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Big Changes Coming for Workers’ Comp

There is still much unknown about how deeply and pervasively the pandemic will affect the U.S. and global economies; however, a deep and long-lasting recession is now a foregone conclusion. The downstream effects of a recession will change the workers’ compensation market dramatically for years to come.  

Employers should anticipate a hardening workers’ compensation marketplace beginning soon.

Rate Increases:   

For the past decade, employers enjoyed the advantages of a soft market. Premium rates fell year over year; in 2019, the average workers’ compensation rate was at the lowest point in the 46 years since 1973 [California Workers’ Compensation Insurance Rating Bureau’s 2019 State of the System report]. 

Businesses in all industries should expect workers’ compensation rates to increase dramatically over the next few renewal cycles. Insurance carriers offering both guaranteed-cost and high-deductible policies maintained their market share in a competitive marketplace with enticingly low premiums. Carriers partially offset the cost of insurance with the burgeoning investment returns earned in the booming stock market. With stock market returns evaporated, carriers must now charge the actual full cost of the insurance plus overhead, operating costs and shareholder profits, which will result in dramatically higher premiums.

Reduced Availability of Coverage:

Over the past decade, carriers competed for the employer’s business by offering a plethora of competitive options.  

Welcome to the new reality of a hard market. In previous hard markets, carriers exited the workers’ compensation market altogether to focus on more profitable and predictable lines such as general liability, auto, directors and officers’ coverage and the like. With limited competition, the few remaining carriers will become more choosy. Even employers with long-term, loyal relationships to a carrier may be bewildered to be refused a renewal offer. New coverage pricing may be so costly as to require the employer to re-think its entire business and pricing strategy. 

This marketplace reversal presents distinct challenges to employers unable to absorb the higher cost of workers’ compensation insurance. Higher insurance rates will hammer companies that have long-term, fixed-price contracts or that operate in markets with cutthroat competitive pricing such as service-based businesses, construction and government contracting.

See also: COVID-19: Implications for Business Models  

A Safe Port in the Storm: Self-Insurance

However, all hope is not lost. A few alternatives to traditional workers’ compensation insurance have always existed. In California, there is a reliable and robust self-insurance option for employers. A recently conducted actuarial study found that self-insured employers lowered their workers’ compensation costs an average of 24% even when insurance rates are favorable. These savings are stable and likely would be even higher in the new hard market. Self-insurance is primarily available to medium-sized and large companies that meet specific financial criteria. Self-insured groups (SIGs) exist in many industries, making self-insurance accessible to smaller employers.

Self-insurance is a stable, predictable and lower-cost option to employers in boom times and recessions.

The employer pays only the direct cost to adjust the claims on an as-incurred basis. There is no carrier involved, so there is no risk of rate increases or lack of available coverage.

In any market, self-insurance offers employers four additional and significant benefits: greater control, increased savings, improved outcomes and peace-of-mind.

Greater Control: Self-insured employers can design their programs, so they exert greater control over how the program works. Employers can determine priorities based on the needs of their company and employees. Priorities may include such objectives as more robust claims processes, faster return-to-work cycles, white-glove treatment of their employees and telemedicine.

Increased Savings: Employers save money because they do not pay carrier overhead, marketing and shareholder profits, as demonstrated in head-to-head studies comparing traditional and high deductible policies with self-insurance. 

Better Outcomes: With the potential of greater control over the care and treatment of the employees and processes comes improved outcomes for injured workers. Employees of self-insured companies receive the care and treatment they need in a timely way, delivered by providers chosen by either themselves or their employers. Expedited medical treatment, caring claims administration and return-to-work programs can hasten healing and recovery of the injured workers. Greater control results in employees reclaiming their lives and returning to work sooner, equaling happier employees at a lower cost to the employer.

See also: COVID-19’s Impact on Workers’ Comp  

Peace of Mind: A stable and predictable workers’ compensation solution, together with improved outcomes all at a lower cost, contributes to peace of mind for the employer.

Are you interested in looking into self-insurance for your company? First, check with your agent or broker. Some brokers may be knowledgeable and willing to assist you in becoming self-insured, working for a flat fee instead of a commission paid by the carrier. If your agent is not able to assist you, contact the California Self-Insurer’s Security Fund or visit the website at www.securityfund.org. 

Is Insurance Office Going Away for Good?

The coronavirus pandemic is already changing the way that American businesses operate, at least temporarily. But look closely, and you can see the potential for long-lasting changes even after life returns to normal. 

One of these shifts might just mean the end of the traditional insurance office. 

Pandemic-related lockdowns have already forced many major companies to expand work-from-home policies on a short-term basis. Having tried it, some employees and their bosses are considering more permanent changes. 

