Most California CEOs wholeheartedly supported the need for workers’
compensation reform in 2003. Now, roughly four years later, the positive effects
of the reform are being realized on the bottom line due to reductions in the average
workers’ compensation premium of nearly
50 percent in the last two years. In 2003,
workers’ compensation carriers were defaulting and leaving the state in droves, but
now more lucrative market conditions are
attracting new carriers.
At first glance, that all seems like great
news for CEOs. Upon closer examination a
familiar problem may be re-emerging. New
insurance carriers frequently offer lower
rates to initially attract new customers, but
if their motive is to make a quick profit and
run, or if they lack the sufficient resources
to handle the complexities of workers’
compensation in California, the cyclical
nature of the industry may find them leaving as quickly as they came.
“The last time we had a soft market for
workers’ comp coverage in California,
when the cycle ended and the claims started hitting, many of the carriers became
insolvent or left the state all together —
taking their clients’ experience rating data
with them,” says Pat Reilly, commercial
insurance broker with Westland Insurance
Brokers. “Costs escalated because it was a
nightmare closing claims with carriers that
became insolvent.”
Smart Business spoke with Reilly about
how CEOs can benefit from the current
soft market and not repeat past mistakes.
How has workers’ comp reform affected the
market for insurance coverage?
Reform has made it easier to control the
cost of a workers’ comp claim. There have
been benefits from structural changes such
as new calculations for permanent disability
and changed parameters around the litigation of claims and in settlement structures.
It takes as long as two to three years for the
effects of reform to be realized, but when
combined with very proactive and aggressive loss-prevention efforts by clients, the
results are finally here. This is attracting
new players to the coverage market.
At least 12 new carriers are trying to establish a California presence. In some
cases, these new insurance carriers are
simply marketing extensions of insurance
companies that exist only on paper. I
would estimate that at least 10 percent do
not have fully functioning claims departments or loss-control units, so they are set
up to sell the business but not to service it.
Why be concerned about purchasing coverage through one of these carriers?
The last time we had a soft market, many
carriers were writing coverage. But when
the conditions changed, they left the state
without filing modification experience
data for their clients with the state bureau.
I acquired one new client when this happened and it had been running an 80 percent ‘mod,’ which translates to a 20 percent
discount from standard rates. When its carrier defaulted, there was no way to document the modification, so the coverage
reverted back to full rates. The short-term
savings from the less-expensive carrier
was quickly negated by the cost of coverage at a ‘zero mod.’
What factors should CEOs consider when
selecting a workers’ compensation insurer?
First, the carrier should be ‘A’ rated so you
know it is financially stable. Preferably, it
has experience in California through both
up and down cycles. This demonstrates the
company’s commitment to the market and
its ability to withstand the natural swings
associated with workers’ comp.
Second, it should have local claims and
loss-control functions staffed by a team
that understands all of the regulations surrounding workers’ comp in California.
Defending claims and conducting surveil-lance in cases of suspected fraud are all
highly regulated activities here. If these
things are not done correctly, you can
quickly see claim pay-outs escalate, which
will chip away at any short-term premium
savings. Or, if you end up hiring a loss-control expert because the insurance company
doesn’t have a local representative, you
also won’t realize the savings you had
anticipated.
Third, do you homework before switching insurance companies and check references by asking to speak with clients who
use the company’s claims and loss-control
services and who have been with the carrier for a few years.
What role should my insurance broker play in
helping with carrier selection?
Your broker should be able to provide a
substantial list of ‘A’ rated insurance companies for you to choose from, and it
should be able to supply references of
other long-term clients it has placed with
the carrier.
It’s a soft market for all carriers, including
the ‘A’ rated ones. Now more than ever,
brokers should be able to help CEOs realize value for their insurance dollar. In some
cases, value might include a premium
reduction, while in other cases value might
be achieved by taking this opportunity to
upgrade your insurance carrier. There has
never been a better time to find workers’
compensation value in California.
PAT REILLY is a commercial insurance broker with Westland
Insurance Brokers. Reach him at [email protected] or
(619) 584-6400. For more information, please visit www.west-landib.com.