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Wokers' Comp Challenges
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
Eric Silverstein
senior vice president National Casualty Insurance Practice, Lockton Cos.
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.
