Why Employers Seek Short-Term Solutions

At issue is Workers’ Compensation Insurance, or any line insurance for that matter.
Employers, for as long as they wish to remain in business, will need Workers’
Compensation insurance to cover the legal obligation of paying for the cost of injuries
to employees. The presence of risk of loss in the workplace is a long-term problem. Yet
the solution is to “shop” for Workers’ Compensation coverage every year in the hopes
of reducing the price of the coverage through a competitive market of carriers quoting
their business. This is a Short-Term approach. What the Employer fails to see and
understand, in most cases, is that every time you change carriers you have to re-orient
the new carrier to your operations, your people, your culture , your methods and style.
This is inefficient as those redundant, start-up activities have already been done with the
past carrier. Also, employers have to send out new information to their staff and other
locations for new claim reporting numbers, new doctors and new adjusters. Most
employers do not shop for there professional services every year. They do not call
around for competitive quotes form their CPA, Attorney, family Dentist nor Doctor.

Why is that?

Perhaps the answer lies in the realization that the Employer sees Comp as an item
of commerce, a commodity, to be shopped. Carriers have to take responsibility for
acclimating employers to shopping for a lower and lower price every year as they
solicit agents to send applications to write business. Then many carriers, in an
effort to gain market share, build an under-priced book of business and when the
losses materialize and develop the carrier is left holing the bag of rocks.

Six national Worker’s Compensation Insurance Companies have lost their rating since 3-1-00 .

  1. Reliance
  2. Credit General
  3. Superior National
  4. Paula
  5. Freemont
  6. Western Growers

There is a little bit of irony in the fact that the desire of employers, in general, to
lower cost is what created the reduced market capacity to give them that lower
cost. So, the competitive price providers have been self driven from the market
place by taking too little premium to cover historical loses and expenses. This is not a new found phenomenon and has been going on consistently in modern times.
The Insurance Industry even has a name for it. It is called the Underwriting Cycle.
Carriers take too little premium and then don’t have enough money to pay claims.

Then they raise the rates to cover the anticipated cost and premiums go up. Now-
they knew all along that a certain amount of money was needed. How easily we forget the red ink of past years.

So, back to the question, why do employers seek short-term solutions to long-term
problems? Is it due to the belief on their part that they just won’t have as many
losses next year? Do they believe that they will continue to get the benefit of the
bargain- where they pay under the Loss Pick and expenses indefinitely? Do they
think they pay too much for Comp regardless of the amount of claims the carriers
has to pay out?

I have often heard that customers are smarter these days. As a matter of fact, the
President of the NCCI, Bill Schrempf, recently stated that there are fewer losses
reported than in past years. Employers, ( according to Schremph), are doing more
prevention in work place safety. Perhaps another explanation is that Agents have
educated Employers to pay the small claims themselves as to not impact their
Experience Modification Factor. So, there are less losses reported but there may
not be less losses occurring in the workplace. Evidence of this may be found in
NCCI’s action to revise the way they calculate Employers’ Experience
Modification Factor. They now use 70% of the cost of Medical Claims to off-set
the claims that are paid by employers.

The effect is to reduce the penalty of reporting all losses to carriers and hence
NCCI. The goal is give NCCI accurate and credible data of numbers of losses.
Back to the point– if Employers have been educated by agents to pay small claims
to avoid the disproportionate increase on their Experience Modification Factor,
then why can’t or why haven’t Employers been educated on the benefits of staying
with one carrier for several in not may years.

To reiterate the benefits are:

1) To develop a long-term working relationship with the carrier -employer
2) To develop. implement, monitor and control a comprehensive Prevention
Program including Safety Program, Drug Free Program, Claims Management
program and other cost reduction techniques.
3) To stabilize price – which means avoiding the drastic swings of the
Underwriting cycle.

I submit that Employers would save more money collectively by showing loyalty
as well as performance to a carrier than by shopping coverage every year for the
cheapest price. You get what you pay for and the loss of the A.M. Best rating by
so many carriers in such a short time is evidence of that. No doubt when
employers had to go back to market to replace coverage it represented a distraction
to their operations. Also, I suspect they had to pay an increase in premiums for

Let me continue that the competitive pressure to write business is the same
pressure that allows a new carriers to come into the market and competition is
good for the consumer- right? I agree somewhat, as long as all carriers are the
same, but we know they are not.

The operations of Carries is pretty similar in that they collect a premium, pay
claims, and perform a Final Premium Audit to make sure the payroll stated was
actually the payroll collected. They all hope to reduce looses and earn an
Underwriting profit from accepting the right accounts at the right price. The
problem is that in the insurance industry, like few others, we don’t know the cost
of goods sold until about 14 + months after the expiration of the policy. The point
is that carrier know there expenses, know the profit they wish to make and then
estimate, based on past experience, what to charge for loss cost, the cost of losses
to come.

I have come to the conclusion that their is enough responsibility to go around. On
one hand the Employer has too have this coverage and no body likes to be told
what they have to buy. That begins a negative bias to the product from the get- go.
Carriers enjoy a stable demand curve for there product. Perhaps there is no
loyalty to carriers because carriers will get off of a risk that is performing badly in
a wink of an eye. They have that right and that has to create even more of an
atmosphere of animosity for the employer. Another ingredient is the Grow or Die
attitude of Insurance Companies. That is, Book Premium so we can grow and
expand operations. Perhaps the motto should be grow moderately and live. In this
case, protect you security rating from A.M. Best. When you focus on growing too
fast you lose sight of controlling workplace safety and claims management which
is where the real profit comes from.

I believe the flattening of the Underwriting Cycle Curve will comes from less
competion, not more and more loyalty from consumers, not less. That will then
create capacity and availability of market and stabilization of premiums.
What do you think?