Workers Comp Markets Affected By Upcoming Election Cycle

October 15, 2020 By JL Risk Management Consultants

Workers Comp Markets – Hard or Soft May Not Matter

My brother asked me this question. Will the upcoming election affect the Workers Comp markets? He is a day trader of sorts.

I Voted Sticker Affect The Workers Comp Markets

Public Use License – Public Domain

Writing articles for over 15 years means that I have covered this topic in the past. My opinion has not changed over the years on the Workers Comp markets.

Investment Trends Affect The Workers Comp Markets

Carriers were making a 15% return on every Workers Compensation dollar written. This figure came from NCCI, so I consider it trustworthy. The pre-pandemic Combined Ratio was 85%.

Insurance carriers did not have to rely on investment returns for profit. The Workers Comp press published many articles recently on the market hardening due to COVID-19. I agree with that assessment.

Premium vs. Profitability

If insurance carriers can make profits by investing in solid and speculative investments, then the need for premium increases subside over time.

If carriers cannot generate profit off investments, then the market will harden quickly. Where does any carrier have to look for funds if their investments do not perform well? The two areas are:

Premium increases
Becoming more conservative in underwriting insureds (hardening)
A combination of the first two.

Carriers also have investment/financial advisory arms that I am not considering when I cover profitability.

Strange Times Defy Investment Trends

Please click to see a clearer image – Courtesy Yahoo Finance

The economy may be sputtering presently. The stock markets are extremely healthy (for now). What does this mean for future investments?

This screenshot from Yahoo Finance shows the Russell 2000 Stock Index over the last two years. If you click on the above thumbnail. you can see the chart much more clearly. The Russell 2000 more closely represents the stock market than most of the other indices.

The market plunged in March 2020 but has recovered most of the losses. Investment profits are back in play for now.

We also cannot forget China’s effect on the overall investment markets. China still owns a large amount of US Federal Securities.

From this article on MSN/Quartz

Beijing could use its stockpile of US Treasury bonds to destabilize the US economy and pressure Washington into backing down.

COVID-19’s Effect on Workers Comp Markets

The long-term effect will not be known for quite some time. Three weeks ago, I published an article on how the delayed effects of COVID-19 may not be realized until mid-2021.

The workers comp system is a delayed system. Only approximately 5% of the data has been reported to the rating bureaus. Most of the Coronavirus’s effects on Workers Comp will not be known until the end of 2021 or after.

Check out my article from two weeks ago for the particulars of how Worker’s Comp data will be delayed.

Bottom Line – Election Cycle and The Workers Comp Markets

When I write the bottom line sections I usually prognosticate an opinion. This subject remains a tough one to call. Will Worker Comp benefit from a Republican or Democratic win in the Presidency, House, or Senate?

The Workers Comp markets, by nature, are localized as each state (good or bad) influences the markets.

The House and Senate races will likely have an effect on each state’s local Workers Comp laws and rules. The Presidential Election may have a minimal effect – that being whether investors remain comfortable in the investment markets.

I apologize as I do not have a definitive answer on this one. In 2020, too many other influences have come into play that may affect the Workers Comp markets.

©J&L Risk Management Inc Copyright Notice

Hard Workers Comp Markets – The Silent Reasons Why

September 17, 2020 By JL Risk Management Consultants

Hard Workers Comp Markets – Two of the Reasons Not Discussed That Often

The hard workers comp markets usually occur when the suppliers (carriers) cut the supply of insurance to (demand) employers. I have heard investment returns often discussed in many of the reinsurance webinars and articles – not so much in the workers comp insurance discussions.

basic supply demand chart hard workers comp markets

Public Domain License

Those two areas are:

Investment returns
The stacked random variable introduction this year

Investment Returns Influence on Hard Workers Comp Markets

Investment returns remain one of the drivers of the insurance markets. The investment returns that carriers experience influences the rates they charge their insureds.

Insurance carriers heavily prefer solid non-volatile investments such as deposit interest rates. Even though the stock markets have recovered much of their losses the volatility remains extreme.

The nations’ largest rating bureau NCCI – published a .83 combined ratio last year. In a very roundabout way, this means the carriers are receiving a 17% return on premiums written. That percentage indicates the market is healthy with much competition. A soft market would likely be the result of such dramatic numbers.

