Industry Outlook

By Arthur Cadorine, Vice President, Information Acquisition, Development, and Service, ISO

The workers comp industry faces many challenges, uncertainties, and opportunities in the years ahead. To be prepared, it’s critical for carriers to understand and stay on top of current and emerging trends. Here are a few hot issues to keep an eye on:

Changing demographics in the workplace
The number of workers over the age of 55 is growing at a quickening pace. This growth is happening for a number of reasons, including the number of baby boomers now reaching their 50s and 60s, the higher minimum age for retirement, longer life expectancies, and older workers’ concerns about the economy, their savings, and health benefits.

With this aging workforce comes a whole new set of risks that carriers need to understand and take into account in their business strategies. For instance, studies are showing that older workers tend to be more experienced and have fewer workplace injuries, but those injuries are more costly to treat and time away from work is almost twice as long as it is for younger workers with similar injuries.

Carriers need to understand the physical abilities, limitations, and unique exposures of aging workers to be able to properly assess the work safety and wellness programs employers have in place and, where necessary, offer strategies to reduce risks and prevent injuries in their workplaces. Dedicated data-collection efforts and analysis can help carriers get a clearer picture of the exposures they face as the workforce ages.

Healthcare reform
As the nation moves closer to universal healthcare, how will the workers compensation system be affected? The two systems are set up differently in many ways. For instance, healthcare reform looks to shifting more and more costs to the consumer, which creates an incentive for lower utilization. However, in the workers comp system, employees don’t pay comp premiums, co-pays, or deductibles. Injured workers are completely covered by employers and carriers, who bear all the costs. So there is no incentive on the part of the employee to limit expenditures.

Will federal mandates take into account the workers comp model's unique benefit structure, which includes lower cost of treatment for workers, involvement of employers in decision making, and indemnity payments for disability? Or will those mandates conflict with long-established state-based systems? Will healthcare reform affect the ability of states to deliver quality workers comp systems?

There are many questions, but no clear direction yet. With so many interested parties calling for change and no plan of action, it remains to be seen how federal legislation may fit in with state workers compensation laws. Needless to say, this is an issue carriers will want to follow closely.

Healthcare reform will almost certainly also impact company operations. To pay for the reforms and coverage expansions, there will be increased focus on fraud detection and prevention and improved operational efficiencies. It is highly likely that these changes will impact the workers compensation system.

The state of the economy
With the economy still reeling from the recession and unemployment expected to peak above 10 percent in early 2010, recovery will take a long time. Some experts predict the job market won’t return until 2011.

Rising unemployment is eroding payrolls, and because workers comp premium production is directly associated with payroll, premium growth is taking a hit. Carriers should be aware of how their insureds are handling any downsizing of their workforce or reduction in payroll. For example, if companies cut wages but not hours, carriers earn lower premium while assuming the same amount of risk. If a company is using large-scale layoffs to reduce payroll, workplace injuries tend to increase and the number of workers comp claims spikes. Then, as there are fewer people working, fewer workplace accidents occur. But as the economy recovers, carriers should be aware of how their insureds are handling expansion efforts. As companies create new jobs and begin to hire a wave of new employees, the incidence of workplace injuries tends to increase, because in some jobs inexperienced workers are more likely to get hurt.

As the mix of employees, classes, and payrolls churns at a faster pace, insurers should not lose focus on the impact of these changes on the premium audit function. Scheduling more physical audits may improve the accuracy of policy premiums, but there is an associated cost in performing the audits. Insurers should look to a more focused and measured approach to premium audits.

The state of the stock market and its effect on investment earnings is also a challenge. For workers comp carriers, investment income is an important factor because they have so many long-tailed claims. But low investment yields have been pressuring industry underwriting results. Additionally, medical costs continue to rise steadily and outpace wages. With troubles in the stock market, indemnity claim costs surpassing wage increases, and premiums decreasing, it’s critical that carriers adhere to sound underwriting practices in these unsettled times.

The need for data, data, data
There are many weighty questions in the workers comp arena that need answers. One of the most pressing is, what is driving skyrocketing medical costs? Is it pharmaceuticals, excessive medical tests, overutilization of medical services, or other factors? The answers lie in the data — much of which remains untapped, untouched, or underutilized, just waiting for the right extraction and analysis.

The industry needs to develop new strategies for identifying cost drivers, controlling medical costs, and understanding the impacts and implications of trends. To develop these strategies, insurers should tap into new ways of collecting data, such as using transactional reporting and data reporting standards, and new technologies, such as predictive analytics.

Predictive analytics, which is beginning to gain credence with insurers and regulators, gives us a better forecast of what will happen tomorrow. Predictive modeling for workers compensation can increase the accuracy and quality of claims analysis, identify high-risk claims early in the process, provide focused service to injured workers, and significantly manage costs. But again, predictive modeling is only as good as the data that’s driving it.

With proper data collection, management, and analysis comes knowledge. The industry is sitting on an enormous amount of data that, once collected in transactional format, can be easily extracted and analyzed to help insurers more clearly understand their exposures and the factors playing against them, so they develop effective competitive strategies to survive.