Tag Archives: mark walls

Employee Concentration Impacting Workers' Compensation Renewals

Workers' compensation continues to be a challenged line, with historically poor results, a benign interest rate environment, and diminished prior year reserve redundancy. Another issue worth noting is the uncertainty around the potential 2014 extension of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which has heightened the focus on aggregation of workers' compensation risk.

Employee Concentration
For years, carriers have monitored workers' compensation exposure aggregations (their cumulative exposures in a geographic area) as a way of assessing the potential impact that an earthquake would have on their book of business. Such analysis has been commonplace in earthquake prone areas, such as California, for many years. However, after the September 11, 2001 terrorist attack, workers' compensation carriers and reinsurers immediately began to focus on employee concentration in large cities which were deemed high risk targets for terrorist events.

Insurance carriers continue to view risks from a concentration perspective — both on an individual accounts basis as well as the aggregate across their portfolio and correlated lines of business. Some carriers will decline a risk outright simply because they are “overlined” in a particular zip code or city. Or, the carrier might impose a surcharge on the premium for the use of their limited capacity for a particularly large workers' compensation risk.

Reinsurers similarly set a maximum amount of capacity they can offer in a particular geographic area and for catastrophic loss scenarios. Insurers purchase this capacity as one way to reduce their potential to incur an outsized catastrophic loss and manage their modeled worst case scenario within their financial risk tolerance.

To that end, catastrophic models have been developed. Catastrophic models allow carriers to gauge their potential exposures in a geographic area under a variety of different event scenarios that are either probabilistic or deterministic in nature. During the last 10 years, carriers have made adjustments to their books of business according to the output of these models to limit their potential exposure to terrorist events — sometimes across multiple product lines.

A unique consideration with workers' compensation over other insurance contracts is workers' compensation policies have statutory coverage (in this case being synonymous with unlimited) rather than a stated limit which could cap a carrier's liability for a certain loss. Given the statutory nature of the coverage, it is difficult for carriers to estimate their maximum exposure to workers' compensation.

The issue of employee aggregation affects any employer with a large number of employees in a single location, but is highlighted in industries such as financial institutions, hospitals, defense contractors, higher education, hotels, professional services, and nuclear.

Impact Of Pending TRIPRA Expiration
Because of the significant financial impact of the September 11 terrorist attacks, Congress created the Federal Terrorism Risk Insurance Act (TRIA) to provide a financial backstop to the insurance industry that would cap losses in the event of another large-scale terrorist event. The Act was initially set to expire at the end of 2005, but because of the ongoing risk of terrorism, and the reliance on it by insurance carriers, it has been extended several times. It is now set to expire on December 31, 2014.

When most people think of TRIA/TRIPRA, they think of the property insurance marketplace. Without this backstop in place, many high-profile properties would not be insurable in the commercial marketplace. However, workers' compensation is also deeply impacted, as there are large amounts of people working in highly concentrated areas.

Although the expiration of the Terrorism Risk Insurance Program Reauthorization Act is almost two years away, the impact of this is already being seen in the marketplace. Employers in certain industries, employers with large employee concentrations, or in certain cities can expect less available capacity with some carriers scaling because of the increased exposure to their balance sheet created by losing some or all of the protections provided under the Federal Terrorism Risk Insurance Act. This trend has the potential to escalate and broaden as we get closer to the TRIPRA expiration date.

In addition, more employers may face increased rates for their workers' compensation coverage because of the combination of less competition and capacity, as well as an increased potential exposure for the carriers. If a policy is being issued that provides coverage beyond the TRIPRA expiration date, and the future of the legislation is not known, carriers will likely price this under the assumption those protections will be allowed to sunset or may be significantly modified.

What To Expect At Renewal
When faced with a potentially challenging renewal and one that may be impacted by this issue, what can you do? We recommend starting the renewal process early, at least 120 days (or more) prior to the policy or program effective date. In the case of Marsh, we will work with you to develop a communications strategy and presentation tactic around all key risk exposures, including modeling and risk analytics in support of your renewal objectives.

For carrier presentations and Q-and-A, insureds must be thoroughly conversant with details of exposures and operations; mergers, acquisitions, and divestitures; loss trends, safety programs, and risk management practices; and future plans, to the extent that they can be shared publicly.

We will help you be familiar with respective insurers' cost of capital and pricing strategy — understanding how carriers evaluate your firm's experience and risk profile, and how they initially develop rates and premiums.

High quality data differentiates employers in the eyes of insurance carriers. In today's environment, it is imperative that organizations provide underwriters with complete, accurate, and thorough data and analysis in order to differentiate their risk profile.

There has already been a significant increase in questions that carriers are asking at renewal that focus on the risks associated with a potential terrorist event. Employers with a large concentration of workers, especially those in major metropolitan areas, should be prepared to provide the following details to carriers:

  • Information on employee marital/dependency status.
  • Employee telecommuting/hospitality practices and impact on concentration.
  • Physical security of the building including information about guards, surveillance cameras, parking areas, HVAC protections.
  • How access to the building is controlled.
  • Construction of the building and location of the offices.
  • Management policies around workplace violence, weapons, and employment screening.
  • Employee security procedures.
  • Emergency response/crisis management plan.
  • Fire/life safety program.
  • Security staff.
  • Crisis management procedures.