Stock Market Volatility and Extremely Low Interest Rates

If one reads any of their mutual funds’ prospectus, many times right on the front page the mutual fund says – there is a chance of loss.

Even though carriers had a 17% return on premium, the wild swings in the stock markets make most carriers very uneasy. Carriers have that same chance of loss as an individual investor. The 17% return can be lost in a few days.

Insurance carriers prefer interest-bearing investments including bonds. I just read the NC State Employees Credit Union investment returns on IRAs. IRAs are considered permanent investments – the money stays there. The rate of return was 0.76% (Wow!).

The safety of interest-bearing investment is offset by the minuscule rates of return. Bond markets do not look that great either.

How do insurance carriers remove this volatility – by not underwriting all markets or class codes. They can remove risk on the “other end” of their financial books. Many insurance industry experts have almost unanimously said the markets are “tightening.”

The tightening could be temporary. Workers Comp carriers move very slowly back into a market or class code where they have pared back underwriting certain companies.

New Random Number Variable – Heavy Effect on Workers Comp Hard Markets

I have attempted to not write articles on COVID-19 lately. So many writers publish those articles every week. The COVID-19 caused a random-number-variable stacking.

Presumptions and Claims Handling

Woman Doctor Hard workers comp markets with yellow mask on

Wikipedia – Agência Brasília

As of today, 17 states have passed COVID-19 presumption laws that make actuaries, underwriters, and claims handlers very uneasy.

Many claims experts including myself have voiced their opinions of the need for presumption laws. I wrote an article on that subject a few weeks ago. Check it out. The Workers Comp Occupational disease statutes have presumptions built into them.

Regardless, they are law now and must be followed. The COVID-19 is a stack-risk.

COVID-19 introduces three random number variables to the risk equation:

COVID-19 increases the risk of an on-the-job occupational disease
The presumption laws may change the claim handling procedures for the investigation of COVID-19 claims.
Our changing relationships with China – this is a subject for a later article.

When you have actuaries, claims handlers, and especially underwriters nervous, the best way to remove some of the nervousness is by not underwriting every company that submits a workers comp app like the old days.

The nervousness results in hard workers comp markets.

©J&L Risk Management Inc Copyright Notice

2018 Soft Market or Just Reactions To Changes In Mod Structure?

February 1, 2018 By JL Risk Management Consultants

Is A 2018 Soft Market For Workers Comp Here or Is It Something Else?

A 2018 soft market began to show up in some of the data this year. In fact, over the last week I have been interviewed for articles on the current WC market conditions.

Interesting enough, the carrier rates over the nation have fallen faster than the Rating Bureau advisory rates. California has recently seen this effect. In CA, the advisory rates from the WCIRB (Workers Comp Insurance Rating Bureau) are referred to as pure premium rates.

Is this a sign of a soft market or something else?

Pic of 2018 Soft Market coral peach komodo

Wikimedia License – Nick Hobgood

The soft market or at least a softer market may have nothing to do with the drop in carrier rates compared to the advisory rates. Why?

Everything in workers compensation rating has an offsetting variable or variables. With the artificial increase in Mods, the carriers’ underwriters actually saw a chance to make their respective carriers look wonderful as they decided to drop rates ahead of the curve.

The artificial increase in Mods was initiated in 2013 by NCCI – better known as increasing split points. The split points between the primary loss in a claim and the excess loss changed dramatically. From 2013 and forward the primary loss (think expensive part of claim) increased from $5,000 to $15,000.

The offsetting variables were that state rating bureaus and NCCI reduced their advisory rates as the increased Mods caused the premiums to increase overall. Carriers’ combined ratios are now reaching to over 100% which makes Workers Comp profitable again.

Recently, California’s WCIRB dramatically changed the Mod formula. It is now based on the size of the respective employer. In my humble opinion, the carriers saw they could be profitable while reducing rates as the Mod will increase the Mods enough to allow for sharper rate decreases than the WCIRB’s recommended rates.

I am basing my opinion on having seen small company Mods increase over the last few month with no increase in claim values.

One only has to look to all of the states decreasing their recommended rates – sometimes by over 10%. Did safety and risk management fuel the lowering of rates? I would hope so, but the results would not be so dramatic.