Nationwide Mutual Insurance is going even further. One of the leading life insurance and retirement companies, it moved 98% of its 27,000 employees to working from home in less than a week in early March. 

CEO Kirt Walker told Fortune magazine that management found no changes in key performance indicators and no negative feedback from customers. 

“We keep hearing from members, ‘if you hadn’t announced you were all working from home, we never would have known,'” he said. 

The Fortune 500 company decided to make the change permanent and has already shuttered five offices in Florida, North Carolina, Pennsylvania, Virginia and Wisconsin, and plans to shrink from 20 offices to just four. 

As you face similar issues at your business, there are short-term, intermediate and long-term issues to consider.

Short-Term Issues

In the past, employees who worked from home had designed a setup that worked for them. Many workers today are doing so under duress. 

Working from home during the coronavirus pandemic is complicated by schools being closed and businesses and workers having no warning.

Taking care of your school-age children, helping with their online learning, sharing home computers and internet bandwidth are all challenging experiences.

Not having the option of going to the office at all is not the best way to make work from home work on a permanent basis.

See also: COVID-19: Moral Imperative for the Insurance Industry  

Intermediate-Term Issues

The coronavirus is going to be with us for a while. Fear of travel and fear of crowds is going to make it hard to convince employees to return to work. Lack of childcare options will continue to be a problem. Even when schools reopen, they may do so under staggered or limited school times.

These issues are going to last for more than the coming 12 months. Now is the time to adjust to the drawbacks of the current forced and hurried experience.

You may need to invest in better laptops and other equipment for your newly remote workers. Your work-from-home staff needs quality video cameras and audio to participate in the increasingly common online meetings. 

While your staff may have a home computer their kids use for gaming that has these features, you really do not want to expose your business systems and data to your employees’ children’s computers. You would not be pleased if your staff let their kids access the computers in your office. Why would you want your staff working from their kids’ devices?

You may need to provide cell phone or better phone solutions for your home staff. For security reasons, you do not want to have company contacts and emails on your employees’ personal phones.

You need to hold regular weekly companywide or department-wide video meetings with your staff. People need to keep the connections with the folks they have been working with in your office.

It is probably a bad idea to have your staff take the computers and printers they currently have in your office home. Most traditional stay-at-home options are combined with remote access to networks and servers used through your current computers at your current physical office.

You need to put in place online methods for your customers to interact with your staff. This means increased use of digital signatures, electronic payments and online video meetings.

Long-Term Decisions

Even in the current situation, working from home provides some positives that you should consider.

Studies over the last several years consistently show benefits to your staff and your company. These include:

  • 13% to 22% increase in productivity
  • Increased employee retention
  • Lower cost for everything from rent, to office supplies, to office snacks
  • Generally happier staff, higher employee morale

Increased productivity and lower costs are two things your business could always benefit from. In the coming economic challenge – whether it turns out to be a recession or even a depression – these may simply be competitive advantages you need.

Take this time to plan how you should restructure your business now. As things settle out you need to have permanent adjustments identified and ready to go.

See also: Will COVID-19 Spur Life Insurance Sales?  

The future comes gradually, and then all at once. We may be at one of those tipping points, where companies shift from traditional offices in downtown buildings to employees working from home. 

Now is the time to start planning for that future. 

‘Smart Homes’? Not Just Yet

Having seen more than a little hype in my decades writing about technology, I have for years asked anyone and everyone associated with “smart homes” whether they could make an economic argument for the devices that can protect homes. Would deploying the devices widely cost less than the damage they would prevent?

I finally have an answer. And the answer is… no.

Not, at least, when it comes to a major focus of the “smart home”: devices that detect water leaks.

The lack of an economic argument doesn’t mean “smart homes” won’t eventually happen as detection devices get cheaper. But the economic issues certainly present a hill for advocates to climb, and, with auto telematics, we’ve seen for more than two decades that a technologically appealing idea doesn’t guarantee broad adoption.

My chance to look at a real economic argument finally came courtesy of a LexisNexis analysis of Flo by Moen, which can detect a leak and notify the homeowner or even automatically shut off the water to the house to prevent what can be extensive damage. The analysis reported that installation of the devices in 2,306 homes reduced the number of claims by 96%, in comparison with claims in a control group of 1.3 million homes in similar areas and of similar size and value. The severity of the claims that still occurred fell by 72%.

Sounds impressive, right? But let’s take out a proverbial envelope and do some calculations on the back.

