Friday, January 13, 2012

Market Hardening Means "Reform" Not Far Away

The next national wave of "reform" shouldn't be too far away if workers' compensation follows historical trends.

The workers' compensation insurance market is "hardening" according to experts interviewed by WorkCompCentral news.

Robert Hartwig, , president of the Insurance Information Institute, told reporter Greg Jones that the national combined ratio is now about 118%. In California the most recent numbers reflect a combined ratio of around 130% according to the Workers' Compensation Insurance Rating Bureau.

"Eventually, the threshold for financial pain is breached," Hartwig said. "Once insurers are paying $1.15 or $1.20 for every dollar of premium, that becomes a wake-up call."

But premium increases won't be dramatic, averaging about 4 to 5 percent according to Hartwig, which means the market is in transition towards pricing discipline.

An analysis of transactions conducted through Dallas-based MarketScout's insurance exchange found workers' compensation premiums increased 3% in December 2011. Richard Kerr, chairman and chief executive officer of MarketScout, told WorkCompCentral news the increase recorded in December is the first in six years and eight months, ending an exceptionally long soft market cycle.

In a hard market, employers have few options to reduce their workers' compensation costs, Kerr said. They can turn to state funds, but state funds will probably also increase their rates. They can look at self-insurance, but many employers cannot afford the substantial deposits required.

Most employers should just resign themselves to the fact that they'll be paying more for workers' compensation insurance, Kerr said.

Reform measures that control costs, such as fee schedules, treatment guidelines and utilization review, can help diminish some of the pain that employers will feel, according to Hartwig.

And that's the start of the "reform cycle".

I've been involved in workers' compensation now for about 28 years. History repeats itself, and that is certainly true with workers' compensation.

What is interesting about this cycle though is that it is on the heels of one of the worst economic times experienced by this country since the 1930s, making this market hardening probably a little slower than what would usually occur.

Employers don't typically start screaming about premium increases until they see double digit increases.

In the early 2000s those double digit increases had numerators greater than one on an annualized basis - a market hardening precipitated mostly by a complex reinsurance scandal that flew under the radar of the general public.

That scandal laid the ground work for election of Schwarzenegger as Governor of California who made workers' compensation premiums his cause célèbre forcing reform legislation in 2004 as the market was already trending towards normalization. It was a part of Florida's historic SB 50-A and Texas' HB7.

In the past the path to "reform" agendas was much less dramatic, and that's what we're seeing in this round. Unless there is some catastrophic event that drains the industry more dramatically than inflation (of which there really is none in this economy - even medical inflation is relatively benign compared to prior policy years) we'll see piece-meal "reform" measures more strategically aimed at the surgical editing of laws and regulations rather than wholesale seismic shifts in systen components.

But those whose agendas were most affected by this last wave of reform are in a perilous place in workers' compensation history. I'm talking of the injured worker contingency.

There is no question that the mid-2000 reform wave dramatically affected benefits claimed by injured workers. That population is just now making up some ground legislatively and judicially in attempts to gain back some of what was lost, namely the size and duration of indemnity benefits, and to a lesser extent flexibility in medical attention.

The current market hardening appears to be timing with benefits hardening (read increasing) such that from a political standpoint there will be that, as one of my business partners is fond of saying as he crosses his wrists in the air forming an "X", the magical "inflection point" - that point in space and time where opposite trends converge.

The inflection point in workers' compensation "reform" is that spot where the pain of premium increases meets the popular perception that someone is getting too much, whether it is injured workers, their attorneys or the medical community.

For those on the front lines of the injured worker community, the attorneys and other injured worker representatives who provide legal advise, counsel and dispute resolution representation, care should be exercised in forming the public's opinion about the work that they do and the plight that injured workers face.

Less than one percent of the working population ever gets hurt at work or ever makes a claim for workers' compensation benefits. It's all in the numbers - that means that 99% of the working population don't really care about workers' compensation, don't really care about injured workers, don't really care about "reform" (which is why Schwarzenegger was successfully able to threaten a voter initiative when pushing his "reform" agenda) - they'll never get hurt at work. They just know that their neighbor gets disability benefits but goes to the golf course every other day...

"Reform" will cycle through again, perhaps in 3 to 5 years, but certainly will occur. How constituencies fair will be determined starting now as these groups begin to refine their marketing messages and political affiliations.

How will you communicate VALUE to the 99%?workers compensation, work comp, injured worker 

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