In addition, carriers may wish to send their loss control engineers for a physical inspection of larger facilities and to interview building/facility management.

The Increasing Demand For Better Data
Because both insurance carriers and reinsurers focus on catastrophic models, it is extremely important that employers provide the highest quality of employee accumulation data, as this will ensure they are favorably differentiated by insurance carriers.

If your company has multiple shifts or operates in a campus setting, make sure you report both the total number of employees and the number working during peak shifts — as well as the actual buildings where the employees are located.

The number of employees working during peak shifts is the actual exposure to a terrorist event, not the total number of employees. Also, some businesses have a large percentage of their workforce in the field or telecommuting, rather than the office where their payroll is assigned. Providing this information to carriers significantly reduces the potential exposures associated with employee concentration. In addition, identifying the actual building where employees work on a campus — rather than a single building — helps overcome pitfalls of the catastrophic model. This also better reflects an employer's exposure to catastrophic losses.

As options about future real estate plans are considered (i.e. in terms of consolidation of employees from multiple locations in a city to a single location, or the impact of closing or consolidating satellite locations and relocating employees in major metropolitan areas), it is wise to review and consider the potential impact on workers' compensation pricing and capacity.

Because of the current political and economic climate in the US, renewal of the TRIPRA by Congress is far from certain. Marsh is continuing to monitor this issue closely, and we are working with employers and insurance industry representatives to raise awareness of the important role that TRIPRA plays in the insurance marketplace.

Teach Your Data to Spot Creeping Catastrophic Claims

“One of the biggest cost drivers in Workers’ Compensation is seemingly ‘average’ claims that take a turn for the worst and result in several years of medical treatment and disability.”1

Too often seemingly innocuous claims lay under the radar, unnoticed until the damage is done. In this article, Mark Walls does an excellent job of pointing to several conditions that should serve as indicators of impending trouble. He discusses issues such as return to work, comorbidities, and psycho-social factors that can contribute to claim deterioration. His ideas are good and there are many more indicators that can be added to the list to recognize creeping calamity.

More Indicators
In fact, there are many subtle tip-offs in claims that could lead to effective prevention if noticed earlier. Delayed injury reporting and treatment is one. We know from industry research that a delay between the date of injury and first medical treatment is a predictor of claim complexity, regardless of the reason. Speculation regarding motivators of delay in filing a claim or to seeking medical treatment may not be as important as actually identifying the situation early and intensifying scrutiny of the claim. The opportunity is to discover claims with migrating intensity early, thereby avoiding unnecessary cost.

Knowing Is Not Enough
Unfortunately, knowing what conditions in claims might lead to trouble is not quite enough. Trying to apply the knowledge without a defined process has variable results. Manually identifying claims with perilous conditions is an inconsistent and inefficient endeavor because mere humans simply cannot do it well. Professionals, busy with a myriad of tasks, cannot monitor claims consistently enough to detect insidious conditions. Better process tools are needed and, happily, they are available.

Computer-Aided Medical Management
Technology can be made a powerful work tool in Workers’ Compensation. A specially designed computer software program will monitor current claim data combined with historic data continuously, something mere humans cannot do. A custom computer program will detect trouble every time and notify the appropriate person in the organization so that focused intervention is mobilized.

A software program designed to spot combinations of data elements that portend risk and cost is a powerful cost control tool. It continually searches the data without human involvement. When an adverse situation is discovered, it automatically notifies the right persons.

Work-In-Progress Tool
Computer-aided medical management programs are designed to be work-in-progress tools that inform the claims management process in real time. They are driven by combinations of data elements that when they appear together in a claim, portend developing risk. Importantly, the computer-aided management tool must continually monitor current and historic data to uncover risk from the broad spectrum. For instance, ICD-9’s in a claim are data elements that can reveal impending trouble in near real time when monitored by a specialized program.

ICD-9’s As Windows Into Risk
ICD-9’s (The International Classification of Diseases, 9th Revision), the medical description of the injury or illness in a claim, can disclose much more than previously thought. ICD-9’s are documented in each bill submitted by treating medical doctors and other providers. They are windows into claim complexity at the start, but they are also powerful real time predictors of impending trouble.

Migrating Claim Severity
One true thing about claims is as they migrate from medical-only status to increasing complexity they accrue ICD-9’s. As the situation deteriorates, more medical providers enter the picture, more medical services are provided, and more ICD-9’s are added to the data. Stated simply, monitoring current and accumulated ICD-9’s will reveal those claims that are unstable and migrating downward. A system designed to monitor ICD-9’s for severity (seriousness) will spot migrating claims.

Smart Systems
A system designed to monitor ICD-9’s is a smart system containing information about how serious individual ICD-9’s are. Like pharmacy programs that alert for unsafe drug combinations, an ICD-9 scoring system will alert for dangerous combinations of comorbidities, age, and accumulated diagnoses. A claim is dynamically and continuously scored for severity and the right persons are notified automatically.

Smart systems that monitor current and historic data for combinations that portend complexity and cost can significantly recharge managed care initiatives. They are the next generation business solutions that are available now for those who are serious about controlling costs.

1Walls, Mark. Creeping Catastrophic Claims-How to Spot Them and Stop Them. Business Insurance. June, 12, 2012. http://www.businessinsurance.com/article/99999999/NEWS080105/120609913