Each device is about an $800 proposition — roughly $500 for the device and $300 to have a plumber install it in a home. Multiply that $800 by 2,306 homes, and it costs you $1.85 million to install the devices. Assume even a modest interest cost for that $1.85 million, and you’re adding perhaps $50,000 a year to the expense of the installation.

LexisNexis didn’t provide the raw data about the number of claims that still occurred, so I made a couple of educated guesses and estimated that those $1.85 million of devices saved the 2,306 homeowners and their insurers about $240,000 a year. That would mean it would take a decade to earn back the cost of installation — $1.85 million plus $50,000 a year for 10 years equals $2.35 million, or almost exactly the $240,000 a year of saving times 10. The payback takes longer, of course, if the devices need any maintenance or, heaven forbid, don’t last at least a decade.

(For those of you who, like me, are numbers geeks, I’ll explain my reasoning on the savings. The rest of you should just skip to the next paragraph. I began with the 96% number, which meant that 24 out of 25 claims that could have been expected did not, in fact, happen. That meant that either 25 claims was the expected baseline (roughly 1% of the homeowners with Flo installed) or that 50 was the expected baseline (roughly 2%). Our friends at the Insurance Information Institute report that 2% of U.S. homeowners each year file claims related to “water damage and freezing,” while the LexisNexis report specified that the claims that were prevented were for “non-weather-related water damage.” I don’t know exactly how the definitions map to each other, but I assume the LexisNexis definition is a subset of the III figure, so I used the smaller of the two possible baselines. If I’m right, then the devices prevented 24 claims. LexisNexis said those claims average $9,700. Do the math, and you get savings of $232,800. The one claim that still happened was 72% smaller than the $9,700 average, according to the report, so it was reduced by nearly $7,000. Add the two savings, and you’re a shade under $240,000.)

Some insurers seem to hope that customers will buy the leak detection devices on their own, but that seems unlikely, at least in any numbers. Perhaps someone will be so scarred by a major loss related to a water leak that he or she will invest in a device. But, if you assume a deductible of $1,000 on a homeowners policy, you’re asking people to spend $800 up front to avoid a one-in-100 annual chance of paying $1,000. That math doesn’t work for me.

Insurers could subsidize the devices, but who can make a rational argument for an investment with a 10-year return (or even with a five-year return, if I picked an unfairly pessimistic scenario on the number of claims prevented)?

Dan Davis, director of IoT and emerging markets for LexisNexis Risk Solutions, cautioned that the size of the sample for the Flo by Moen study was still pretty small, even though it dwarfed anything I’ve seen elsewhere. If there was noise in this study, and the actual results turn out to be a 99% reduction in claims, rather than 96%, then you’ve tripled the savings and brought the economic argument into at least the realm of possibility. (Of course, if that 96% turns out to be 90%, you’ve got a real problem.)

He said insurers should also be looking at how subsidies for leak-prevention devices might improve customers’ feelings about an insurer. How much of a subsidy might a company be willing to offer for a major increase in Net Promoter Score or in the number of years the company can keep a client?

Auto telematics, with their two decades of feeble adoption, have shown the need to think broadly about benefits: Insurers focused on offering discounts to good drivers, only to find that customers often cared more about other, less costly benefits such as free roadside assistance.

The good news for advocates of smart homes is that customers seem genuinely interested, according to other LexisNexis research, and are, despite some privacy concerns, generally willing to share information with insurers in return for some kind of benefit. (My 20-something daughters warn that their generation may be scarred by a 1999 Disney movie, “Smart House,” about a smart home that goes berserk and imprisons a family — the story is Disney-ified, but it’s still basically HAL from “2001: A Space Odyssey.”)

I keep thinking that Roost will build momentum for smart homes based on its intelligent batteries for smoke detectors. The cost of the battery is minuscule, just slightly higher than for a regular nine-volt battery, and there is no cost for installation — you just get on a ladder and swap out your old battery for a Roost battery that alerts your phone any time your smoke alarm goes off. But I have to assume the economic argument doesn’t quite work for Roost, either, or someone would have made that argument after years of my asking.

And if a clear case can’t be made on preventing fires or water damage, two of the biggest perils for homeowners, then the whole “smart home” movement rests on a shaky economic foundation.

Yes, people will keep buying “smart” devices that help manage energy consumption or that tell you who’s at the door (or who’s stealing the packages left there), but it seems that the broader revolution will have to wait a bit.

Stay safe.

Paul

P.S. Here are the Six Things I’d like to highlight from the past week:

COVID-19’s Once-in-a-Lifetime Opportunity

If insurers innovate aggressively, they have a once-in-a-lifetime opportunity to educate potential buyers on the value of insurance.

Managing Risk in a Pandemic

Amid the chaos, there are clever ways to introduce incentives for both businesses and individuals to be smart.

