3 Signs of Trouble Ahead for Workers’ Compensation Insurance

March 18, 2016

Workers’ compensation insurance costs can be daunting for business owners, especially those in high-risk industries like construction and manufacturing.

Fortunately for businesses, insurance premiums since 2012 have grown faster than losses. For Colorado employers, the decline in claims costs has meant a reduction in the loss cost component of the workers’ compensation premiums they pay. Last October, the Colorado Division of Insurance approved a 1.9 percent cut in the average loss cost component of premiums for 2016. The loss cost component in Colorado was flat from 2014 to 2015.

“As with last year, this positive development comes from the work by employers and employees to better manage workers’ compensation costs,” Marguerite Salazar, Colorado’s Commissioner of Insurance, said when the rate cut was announced.

But there are signs of trouble ahead.

Conning, a Hartford, Connecticut-based investment management company for the insurance industry, issued a report in February with evidence that loss costs could increase faster than premiums in 2016 and beyond.

Conning cited three red flags for workers’ compensation underwriters:

• Accident frequency has increased. A stronger U.S. economy has meant more inexperienced workers have joined the workforce, so high-hazard occupations like transportation and construction have seen increases in work-related injuries since 2012. For example, non-fatal work-related construction injuries jumped 9.5 percent from 2012 to 2013. Also, as older employees work longer, the number of accidents among those 65 and older rose 18.5 percent from 2012 to 2013.
• Accident severity is rising. The Bureau of Labor Statistics reports that construction fatalities rose 5.6 percent from 2013 to 2015, and manufacturing fatalities rose 9.3 percent from 2013 to 2014. In addition, hospital and drug costs – the biggest expenses associated with workers’ compensation claims – are rising faster than inflation.
• Evidence of cost-shifting. The Affordable Care Act may be driving physicians and hospitals to “leak” group health cases into the workers’ compensation system, where they can charge more for the same services than under a group health contract, according to Conning.

All of those things mean insurers can expect to pay higher medical expenses and wage replacement benefits, which will eventually raise the loss cost component of workers’ compensation premiums.

Some quick tips on managing workers’ compensation costs:
• Both employers and insurers need to double down on their risk management and safety and training programs to keep their employees healthy and happy, and to keep their costs down. In the end, an ounce of prevention truly is worth a pound of cure. Studies have shown that every dollar invested in injury prevention results in a $2 to $6 return for businesses.
• Employers should also take care when hiring, even during a time of labor shortages, to weed out candidates who could pose a safety risk to the company.
• Employers must be engaged and involved in managing the claims process for their injured workers.
• Employers should consider implementing a strategic Return-to-Work program to proactively help injured employees return to work as soon as possible.

Ultimately, managing and educating employees at the time of hire and after an accident is critical for businesses to control costs and remain profitable.

Steve Doss, CPCU, CRM, CIC, is CCIG Vice President, Commercial Lines

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