There has been much ado about the Workers Compensation market over the last several years, and particularly in the last six months or so. We’ve seen rate increases, a firming market, carriers struggling with underwriting profitability, a rise in claims frequency, and businesses paying more in premiums even though payrolls are down. Much of the talk in the industry centers around cost containment, loss control protocols, risk management, Return to Work programs, vetting out fraud, and, most importantly, getting a grip on ex-mod factors.
We wanted to find out more about the state of the Workers Comp industry, the impact of upcoming NCCI changes on ex mods, and how agencies can help customers to deal with rising Workers Comp premiums. We spoke with Simon Feuer, president of New York-based APEX Services, a leading national independent compliance audit firm for Workers Compensation premium recovery.
Annie George (AG): What are the issues plaguing the Workers Comp industry?
Simon Feuer (SF): “One the biggest issues facing the Workers Compensation industry is that year after year employers find themselves paying more for coverage while revenue and staffing levels have been significantly reduced or remain flat. This decrease in payroll and revenue does not correlate to the rate increases taking place in the Workers Comp marketplace. Let’s look at three states, for example: New York, New Jersey, and California. In New York, in October 2001 right after the World Trade Center bombing, which was when the market began to firm, the unemployment rate was 5.30%; in April of this year it’s at 8.10%. In New Jersey, the unemployment rate in 2001 was 4.60%, today it’s 9.10%; and in California, it was 5.90% and now it’s 10.50%. Overall, in the United States going back to May of 2001, the unemployment rate was 4.10%, today it’s 8.20% as of May 2012. That’s exactly double the rate from eleven years ago.
“Today’s ‘hardening’ market is taking place in a much different environment than in 2001. We’re seeing firming rates with double the unemployment – a dangerous place to be in. Employers today are experiencing increases in their premium rates but they’re not better off…in fact, they’re doing a lot worse, with less manpower, lower sales, and a decrease in income. You have higher unemployment with diminished revenue, with employers’ fees and charges continually going up.
“When the market hardened as it did the last time, businesses were doing well. When they were hit with premium increases, they weren’t pleased but it was part of the cost of doing business. Now employers are seeing increases and they’re not in a position to absorb these costs. They have to carry these costs while performing poorly.”
AG: What type of increase rates are we seeing?
SF: “New York filed a rate increase of 11.5% for October 2012, following a big increase last year. New Jersey had an increase this year of 6.9%. And, California just approved a 8.25% workers compensation advisory pure premium rate hike for new policies and those renewing on or after July 1, 2012 on top of an earlier increase of 37%. These are dramatic increases we’re seeing, while businesses are struggling,” explained Simon.
“When looking at what makes up the experience mod factor, payroll is the main determinate for a company’s allowable expected losses. The higher the payroll, the more room for expected losses. The big problem here is that, although company payroll has decreased due to layoffs and a retraction in hiring over the last several years, businesses are not experiencing fewer claims. Instead they’re seeing an increase in claims frequency, impacting the experience mod’s primary losses, which in turn drive the mod up. You’re allowed fewer losses because you have lower payroll, but in fact your losses are higher than what is allowable.”
The claims frequency is up 3% despite the lagging economy, according to the National Council on Compensation Insurance (NCCI Holdings). “The logic has always been that claims frequency is tied to the employment rate,” said Simon. “In this economy with high unemployment it’s perplexing as to why claims frequency has gone up – but this is what the data shows. And the bottom line is that companies that have more claims will drive their experience mod way up.”
The NCCI at its 2012 Symposium also revealed that the residual market [assigned risk] for the first quarter of this year experienced a 47% premium growth. What’s more, the major growth was seen in the sector exceeding $100,000 in premium. “What this is showing us,” explained Simon, “is that employers with poor experience and reduced payrolls are paying higher premiums and experiencing more claims, and ultimately brokers might lose these accounts to the assigned risk market or state insurance funds.”
Another issue that’s set to further impact the Workers Comp market is NCCI’s announcement last August that it will be increasing the split point value in the mod factor. “One of the most important factors in the mod is primary losses, which are frequency losses, as I mentioned before,” said Simon.