Retrenchment on Technology Plans? Not Yet

Many insurers report no changes to their plans, with some reshaping and a few accelerating but very few pausing or retrenching.

Will COVID-19 Spur Life Insurance Sales?

It may be that COVID-19 will eventually help drive demand for life insurance, but the data says it hasn’t just yet.

COVID-19 May Mean Big Changes for LTD

The recession may bring changes to the long-term disability industry that require strategic agility during evolving economic conditions.

Parametric Insurance: 12 Firms to Know

These companies are worth considering as examples of how parametric insurance works, and what the future might look like.

4 Key Changes to WC From COVID-19

COVID-19 and the onset of a deep global recession are reshaping every corner of workers’ compensation, from legal issues surrounding coverage to the delivery of care to injured workers. Some of the changes can be anticipated based on prior recessions. But others are new and highly dynamic and will vary based on the course of the pandemic.

Amid the flux, we see four changes that are critical for carriers to grapple with. How companies respond to these changes may determine their survival in an extremely challenging economic environment. Fitch is expecting a five-year high default rate this month, and economists are expecting even more bankruptcies in the current downturn than in the Great Recession in 2008-2009. Even well-capitalized companies need to quickly adapt.

A Shift in the Types of Claims Filed

Carriers are seeing a sudden shift in the flow of new workers’ comp claims. On the one hand, aggregate claim volume has dropped 40% or more. This is primarily due to the slowdown in activity and hours worked in industries that traditionally drive a high number of claims, especially retail and hospitality. In addition, roads now have 80% less traffic, so there are far fewer accidents and claims from drivers on the job.

At the same time, new types of claims are emerging. Most specifically, COVID-19 claims are rising sharply. As many as 1,500 had been filed in California alone by late April, according to the California Department of Industrial Relations. The share of new COVID-19 related claims flowing into CLARA Analytics’ cross-industry data lake jumped from 1% in March to 4% in April.

The large majority of these claims are from healthcare workers who interact with patients and first responders such as EMTs and firefighters. Many of these cases are likely to be covered under workers’ compensation, pending an array of actions at the state level to cover these workers, such as Kentucky’s state order on April 9.

We should also expect to see a rise in claims from employees who have been recently furloughed. This is driven in part by situations where an employee has an injury that he or she might not normally have filed a claim for in a healthy economy but decides to file the claim given a declining bank account. Experience from prior recessions indicates these situations skew toward cumulative trauma claims, which are complex and costly to manage.

Changes in Healthcare Delivery

Social distancing and crowded hospitals are also leading to treatment delays for non-critical cases, including both recent and long-standing worker injuries. This will create extended periods of disability, more expensive claims and potential litigation. The impact of these delays will depend on the duration of the pandemic. If the impact on hospitals extends deep into the summer or there is a resurgence of the virus in the fall, there could be a new wave of issues for claimants, employers and carriers.

See also: COVID-19’s Impact on Workers’ Comp  

One benefit: The delays are pushing claimants to seek care in new ways, including telemedicine. Services like Righttime and One Call have seen a 2,000% increase in the use of telemedicine in just the past few weeks. Quicker, easier access to physicians may drive better outcomes and enable incapacitated workers to get care they might not otherwise get, which could lead to lower health-related costs.

More Fraud

Experts predict a rise in fraud in the coming months, as COVID-19 opens up opportunities for new scams by the segment of attorneys and providers known to engage in workers’ comp fraud. We will likely also see more claims that are challenging to define as legitimate or fraudulent because they occurred in a distributed work environment where there are no witnesses to corroborate the injury. Even the definition of a workplace injury is strained in a work-from-home situation.

In response, investigation teams are investing in expanding their online detection practices. AI-based data analysis and predictions can open up insights. “Advancements in AI now enable claims teams to see through hidden provider links, complex supply chains and long lag times to identify fraud that previously went unnoticed,” said Dr. Gregory Johnson, a medical cost consultant and former director of medical analytics at the California Workers’ Compensation Insurance Rating Bureau.

A Rise in Litigation

A set of states have recently issued executive orders and directives that shape COVID-19-related workers’ comp coverage, and some states, like California, are on the verge of doing so. As we’ve seen in the past, new legislation drives legal activity, so we can expect to see an increase in COVID-19 litigation over the next few months.

Litigation may also rise from the increase in terminations. An abrupt layoff can leave employees feeling aggrieved. In other cases, workers may simply be anxious to cover an income gap or are uncertain whether to file a workers’ comp or unemployment insurance claim. Unreported or latent injuries can come to the fore and result in a sharp rise in workers’ comp claims.

