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Workers Comp Insurance Crisis – #1 Cause Called A Bubble By Bankers

Workers Comp Insurance Crisis Comes From Outside US – Or Does It?

The Workers Comp Insurance Crisis of the 1990’s seems so far away now. The most notable factor comes from outside the US. I have written often that China’s banking crisis could cause quite large rumblings in most of the domestic financial markets – including insurance. Where would the crisis be the most devastating?

picture of workers comp insurance crisis bubble

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A recent Business Insider article even remarked that China’s own bankers call the current credit crisis there as a “bubble.” China has followed the US by financing growth with pure debt – in other words – borrowing money to invest. The volatility from China is twice as high as anywhere else in the world.

Currently, any type of insurance-based crisis may seem like an occurrence that will not happen for many years. The insurance carriers can invest the premiums into stocks which has made everyone including insurance companies a tidy sum over the last year.

However, if China pulls their investments in the US back to China to cover the “banking bubble” the financial markets would feel more than just a ripple-effect. The days of the 1990’s insurance crisis would return very quickly.

After all, China holds a large amount of US debt instruments – basically the US borrows from China to run the Federal Government.

I am not implying that there is an upcoming workers comp insurance crisis in the near future. Employers cannot just keep expecting low rates due to the investment returns by a certain carrier or group of carriers.

The bottom line is to not be complacent in your insurance programs – even if self insured. In other words, now is a great time to explore a Plan B coverage for your workers if your company could not find coverage in the general marketplace. Company owners and risk managers lose much sleep when having to ingest the Assigned Risk Pool rates.

As mentioned often in the articles on this website, if the insurance carriers decide to not write a certain business, companies with an E-Mod of .90 end up in the risk pools. The rates can increase over 400% in just one year when being placed into the assigned risk pool.

Hopefully, I can look back at this article and ask myself – was I being too paranoid and make a joke about the non-occurrence of a workers comp insurance crisis.

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Voluntary Market Best For Employers Workers Compensation Policies

Voluntary Market Very Critical To Workers Compensation

A voluntary market compares to free market version of workers compensation insurance. Most states set the Advisory Loss Costs. Carriers deviate from the Loss Cost rates by filing loss cost multipliers (LCM)

A group of insurers in a competitive environment who underwrite coverage to insureds based on risk or market dynamics. Usually, employers with low risk (E-Mod) will be placed in the voluntary market. Employers that are more risky may still be placed in this type of market, but it may be very expensive coverage.

The Workers Compensation market itself may dictate whether a voluntary market for a certain business segment exists or not. Having a low E-Mod is not guarantee that an employer will be placed into the market.

If an employer cannot be placed in the voluntary market, they will have to turn to the assigned risk markets for coverage or to some type of alternative insurance plan such as a Captive.

States with assigned risk pools provide a much more expensive coverage if the insureds cannot find coverage elsewhere. The drawback consists of up to a 400% increase over market rates.

The reason for the massive increase in rates is the assigned risk pool is the “last change saloon” for employers that cannot find coverage in the voluntary marketplace.