The picture above is the soft orange lion coral. It looks rigid, but is extremely soft.

The bottom line is that one has to think that there is some variable out there that is the offset to the sharply decreasing rates resembling a possible 2018 soft market condition. Time will tell over the next three years to see the full effect.

©J&L Risk Management Inc Copyright Notice

Major Workers Comp Changes On Horizon Fed .25 Point Increase?

March 15, 2017 By JL Risk Management Consultants

The 10 Ways The Fed May Cause Major Workers Comp Changes

Graphic of major workers comp changes on Road With Coins Dollar and Building at the Back

We could be on the verge of major workers comp changes. The Fed Head Janet Yellen and her Board just increased the Federal Bank lending rate by .25%. This may not be a jolt to the insurance markets – yet. Read the article linked to in the second sentence. Yellen may institute a stealth increase soon.

A scenario follows which may cause a Hardening of the Markets. I warned about this before when China was affecting the world money markets. Now, the money market changes are much closer to home.

The Fed increases the prime lending rate a few times over the next two years.
Naturally, the investment and debt interest rates will follow.
Insurance carriers have been able to support a soft market by making up their lower premiums with outside stock investments – check any insurance carrier’s financial statements.
Over the last 50+ years, when interest rates look better, people and companies move their funds from stocks to money market accounts.
Over the same last 50+ years, the numbers show that stocks earn much more than any type of interest bearing account
Insurance carriers will not be able to earn the same returns, stocks earnings always beat interest bearing accounts
As mutual funds and investors in general put money on interest, the stock market usually suffers – not a market correction
Wikimedia Commons flickr.com-epSos.de
The carriers have to make up the prior soft market underwriting losses somewhere – namely premiums
Due to these major workers comp changes, carriers will become risk averse and stop underwriting certain riskier markets
The above nine steps are not a crisis of any kind. They represent the start of a Hard Market.
Bonus thought – as the dollar strengthens (as it has for three months), foreign investments will suffer as bringing funds back into the US will cost much more than in 2016 and previously. Ouch for foreign investments

A friend of mine says that even a broken clock tells the correct time twice a day. He could be correct in this case. The stealth concern is that the US printed money by the basketful.

Businessman Major Workers Comp Changes Embracing Dollar Sign

StockUnlimited

The interest rate on a large amount of currency – we do have a ton – needs only small interest increases to cause a spike in inflation > Think about Greece in the EU.

Will 1 – 11 above happen? The Fed would have to increase interest rates over the long term each time they meet. Carriers may decide to take it on the nose just to keep business.

Are the conditions right for a hard market? Major workers comp changes may occur if the interest rate spikes.

©J&L Risk Management Inc Copyright Notice

Workers Comp Hard Markets and China Financial Crisis

September 20, 2016 By JL Risk Management Consultants

New Workers Comp Hard Markets May Come From China

The Workers Comp hard markets of old have almost a fairytale connotation. Many insurance workers and press may have only seen soft markets. Workers comp hard markets still exists today. It is sectional or just hardening for certain markets.

Hand Presenting Financial Workers Comp Hard Markets Crisis Concept

StockUnlimited

The trucking and temporary personnel agency markets are but two that have felt the searing pain of no carrier willing to write in those marketplaces. Carriers are risk-averse most of the time as there is limited profit in WC insurance.

China’s financial market turmoils have been the subject of more than one article written by me. Following the prior link to the article written last year will explain it more fully.

Earlier this week a financial red light started flashing for the China economy. A banking crisis in China would have far reaching effects and would affect the insurance markets. One reason for this effect is the amount of investment China has made in the American financial markets including insurance.

Has anyone heard of the Bank for International Settlements (BIS)? According to the linked article, they are the number one worldwide financial watchdog.

The BIS posted to its quarterly report that China’s credit to GDP gap had:

Reached 30.1- the highest to date
In a different league altogether from any other major country tracked by the institution
Significantly higher than the scores in East Asia’s speculative boom in 1997 or in;
The US subprime bubble before the Lehman crisis.

The comparison to the subprime bubble should raise more than a few eyebrows. Hold onto to your office chairs, it may be a bumpy ride.

