Workers’ comp market hardens, bringing higher premiums
By Craig Johnson
The Patient Protection and Affordable Care Act has grabbed much of staffing executives’ attention. Figuring out financial liabilities implications while trying to be compliant is keeping folks busy. But there’s another development that needs the industry’s attention — a cyclical “hardening” of the workers’ compensation insurance market.
Its eﬀects are already taking place, and it is likely to continue for a while. Why does this matter?
“One of the hardest markets in the last two decades is about to hit,” says Geoﬀrey Goldwater, a principal at Odell Studner, insurance brokers and consultants. “The hardening of this workers’ comp market is quietly going to create a storm.”
A hardening insurance market means rising premiums and stricter underwriting. Staffing ﬁrms — particularly those in areas such as light industrial and hospitality — will feel the pinch given that workers’ compensation costs represent a signiﬁcant expense for many of them.
Workers’ compensation insurance premiums reached their lowest level just before the recession, says Goldwater. The down economy helped keep premiums low, but now they are rising to make up for the softer market.
Insurance carriers have been struggling to charge enough in premiums and earn enough from investments to cover the losses from claims. How much money insurance carriers take in premiums compared to how much they pay out in claims is known as the “combined ratio.” A combined ratio of more than 100 means ﬁrms are paying out more than they receive in premiums. The National Council of Compensation Insurers — a nonproﬁt provider of workers’ comp data to industry and almost 40 state governments — reported the combined ratio for private carriers was 109 in 2012. It marked the ﬁrst decline since 2006, but things remain far from ideal.
Robert Thompson, vice president of insurance provider World Wide Specialty Programs, said more and larger workers’ compensation claims are being seen. A force behind rising workers’ compensation is increasing medical expenses; even a minor injury can drive signiﬁcant costs.
One example, the Oregon Department of Consumer & Business Services reports that medical claim costs for workers’ compensation have risen 31 percent from 2003 to 2010 in that state while wages have risen just 20 percent.
Smaller ﬁrms have seen workers’ compensation premium increases in the range of 15 percent to 25 percent as of late, says Chris Ottesen, vice president of ﬁnance and risk at People 2.0, a provider of infrastructure and back-office services for a network of staffing ﬁrms. Larger staffing ﬁrms, well-capitalized with more sophisticated risk management programs, have seen smaller increases. The larger ﬁrms have signiﬁcantly greater purchasing leverage in the insurance marketplace compared to small and midsize staffing companies.
Ottesen also notes that carriers are looking more closely to see that workers are correctly classiﬁed under the right workers’ compensation codes, which describe jobs and the exposure to risk they represent.
“They’re much more aggressive in forcing compliance with workers’ comp codes,” he says. “That’s an area they are really focusing on.”
The more risky the jobs being ﬁlled, the higher the cost for workers’ compensation coverage. And that can mean a large expense for staffing ﬁrms. Workers’ compensation costs could represent more than 30 percent of payroll for high risk positions.
But while the workers’ compensation market for staffing ﬁrms may be difficult, there are best practices that can help make sure premium increases are as low as possible.
They include screening client companies, screening candidates and having accurate coding of workers’ compensation classiﬁcation codes. In addition, when a claim does happen, ﬁrms should have a good process in place to deal with it, including getting injured employees immediate treatment and follow up as well as getting them back to work after they have recovered.
The best practices haven’t changed much over the years, but they really start with the basics of thoroughly screening clients and candidates, Ottesen says. Staffing ﬁrms should check clients to make sure they are operating a safe environment and that the client isn’t trying to shift risk to staffing ﬁrms. It boils down to “really just making sure you’re doing business with companies that have good safety programs and are best in class,” he says.
World Wide’s Thompson says staffing ﬁrms should check clients’ OSHA logs as well as their experience modiﬁcation. “If they’re not a safety conscious company, or if they don’t have a loss control culture already established, you could be walking into a hornet’s nest.”
And when a good client is found, staffing ﬁrms should check to ensure workers are doing the jobs they were hired to do, Thompson says. People can get assigned other jobs onsite — and if they are not trained properly — can end up getting hurt. For example, a warehouse worker might get reassigned by a client to drive a forklift.
