Battle for the middle: Lead with work comp
Broker who can deliver alternative risk-financing options has a clear advantage
By Michael J. Moody, MBA, ARM
Middle market property and casualty accounts continue to be a target for many brokers. Both large and small brokerages have developed expertise in handling this important market segment. However, as the first signs of market changes begin to appear, some brokers are searching for ways to maintain or even expand their middle market business. As has been the case many times before, they have to look no further than workers compensation for ample opportunity in the middle market.
At this point, the workers comp segment of the property and casualty market is already beginning to experience some significant long-term structural changes that can provide mid-sized brokers with unique advantages and opportunities. The following article points to several key aspects to this new and emerging landscape.
Risk-financing front and center
Historically, most of the more sophisticated risk-financing approaches, such as captives, high deductibles, and self-insurance, were reserved for the larger accounts, and mid-sized agents and brokers had little need to understand the nuances of these more advanced methods. However, over the past 15 to 20 years, the insurance industry has begun to design specific, advanced risk-financing programs for small accounts. This requires mid-sized agents and brokers to become much more involved in these types of programs to provide critical advice to their clients and prospects.
A few insurance people lack even a rudimentary understanding of the more sophisticated approaches. A perfect example of this is the misconceptions that surround the concepts of deductibles and self-insured retentions (SIR). First, it is important to remember that these concepts are not interchangeable; each has its own requirements. While books have been written on this subject, in essence it comes down to the fact that deductibles are paid by the insurer and reimbursed by the insured at the conclusion of the claim. This contrasts significantly with SIR, where the insurance policy acts as an excess policy that does not pay until the SIR is exhausted.
The days of simply providing a quote for several retention levels for your clients are gone forever. In order to be competitive today, brokers must be able to counsel their client base on the various aspects of these more advanced work comp methods. Among the more critical aspects of any analysis are:
• First and foremost, any assistance will require a "true" picture of future claims. In order to complete this aspect, recent and relevant claims data must be used to project future losses. If the agency is unable to provide a proper projection, it must obtain the services of an experienced, independent actuary. Since so much of the analysis is geared towards this projection, it is extremely important to establish a relationship with an actuary that can not only provide the required projections, but also be able to communicate the results.
• Most of today's risk-financing alternatives require some form of collateral, so it is also important to understand how to get the best terms, timing and amounts for your client. Fully explaining this important aspect of the equation can head off a lot of issues that could arise later. A perfect example of this occurs with the stacking of limits that become meaningful in later years of many risk-financing programs. These are the types of things that clients or prospects need to be aware of when making their decision.
• Another important aspect to determining the proper risk-financing approach is the client's commitment to loss control and loss mitigation. Without a major commitment to these issues, assuming a higher retention/deductible will not be sustainable and, thus, not the proper course of action.
Workers compensation, because of its complexity and the recent movement to more advanced risk-financing for mid-sized accounts, can provide a mid-sized broker with a unique opportunity to stand out from the crowd. Further, since workers compensation is a central coverage for all business, developing an expertise in this area can pay dividends for mid-sized agents and brokers and open the door for additional business.
Increased benefits with lower costs . . . really
For most employers having increased benefits for injured workers at a lower cost is difficult to imagine. However, that is exactly what California employers are expecting from legislation that was signed into law by Governor Jerry Brown on September 18, 2012. Indications that were becoming clearer over the past few years were beginning to spell trouble for employers in California. The state work comp system, which is made up of $16.2 billion in premium, needed some major remodeling in order to prevent a mass exit by businesses in the state, due to estimated rate increases.
In order to avoid this mass movement, Governor Brown formed a bipartisan group of employers and unions to develop specific plans to head off what was anticipated to be around an 18% rate hike in January 2013. Much of the expected increase was due in large part to a 2004 law that was designed to keep the lid on growing WC costs. But the law needed to be revised again, so the bipartisan committee suggested major changes, and SB 863 was approved in the California Senate on a 68-4 vote, with a similar result in the State Assembly.
The new law has a wide variety of far-reaching changes incorporated into it. Because changes of this magnitude first occur in bellwether states like California and then, frequently, become a springboard for other states as well, it is important to understand the approach used. The primary change centers on how benefits are calculated for injured workers. The new law is expected to boost workers comp benefits to injured employees by an average of 29%. Additionally, $120 million is earmarked for a special fund for victims of catastrophe accidents who are unable to return to work.
In order to pay for these increases, the other key aspect of the law involves the creation of a binding arbitration process that is designed to resolve those issues that most frequently lead to lawsuits. This is accomplished through the establishment of a new fee schedule for several difficult and typically highly litigated areas. Analysis and agreement of these types of costs was a significant key to adoption of the new schedule. A sample of several areas that were chosen will quickly illustrate the continuous nature of this approach:
• Restricting the role of chiropractors who serve as primary care physicians
• Establishing the value of home health care, particularly that provided by family members
• Limiting the amount of acceptable copying service fees that are associated with workers compensation claims
For those situations that are not included specifically within the new fee schedule, the law also establishes an independent binding review board to resolve the issues. It is expected that this process will speed up the current two-year wait to a more acceptable approval of three months or less.
As noted previously, California employers were on track to face an 18% rate increase effective January 2013. However, most industry experts agree that this figure can be significantly reduced by utilizing appropriate fee schedules that help mitigate potential litigation issues.
In every market disruption, there are brokers who are winners and there are ones that are losers. The key is to chart a path that will provide a brokerage with a good, sustainable plan to capitalize on key coverage areas. First, know the financing options—all of the financing options. Understand the advantages and disadvantages for each option, as well as how to determine the associated cost of each. It is clear that mid-sized accounts are interested in and can benefit from the alternative risk-financing market. It is important to become intimate with this aspect of the market.
It is also important to keep up with innovative approaches that are being introduced in state legislation to help solve the escalating cost of workers compensation. The anticipated savings from the institution of a new fee schedule and binding arbitration approach that California has enacted would appear to have universal appeal to any state struggling to control workers comp costs. After all, work comp is considered to be a "no fault" system; it appears that any program that can reduce the amount of litigation involved should be closely reviewed.
Not long ago, about the best that mid-sized accounts could hope for was an incurred loss retro program with some favorable terms, but today's mid-sized insurance buyers have a number of options available to them. If a mid-sized brokerage hopes to compete for this business, it will need to develop and maintain top-level expertise in this changing market segment.