At the end of the last decade, most companies weren't focusing on changing their Workers Compensation programs. Prices had been decreasing or were flat for many years, and coverage was easy to come by. Now the Workers Compensation market is beginning to change. Risk managers will see the following underwriting trends during the next few years:
Trend 1: The market appears to be shifting. During the 1990s Workers Compensation pricing conditions were the softest that almost anyone can remember. The popularity of guaranteed cost programs exploded, and many risk managers were able to remove liabilities from their balance sheets at attractive prices. Now there are indications that the market is firming.
The National Council on Compensation Insurance (NCCI) reported an industry pure loss ratio of 71.2 % for the third quarter of 1999, compared to 59.1 % in 1997. When these statistics were announced, NCCI President and CEO Bill Schrempf stated, 'Free market competition, declining reserves, and a growing challenge to existing benefit levels across the country continue to place pressure on the market.'
Workers Compensation pricing has not yet fully responded to industry pressures. Currently both reinsurers and carriers, after reporting less-than-ideal bottom-line results, are evaluating and changing their underwriting and pricing practices.
Trend 2: Use of alternative programs is increasing. The changing market has renewed many companies' interest in taking on larger retentions rather than purchasing first-dollar Workers Compensation coverage. Large-dollar deductible programs and other alternative risk financing mechanisms will be more widely used in the early 2000s.
Perhaps a company's goal for alternative rating plans will be to find the right level of risk to retain. Previous trends in Workers Compensation pricing had sometimes fluctuated between the extremes - from standard premium plans to high excess-of-deductible layers and back to guaranteed cost. In the coming years, risk managers may find middle excess layers and moderate aggregate limits more appropriate win-win solutions that are preferable to all-or-nothing risk positions.
As organizations retain greater levels of risk, the need to manage that exposure becomes paramount. Using captive insurance subsidiaries may become more prevalent in the years ahead. In addition to potential tax benefits, captive arrangements offer substantial flexibility to meet changing risk financing needs. As a separate corporate entity, a wholly owned captive also enhances an organization's management perspective.
Trend 3: Integrated disability management programs are more common. Integrated disability management programs are being more commonly explored and used today by all sizes and types of companies. Market conditions are allowing a different perspective to finally take hold, not just with risk managers but also with CFOs and benefits managers.
These programs typically include a combination of two distinct components: a Workers Compensation contract and a short-term and long-term disability program. When such a program is implemented effectively and for the right organization, risk managers can expect to see improved claim results, administrative efficiencies, consolidated reporting, improved return-to-work outcomes, and elimination of claims double-dipping into one or the other program.
Many companies are taking a comprehensive approach to their Workers Compensation program. This means applying best practices and the program's core concepts - such as incident prevention, illness and injury treatment, and return to work - to all health- related incidents that affect employee productivity. Advances in technology give underwriters and risk managers access to the merged data necessary to fully understand employee exposures.
These underwriting trends may take a few years to become clearly visible to all risk managers. Today, the only clear trend is that change is happening. In the new Workers Compensation marketplace, successful programs will result when risk managers work closely with all areas of their organization to understand the unique exposures and develop a partnership to manage all employee-related risks.