Excess Workers' Compensation

11/08/2016

How to Combat Rising Rates and Retentions in Excess Workers' Compensation Insurance

For 10 years, rates and retentions for self-insureds have been steadily (sometimes drastically) increasing. The good news is there’s a way to fight the increases, though it has little to do with insurance.

The first step to solving this, or any problem, is to understand the problem itself.  Many would say it’s simple supply and demand. As there are only seven markets left writing monoline excess workers’ compensation for qualified self-insured entities, companies and groups, the common perception is there is limited competition for each risk. That, however, is not the real root of the problem; to get to the core of the issue, one has to look at two outside economic factors that serve as the primary financial drivers on excess workers’ compensation accounts.

The first is income. Excess workers’ compensation (XSWC) carriers generate income in two ways: underwriting profit and investment income.  Typically, all carriers invest heavily in fixed income securities of durations of approximately 10 years.  According to the U.S. Department of the Treasury, on January 3, 2006, the 10-year Treasury bond yielded 4.37%.1 Today, that same bond yields only 1.74%2, meaning an XSWC carrier must reduce their combined ratio by 20 points in order to get the same return on their investment as they did 10 years ago.  The only way they can achieve this is to raise premiums and lower claims expenditures – also known as raising the retention. It’s simply a matter of how much.

The second factor driving rates and retentions higher on excess workers’ compensation accounts is future medical costs.  While investment yield has been declining, medical costs have been accelerating. In approximately 85% of all XSWC claims, the Self Insured Retention is not breached until 8-10 years from the date of the occurrence. So the carrier must fund for paying medical outcomes they will not see for nearly a decade.  When you consider the idea that medical care costs will only continue to increase or factor in advances in medical technology that will create new, more expensive treatment methods 10 years from now, it is easy to see how volatile the situation can be.

At the same time, if you consider the highly actuarial nature of XSWC underwriting, you will quickly discover there is no amount of brokering underwriters, market shopping, or general insurance wizardry that will result in a dramatically lower premium and/or retention at renewal. That’s the bad news. But thankfully, the good news is that there is still a way to bring rates and retentions down.  It takes time, discipline, and commitment.  But it can be done. 

How? Help the insured become a better risk.

When asked: “Why do you rob banks?” the famous bank robber Willie Sutton was erroneously quoted as saying, “Because that’s where the money is.”  In excess workers’ compensation for self-insureds, “where the money is” is in their claims. Claims make up roughly 90% of a self-insured’s total cost of risk compared to the insurance premium which typically ranges from three to five percent. On top of being the largest part of their total cost of risk, claims also represent the area in which a group has the most direct influence. Insurance premiums, collateral posted with the state, and TPA costs are all driven by claims costs, and are largely determined by other organizations.  Claims, on the other hand, are 100% in the hands and – more importantly – the wallets of the insured. They pay every dollar of every claim under their SIR, meaning every dollar saved is theirs to keep. So if a self-insured has $1,000,000 in claims under their SIR and can reduce their claims by just 5%, they have just saved $50,000.  That’s a much bigger savings than a slightly better rate on their insurance. And that’s just the beginning.
 
Self-Insureds can proactively work to reduce the frequency or severity of their claims through predictive analytics, return-to-work programs, optimized pharmaceutical benefits plans or any of a host of services designed to help achieve better medical outcomes for injured employees. There are also a wide range of services such as workplace ergonomic studies, wellness plans and employee compensation incentives to help prevent accidents from happening in the first place.  The result of taking these actions is an informed, holistic approach to safety and loss control that, over time, will bend the insured’s claims cost curve down.  Do that and the cost of insurance will follow suit. 

Changing the conversation from rising rates and retentions to managing the total cost of risk through better safety and loss control programs is the most effective way to achieve better results for the insured in the current marketplace.  It begins with asking the right questions: Is the insured getting the most out of the value-added services provided by the carriers? Is their TPA actively engaged and optimized to not just handle, but actively manage their claims?  What additional services can give them better insight and methods to prevent claims before they happen and get better care for their employees after an accident?  The discussions that arise from these questions will undoubtedly lead to answers that can begin to lower claims costs and achieve better medical outcomes for employees. That in turn will help make the self-insured individual or group a better risk for the carriers to take on, resulting in lower rates and retentions in excess workers’ compensation and leading to a more durable and cost effective self-insurance program.
 
 
_________________________
 
 
ABOUT THE AUTHOR
This article was written by John Cooper, a broker specializing in excess workers’ compensation with AmWINS Brokerage of the Carolinas.

1 https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2006
2 https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

Insurance Impacts of COVID-19 on the Healthcare and Senior Living Industry

03/30/20

As the healthcare industry remains on the front lines of battling the COVID-19 pandemic, staying abreast of the changing landscape and how the insurance market is adapting is critical to ensure new exposures are covered and renewals are successfully placed. In this article, our specialists share what they are seeing in the Healthcare and Senior Care markets, tips for risk control and mitigation, and how to get the best results for insureds.

COVID-19 – Are Your Clients Covered?

03/19/20

The disruption to business and everyday life caused by the coronavirus (COVID-19) pandemic is resulting in an economic impact for insureds. Much of this disruption is likely not covered by insurance. We have consulted with several AmWINS insurance specialists across the Property, Casualty and Professional Lines sectors and offer a COVID-19 update.

From Seed to Sale: The Top 5 Issues Impacting the Cannabis Insurance Industry

09/19/19

​Over the last few years, the legal cannabis industry has seen rapid growth and had a significant impact on the U.S. economy. With states continuing to legalize its use, insurance needs for cannabis-related businesses are becoming a popular topic of discussion. This article examines the evolving cannabis industry by exploring five key issues impacting coverage.

Four Key Additional Insured Endorsements for Contractors

Construction contract negotiations, which determine the kind and amount of insurance required for a construction project, can be time-consuming, complicated and frustrating. Project owners require contractors on a project to name the project owner as an additional insured on the contractor’s casualty insurance program. It's important that both project owners and contractors understand the coverage provided by these additional insured endorsements. This article discusses four common ISO additional insured endorsements related to commercial general liability policies purchased by contractors, including their limitations, conditions and exclusions.

How Parametric Products Benefit Catastrophe-Driven Risk Transfer

03/19/20

Parametric insurance is an innovative product that functions differently than traditional insurance by covering the impacts of an event and not just losses sustained to an asset. Proceeds of the policy are paid quickly and can be used flexibly to cover any expense associated with the triggering event. Coverages can be designed to capture the impacts of natural perils and other forms of non-damage business interruptions such as future epidemics. Learn how the parametric landscape has and will continue to play a major role in improving coverage and the recovery experience.

Understanding Property Theories of Recovery and Ensuing Loss Clauses

​The theories of recovery, as well as the ensuing loss provisions, contained in property insurance policies are often complex and, at times, seemingly in conflict. Although a policy may not directly address these theories, their application by courts plays a significant role in the coverage determination process after the claim. It is essential that brokers understand the primary theories of recovery – Efficient Proximate Cause, the Concurrent Causation Doctrine, and the Anti-Concurrent Causation Doctrine – in order to navigate the challenging post-claim process and effectively serve their clients.

Sign Up For Our Monthly Newsletter

Sign Up