SI Review: July 2013

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Rising Tide

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.

Rising Premiums

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.

Thorough Vetting

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.

Screening Clients

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.

Looking Ahead

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 cjohnson@staffingindustry.com.

[SIDEBAR]

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.

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