“Companies that initiate layoffs with little forethought and guidance may see a rise in workers’ compensation claims and experience numerous other unintended consequences,” said Kevin Combes, Aon’s director of U.S. casualty claims, Global Risk Consulting. In the last recession, Aon saw post-termination claims surge at companies that did not manage the event. “Companies that develop thoughtful reduction-in-force strategies are likely to see fewer workers’ comp claims and lower overall expenses,” Combes said.

A Reason for Optimism

Some of the changes we’re seeing, while disruptive, could have major long-term benefits. New healthcare treatments and delivery channels may emerge that improve outcomes and lower costs. Both private and public players in the workers’ comp system are adopting virtual case reviews, settlement discussions and other practices that might also increase efficiency and system access.

In addition, factors that drive cost in the industry may be seeing positive short-term shifts. For example, many claimants and attorneys may be focused on near-term cashflow and are less intent on maximizing claim values by stretching out litigation. As a result, many of CLARA’s customers are seeing cases move to settlement more quickly, at or below reserve estimates. This may be a prime opportunity to resolve stubborn cases or resolve new ones quickly.

Short-Term Disruption, Long-Term Progress

Claims operations at carriers and third-party administrators are not standing still. They are taking steps to respond and prepare for the future. The most aggressive are preparing teams to handle the shift in claims, including new training and handling procedures and updated case reserve guidelines. Many are evaluating new tools and programs to optimize organizational productivity in anticipation of eventual recovery. Principal among the tools available to manage this new world are the AI applications that have recently come to market.

See also: Impact of COVID-19 on Workers’ Comp  

It’s an ideal time to be evaluating AI, which can dynamically update models to account for changes in claims types and trends. By applying AI, claims teams can identify providers to bring into their networks and evaluate and optimize the performance of their attorney panels with evidence from prior outcomes. AI also can aid in making smarter decisions about when to settle a claim and when to litigate.

By investing now in talent and technology, claims teams set themselves up for success when we move into recovery.

To provide a deeper exploration of these trends and best practices, CLARA Analytics has published a whitepaper, “A Perfect Storm: Six Steps Top Claims Teams Are Taking to Navigate COVID-19 Turbulence in the Workers’ Compensation Market.”

As first published in Claims Journal.

The Right Counsel for the Right Coverage

As a scientist, I value clarity—in every sense of the word. From the work I do to the conclusions I draw to the products (or policies) I buy, I act based on the clarity of the terms and conditions of the documents I sign; or choose not to sign, if the language is unclear, the provisos too ambiguous, the provisions too abstract. 

Were I to act otherwise, unaware of the consequences and unable to bear the costs of my own ignorance, I would betray my commitment to clarity. I would also jeopardize or squander my family’s financial safety.

When in doubt, in other words, have an expert review the words. Have a lawyer explain the words, so the insurance you have is the insurance you need. Simply stated, assurance comes from ensuring you have the right insurance.

According to Reed Aljian of Daily | Aljian, a boutique litigation firm in Orange County, CA:

“Insurance can save a business millions of dollars and can change the landscape of litigation. But if you did not get the right insurance or you did not carefully review the policy to determine whether you have all necessary coverage, your premium payments could be worthless. This is precisely why hiring competent counsel early is important: Get the right insurance, and you could save yourself millions. Get the wrong insurance, or no insurance, and watch your business die.”

I agree with Aljian for reasons both moral and monetary, because I think it is irresponsible to not know—to refuse to know—what insurance you need; while I know how ruinous it can be to dismiss the advice of counsel by trying to defy the odds and anger the oddsmakers, the actuaries who calculate the risks of every policy an insurer issues. I know the outcome from having seen employees lose their jobs and employers close their businesses.

We need sound counsel to help us choose just policies over unsound business practices.

We need to be unafraid to ask for help, too, because many of us are reluctant to admit or embarrassed to say we need help in the first place. But we need only remember a truth as old as the scriptures and as clear as a prelate’s personal constitution: Be not afraid.

See also: COVID-19’s Once-in-a-Lifetime Opportunity  

In asking for help, we may receive the help we deserve. 

When help comes in the form of a lawyer’s advice, when a lawyer clarifies what each form says, when the forms provide the right insurance to protect a business, the rewards belong to the many.

Insurers and lawyers thrive in such a scenario, as do business owners, because clarity is triumphant. So triumphant, in fact, that all parties may pursue their respective interests and champion their individual causes.

Let us work to achieve these goals, knowing that insurers and lawyers have much to offer. 

Let us, therefore, resolve to be clear in our intentions, unequivocal in our needs and unwavering in our support of lawyers who can help us.