Jeﬀ Tuisl, principal at insurance brokerage Assurance, also says staffing ﬁrms should not just look at a client once, but check on the site periodically as well as help clients with safety issues. Things at client sites can change — such as a piece of safety equipment being removed from a machine. Staffing ﬁrms need to know what’s happening.
In addition, the contingent workers themselves should be taken into consideration.
Staffing ﬁrms need to ensure they hire employees who are honest and produce quality work; there are some people who will ﬁle false claims, Tuisl says. And this is one area where the Aﬀordable Care Act might have an impact in the future. It’s believed some employees may ﬁle a workers’ comp claim because they don’t have their own health insurance. Such claims can be difficult to weed out, but one question is if everyone had health coverage, could it reduce costs?
Having a process in place to handle claims should an injury occur is another key best practice.
Odell Studner’s Goldwater says staffing ﬁrms should also have an accident/injury protocol. He recommends that staffing ﬁrms put processes in place that provide a nurse on call who can guide those on-site in ﬁrst aid via telephone. It would be a smart move for staffing ﬁrms to have a relationship with speciﬁc clinics near the client sites. This could ensure prompt treatment in the event of injuries saving time and money.
State by State
Bradley Isaacs, senior vice president at professional insurance buyer Risk Transfer LLC’s staffing division, also cautions that staffing ﬁrms should be cognizant of the loss ratio for occupations. A great performing class of business in one state may not be as profitable in another. Even within the same state there are wide ranges of expected proﬁtability that creates blind spots when pricing and managing workers’ compensation portfolios. For example, carriers look to maintain loss ratios (loss dollars paid out versus premium dollars collected) to under 65 percent, the expected loss ratio for the hotel classiﬁcation code (WC 9058) in Maryland is 424 percent compared to 37 percent in Texas.
Staffing ﬁrms sending workers to occupations with historically high loss ratios need to be concerned about the inherent dangers within the scope of the job classiﬁcation. If there is an injury and a loss, it can hurt a staffing ﬁrm’s insurability down the road as well as result in higher experience modiﬁcation (a calculation used to formulate insurance premiums based on past experience).
By managing their workers’ compensation portfolio, staffing ﬁrms can turn their workers’ compensation program into a proﬁt center, Isaacs says. For example, if a staffing ﬁrm’s net cost for a workers’ compensation code for a restaurant worker (WC 9082) in a given state is $2 per $100 of payroll, the client company may be paying $3 per $100 of payroll. The staffing ﬁrm is buying workers’ compensation in aggregate: if the staffing ﬁrm charges the client $2.50 per $100 of payroll for workers’ comp coverage, the arbitrage on the workers comp is the extra 50 cents per $100 of payroll and the client beneﬁts through savings as well. By focusing on risk management and safety, if we can reduce the overall cost of their workers’ compensation program, our clients can increase the proﬁtability.
Just as the cycle is hardening now, it will swing back at some point. Assurance’s Tuisl says the current cycle has been going on for the past six to 12 months and he expects it to last another 12 to 18 months — possibly through all of 2014. “I think a lot of people have already seen the biggest increase,” he adds. Increases of 15 percent to 25 percent shouldn’t continue, but increases in the 5 percent to 10 percent range could go on — though ﬁrms with poor workers’ comp experience could still see increases of up to 25 percent, depending on the state.
Tuisl says during these times it’s good to work with a broker that deals with the staffing industry because the markets are deﬁnitely limited. “If you’re working with a broker who deals with staffing, it just puts you ahead of what else may happen to you,” he says.
Unemployment taxes, workers’ comp and the Aﬀordable Care Act are the three biggest controllable costs a staffing ﬁrm will face. And ﬁrms big and small need to have an understanding of all three.
Craig Johnson is managing editor of Staffing Industry Review. He can be reached at firstname.lastname@example.org.
Managing Experience Modification
Robert Thompson, vice president of insurance provider World Wide Specialty Programs, lists six strategies staffing firm can employ to manage their experience modification:
- Have a zero-accident commitment.
- Implement an effective return-to-work program.
- Look for opportunities for employee selection and training programs.
- Report claims promptly.
- Establish a solid medical provider relationship.
- Make sure the payroll classification codes are correct.