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.