“These losses represent claims that are currently $5,000 and under. Claim amounts that exceed $5,000 are considered excess losses. Primary losses have a greater impact on the mod than excess losses. The concern here is that these frequency claims will lead to some type of major severity loss in the future.”
“With NCCI’s announcement, the split point value will change so that over a three-year period the current value for frequency claims of $5,000 will increase to $10,000 for the first year, beginning in 2013. In 2014, this will increase to $13,500, and from 2015, the split point value will be $15,000 plus inflation adjustments. This ultimately means that more claims will fall into the primary loss category. According to NCCI, these changes are being implemented as the average cost of a claim tripled since the last split point update occurred two decades ago. NCCI basically sums up this new split point value by stating that ‘good mods will get better and worse mods will get worse.’
“With this change, employers with poor claims experience are facing major experience mod increases. To cover higher Workers Compensation costs, the employer might need to increase its bid or pricing on certain projects, causing the business to lose those accounts altogether. Also, many large companies refrain from hiring businesses with workers compensation experience mods greater than 1.00 if they’re doing some time of bidding work. Furthermore, there is a great risk that the insurance carrier will not renew the insured’s account, resulting in higher costs by forcing the employer to move into the assigned risk plan at a higher rate with an ARAP surcharge and possible loss of scheduled credits.”
AG: What steps can an employer and their agency/broker take to help stem rising costs, including the premium recovery program your company provides?
SF: “There are many cost containment steps and safety programs that one can implement. And, while safety and loss control programs are great and I believe a lot of employers have some sort of program, these are solutions that usually involve hiring a consultant for a fee and will only garner real benefits over time. The safety programs that usually show real results are ones that have someone at the employer overseeing the program and measuring results to find what really works.
“Based on the current workers comp market and continued rate changes needed to offset rising costs, in addition to the upcoming NCCI mod split changes, immediate results are needed to get immediate changes. The only immediate solution to reduce experience mods effective 2013, 2014, and 2015 is to change losses that have already occurred. For example, the 2013 experience mod utilizes losses from 2011, 2010, and 2009. In order to knock down an employer’s 2013 experience mod and most of the 2014 and 2015 mods, Workers Compensation premium recovery is needed. Safety and loss control protocols only affect forward solutions, but do have an impact on previous years. Workers Compensation premium recovery offers solutions going backwards and forwards.
“What always works well is when brokers and employers utilize insurance recovery services that have no out-of-pocket expenses and work on a no-recovery no-fee basis. It’s a win-win for everyone. Safety and loss control programs are great but they can be costly, and they require a lot of time and patience and someone to manage the programs daily to make sure that they’re actually effective and stay effective. With the service we provide, which is contingency-based, you have nothing to lose, and you get quick, quantifiable results. What’s more, if you are a broker, your clients/prospects will receive cash back returns on current and prior years’ workers comp policies and save on future years. You will not only benefit by maintaining current clients and winning new prospects, you’ll also give these employers a better underwriting profile in the renewal marketplace.”
Simon explained that through APEX’s website, brokers can calculate a minimum (loss free) mod and controllable premium in about 60 seconds for NCCI, New York, and New Jersey. “While this can be a helpful tool, you can’t tell employers you’re going to reduce their mod by 50 points. It will take years to accomplish this. We don’t recommend selling on minimum mods because, if I were an employer, I’d be watching those results. Rather, you can reduce an employer’s current and up to 6 prior years’ mods within just a few short months,” said Simon.
“Clients will stay with a broker for life when this happens, and prospects will listen when you show them some cash back returns. This is especially important now with many more of the larger brokers going after middle-market business, which will make it more difficult for current middle-market brokers to compete on price. Brokers that want to protect their book of business and cement new clients will need to use all the tools available to them. We suggest brokers begin with services that have no out-of-pocket expenses to them or their client/prospect. Plus, referring brokers earn first year and renewal commissions.”
For more information about Apex, please visit: www.apexservices.com. Or, you can call Simon at (888) 380-APEX (2739).