payouts totaling a staggering $61.3 billion-- are just now starting to hit reinsurance costs.
If, as an employer, you are wondering how an earthquake half a world away can affect the 2012 Workers' Comp premiums for your widget factory in Iowa City, think Butterfly Effect to the nth degree. Your insurer, or excess company, may be local, but reinsurers are global.
The re-insurers lost money, the self-insured programs lost money, and just about everybody took a hit. As a result, no matter what type of coverage you have, you're going to be exposed to increases, if you haven't already experienced it.
You may even think you can seek shelter from the storm by getting a dozen quotes. However, shopping has never helped an employer reduce injuries, discover and correct errors, returned an employee to work, reduce their experience modifier, find the right doctor to treat an employee, keep an attorney out of the system, find them an agent who was an expert at workers' compensation, or improves how the insurance company sees their business.
What can you do about it?
Remember, the basic tenet of insurance is a financial transfer of risk for an amount of money. What drives your rates and increases your premiums is what the underwriters perceive as the risk. Simply put, the greater the risk underwriters perceive, the more you pay in rates. In the world of Workers' Comp, perception is most definitely reality. And the reality of the situation is if you don't get your company's risk under control, you're going to pay for the oversight.
All risks are different and not locked into a certain profession or occupation. It's true that a retail grocer will have lower rates than an electrical contractor. But it's false to believe all electricians get hit by the same rate. For electrical contractors, the rates are proportionate to the risk. The electrical contractor who has 5% or more of his employees involved in incidents a year, lets injured employees sit at home, and does not have a true safety program in place, will pay higher rates than the electrician that goes years without incident, brings injured employees back on transitional duty, and focuses on having a formal, effective safety program in place that goes far beyond just OSHA compliance. It never ceases to amaze me how many employers say they have a safety program and a safety culture, yet continue to suffer with an above industry average frequency and are hemorrhaging money to pay for injuries (a.k.a. higher premiums).
Risk profile improvement is the answer
What you can do to keep insurance costs as low as possible is improve your company's risk profile, whether it's using PEPs, offering educational courses, limiting your physical exposure to potential accidents, or monitoring the behavior of your employees. You then need to address them in order of potential severity by installing the proper policies and procedures to each risk. After doing so, you must tell your story so you convey to the underwriters why you are a better risk today and what you are doing differently today than you were last year, if you expect to see your rates go down.
Your Experience Modification Factor is also a driver of the risk perception bus, so work to control it. An Experience Modifier out of control-- anything in the 1.002 to 1.8 range-- gives the impression of an unsafe company with poor quality control and a lack of safety procedures. This will also come back to bite you in the wallet as a higher Experience Modifier drives you to a higher premium. Experience Modifiers can also be used as a screening tool to prevent you from obtaining a job or contract, particularly in private sector.
It's critical to prove to the underwriters you're committed to improving your potential risk by concentrating on getting your incident frequency down, even if it's simply by implementing drug testing and screening, doing some tool box talk, keeping minutes of safety and committee meetings, and/or stepping up the HR process to keep from hiring a potential Workers' Comp claim. It's all about being able to convey to underwriters that you have a better risk profile today than yesterday.
Also, consider hiring a Certified Risk Manager (CRM or ARM designated), and not simply a loss-control/safety person. Make certain it's someone who can both steer and direct your company towards improving your all-important risk profile. This is essential as many people, particularly those in the insurance industry, incorrectly use the terms Risk Management and Loss Control interchangeably, and they are not. Loss Control is only part of an effective Risk Management ongoing process; so a Loss Control person should not be called a Risk Manager, which occurs quite frequently, unless they are a fully trained Risk Manager.
It's what you don't see, or pay attention to, that will come back to cause your ship to sink. Think of the Titanic: the impact below the water line, what you cannot see, is what sunk the ship. Having standard policies and procedures in place are useless if someone is sacrificing safety for productivity or a better result. The Titanic had superb navigational charts in place, but it was all for naught because someone was trying to make record time crossing the Atlantic.
You can't control natural disasters-or insurance company profits--and what's done is done. But you can control your company, your employees and the potential financial fallout by adopting the correct measures today. Because by at least righting your own ship, you may avoid the risk of sinking as this big storm continues to intensify. And I have no doubt it will.
David R. Leng is vice president of the Duncan Financial Group in Irwin, Pa. He is certified by the Institute of WorkComp Professionals (IWCP) and can be contacted at dleng at duncangrp.com. For more information visit www.RiskProfileImprovement.com.