WC Premium Increases Source Not Rating Bureaus
The secret to WC premium increases has to do with investment risk.
The questions that I am asked the most in my line of work are twofold:
Do you know of a good stock to invest in – a hot stock tip as I am a Chartered Financial Consultant? I usually say none as the markets are artificially inflated right now – Greenspan’s irrational exuberance comment still applies today – one of my favorites.
- The second one is – are my Workers Comp premiums going to increase – usually asked right after a premium audit.
The second one is harder to assess than the first even though they are interrelated to a large degree. The secret is that insurers base their premiums (hard vs. soft market) on what investment earnings they can obtain by investing a portion of your company’s hard-earned premium dollars.
The carriers can file rate deviations also known as Loss Cost Multipliers (LCM’s) at any point in time with the rate bureaus. That is not true for assigned carriers that handle the assigned risk pool claims. There are carriers presently that will deviate from the recommended rates up to 220%. The carriers cannot deviate from reality – investment earnings.
Banks are the most conservative investors closely followed by insurance carriers. Even though the market is rocketing along, there are not that many small company conservative stocks that are doing well over the long term (10+ year horizon).
The Dow Jones index does not represent the full market or the proper portion of the market. The Dow has changed the companies in the index to have more appealing and profitable companies – the flavor of the week, so to speak.
If you use Yahoo Finance (freebies) and search for Russell 2000 and Russell 3000, you will see how the REAL market is doing overall. This will give you an indication of how your WC premium will shape up over the next few years.
I question any Risk Manager’s decision that does use these or similar indices in their decisions. The two indexes are basically a peek into the real world results for upcoming premium changes. As we all know, insurance premiums, including WC, are based on a lagging system of 2 – 3 years.
If you ever look at a 10K (found on the free Edgar System) of an insurance carrier, you may be shocked at how much funds they have in investments. What are the carriers that had invested in risky investments doing today? They are no longer in business.
You now know the secret. I will send you the bill next week – kidding.
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