INTRO: A number of factors are motivating insurers to seek higher workers compensation rates and premiums, as they struggle to reduce their workers comp costs in this transitioning market. Christopher Flatt and Claude Yoder of Marsh Inc. describe how analytics can play an important role in employers' efforts to improve their companies' risk profiles and ultimately be favorably differentiated by insurers.

After a prolonged soft pricing environment, the workers compensation market is firming. Employers seeking to reduce their workers compensation costs in the current transitioning market should focus on improving their companies' risk profiles and differentiating themselves in the market. Analytics can play an important role in this effort.

Although prices may not be rising by the magnitude that some insurers want, 44% of Marsh Inc.'s clients renewing their workers compensation programs in the second quarter of 2012 received rate increases. This continues a trend that began in the first quarter of 2012, when 46% of Marsh's clients received a rate increase. Firming market conditions are likely to continue for the remainder of 2012 and into 2013.

A number of factors are motivating insurers to seek higher workers compensation rates and premiums. Consider the following: For the past three years, workers compensation has led all commercial lines with the highest combined ratio, according to the National Council on Compensation Insurance Inc. The 115% combined ratio posted by the private-carrier underwriters in 2011 is the worst the industry has seen since 2001 and is in some measures a deterioration over the prior year.

In addition to poor historical underwriting results, reserve adequacy remains a concern for the industry, with NCCI estimating an undiscounted loss reserve deficiency of roughly $11 billion at year-end 2011. Average indemnity and medical costs continue to rise, putting additional pressure on underwriting results. All of that, against the backdrop of a continued low-yielding interest rate environment and current sluggish macro-economic conditions paint a relatively difficult picture for the workers compensation business segment.

That said, the overall property/casualty industry is potentially on pace to achieve a record-high level of surplus in 2012, barring major catastrophe losses. At the same time, the frequency of lost-time claims was down 1% in 2011, after a 3% increase in 2010, according to NCCI. Coupled with an ongoing competitive landscape, this likely will serve to moderate any major spikes in workers compensation rates and could prolong the firming market cycle.

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Analytics as part of an integrated approach

Workers compensation programs tend to be the single largest insurance expenditure for employers, and a key component of any human capital and risk management program. As such, risk managers would be well-served in this transitioning market to understand what can be done to improve their companies' risk profiles and ultimately be favorably differentiated by insurers.

Controlling workers compensation claim costs and improving workplace safety are key issues for most companies. But in their search for causes and solutions, too many organizations address workplace safety, workers compensation claims administration, data and analytics, and cost considerations as isolated or disconnected practices and in turn look at data in silos without much consolidation.

A more effective approach is to develop an integrated workers compensation cost containment strategy built on a deep analytical foundation. Such a strategy examines not only the loss drivers, but also the potential returns of cost containment efforts, which leads to an examination of the root causes of workers compensation cost drivers; development and execution of focused and prioritized safety management and claims administration solutions; consideration of a range of risk transfer opportunities; enhanced measurement of program outcomes; and adjustment of priorities and cost containment measures as necessary.

Insurance marketplace knowledge and comprehensive analytical viewpoints play an extremely important role in achieving true differentiation and in effectively reducing the total cost of workers compensation risk. Analytic capabilities have made substantial strides over the past few years due in large part to better technology, data mining and other advances. The full integration of analytics into the workers compensation space, however, is just beginning to take hold as employers realize the ways analytics can help reduce the costs and variability of risk.

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Value of analytics, modeling

One of the key considerations in an integrated approach to workers compensation management is to consider the financial costs and potential return of any one cost containment initiative. This entails modeling an organization's workers compensation claims data against credible benchmarks. Once the data has been analyzed and modeled, the individual components of an integrated approach can be properly designed, taking into consideration anticipated savings and projected costs. Once armed with this analysis, organizations will be poised to make informed decisions.

Related and logically connected to the financial considerations is the identification of the root causes behind an organization's workplace injuries. Loss control, occupational health and safety, claim management, injury management, and employment practices and processes all need to be reviewed. A comprehensive approach using analytics and predictive modeling will allow a company to identify the unique cost drivers of its workers compensation program; benchmark its performance against peers on average paid, incurred reserves, closure rates, and more; estimate future losses at specified retention levels; identify claims and workplace safety management inefficiencies and redundancies; and fine-tune solutions to maximize cost containment efforts in a manner designed to improve the bottom line.

Analytics also can play an important role in analyzing and modeling a company's retained losses, premiums paid, claims administration expense, and collateral costs—typical components of a company's total cost of risk. Such an analysis allows employers to optimize their decision-making and potentially drive down the cost and volatility of risk.

This is especially true when it comes to decisions around program structure. It's not uncommon for a particular structure to be in place without the organization understanding why it was chosen. And although a particular structure may have had sense when it was adopted, the effective use of analytics may indicate that a change would be beneficial given current conditions.

For example, a better understanding of a company's projected workers compensation losses and loss costs within their retained and placed layers of insurance may lead risk managers to make changes to their retentions. A company with a $500,000 deductible workers compensation program and whose annual loss costs historically fall well within their retained layer may be better able to increase its deductible and save on premium costs.

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Conclusion

To achieve the most positive renewal outcome in today's transitioning workers compensation market, it is imperative that employers differentiate their risks to insurers. Analytics can play an important part in this effort. By gaining an in-depth understanding of a company's loss profile—from root causes to aggregated, projected losses—risk managers are able to make better decisions that can ultimately drive down costs and volatility of risk.

Partnering with a broker that can provide the most comprehensive and complete set of analytical tools and market intelligence is key to this effort.

Christopher Flatt is Marsh Inc.'s Workers Compensation Center of Excellence leader and Claude Yoder is Marsh's head of global analytics. Mr. Flatt can be reached at 212-345-2211 and christopher.flatt@marsh.com. Mr. Yoder can be reached at 212-345-8297 and claude.yoder@marsh.com.