Employers often times don’t understand the renewal process for their workers’ compensation policy is really just taking 3 of the last 4 years claims results, averaging them, and applying some credits or debits. In other words, by renewal time there isn’t much you can do to affect your rates, you are in the hands of the negotiation ability of your broker and the fickleness of the insurance markets.
Workers’ compensation has a long tail when it comes to claims. That means that it is virtually impossible to understand the value of your losses till a few years down the road. That is especially true in California where 20% of claims are still open 5 years from the date of injury.
Every so often we enter into a soft market for workers’ compensation rates. That means the insurance carriers tend to relax their calculators and bid for clients at rates that are far under profitability.
Why would they do this?
One of the big reasons is they are enjoying a very high rate of return on their investments. Because they will sit on the premium for many years while they are paying out the long tail of claims, the compounding return of a great market can make up for losses. Today, we are in an incredible bull market for both real estate and stocks. Insurers want as much capital as possible to take advantage of this trend.
So what’s the big deal?
When clients have a bad year (or sometimes bad years) with their claims results, the soft market may not penalize them with higher rates. This can be highly dangerous as gives clients a false sense of reality. The experience modifier will often go up even when their rates go down.
The one constant in workers’ compensation in California is the pendulum-like way the rates fluctuate. In other words, the market will get hard again at some point. When it does, the underwriters will pivot and go the opposite way with rates. That means rates could go up at the same time they start rigidly applying the higher Xmod. When they do, clients may see massive changes in their rates. Because workers’ compensation can be the most expensive cost of employment, some businesses will not be able to survive the change.
We could see many businesses leave the state, sell or close their business, lay off workers, or go to illegal workers’ compensation programs.
So the best thing to do is never let rates dictate how you approach your workers’ compensation program.
Best practices include the following
- Plan ahead and have a long-term approach to workers’ compensation insurance. That means invest in safety and claims management today so that you can have better rates in 2 to 4 years.
- Find a broker who will do the same.
- Know your ELR (expected loss rate – WCIRB) and manage your current year claims against it.
- Pay attention to the Pure Premium Rate Filings.
- Don’t rely on insurance companies to manage your claims efficiently. Broker or claims oversight companies can save huge money be staying on them.
For more information, please contact me.