©J&L Risk Management Inc Copyright Notice

Top 10 Challenge Areas – Expanded Part I

June 19, 2014 By JL Risk Management Consultants

Top 10 Challenge Areas – The First Five

The article on the Top 10 Challenges for Workers Compensation received a large amount of inter-buzz.

Two readers suggested an expansion (better explanation) of my list. I will split the Top 10 into two articles.

The first five of My Top 10 areas of challenge are:

Harder market – without investment returns, WC cannot sustain lowering price pressures
Captives/Alternative Insurance – every company wants out of the current WC system
States that have legalized marijuana – now what does that do for the workplace?
Employers need to monitor next year’s premium
Affordable Care Act- the elephant in the room for any healthcare discussion

Harder Market vs. Hard Market

I rarely disagree with NCCI. However, a few weeks ago, the published an article on the underwriting cycle that I did not agree with overall. Investment returns besides a minuscule rate of rate on interest bearing accounts drive the insurance markets. To NCCI’s credit, the current situation with a low rate of return (interest) is not enough to sustain a market. The stock markets have been doing very well. Other than bonds, carriers can produce a great rate of return on premium dollars invested in the stock market in the long term.

If the stock markets take a hard downturn and the interest rates stay low deflation would rule the day. Carriers have nowhere to go for a decent rate of return. They will have to look to their policyholders which would equate to a hard market.

Captives/Alternate Insurance

As companies grow, there now seems to be a large push to examine other methods to find WC coverage such as captives, PEO‘s, and small/large deductibles. Alternative insuring arrangements does carry a large risk especially if a company is going to retain a large amount of the premiums. The alternative market must be examined with caution.

States That Have Legalized Marijuana

Wikipedia – Jonathunder

Two recent New Mexico court decisions have shined a bright light on the problem of marijuana in the workplace. California issued a similar decision a few years ago. If marijuana is prescribed medication by a physician, will it be considered the same as any employee that happens to be taking a prescription while on-the-job? Will an employee file a “drug discrimination” grievance in that instance?

Employers Overpaying Premiums At Policy Inception

There are many articles in this blog concerning the level of payroll decreasing for certain employers. If your company has a 20% reduction in workforce, why would you pay the same premium base as last year?

Affordable Health Care Act

As I have written so much on this subject, I will refer to this article (click on the heading) on how the changes in healthcare will affect WC.

©J&L Risk Management Inc Copyright Notice

Workers Compensation Hard Market Employers – How To Prepare

January 22, 2014 By JL Risk Management Consultants

Workers Compensation Hard Market Preparation and Solutions

Employers need to know how to prepare for a Workers Compensation hard market.

Forex Money Workers Compensation Hard Market for exchange currency bank

Wikimedia Commons – epSos.de

China’s upcoming cash crunch may possibly never occur except there is an upcoming default by a major bank.

I am not a financial doomsday prepper. However, in the world of Workers Comp, if the money markets are tightened, then carriers will have to begin cherry picking out their best risk clients.

The cherry-[picked employers may not necessarily be the ones with extremely bad E-Mods (X-Mods). Many industries such as trucking and construction have headed into the Assigned Risk Pool even though many trucking and construction companies had very low Mods. Two types of hard markets exist. The silent workers compensation hard market can easily cause whole industries to not be underwritten. Insurance carriers exist to make money. The rest of this article covers how to battle the silent hard market.

Hand Illustrating Workers Compensation Icon

If the insurance underwriters think a market is never going to be profitable, they will not even accept employers with a .80 Mod. That situation happened in the mid-1990’s and again right after 9/11. Alternatives exist instead of just going into a risk pool where rates are sometimes 400% more than the regular market. This can ruin an employer’s budget quickly. Many alternatives to a regular policy exist today. Alternatives are (click on the term for definition):

Alternative Market Concerns

An employer needs to basically seek out alternative markets for WC coverage. The reward for such a search can be very significant over a risk pool. However, and mark my words on this one, if your company signs up with a bad alternative line of insurance, you may not have coverage and/or you may be running afoul of the insurance laws in your respective states of operation.

Picture Of Hand Drawing Workers Compensation Hard Market Research

We receive calls, emails, and letters where a company may be in a very tight spot when using alternative insurers. For instance, how many employers ask – Who is going to be handling the claims for us? Over the last five years, we have received in piles of files where a PEO,, Captive, or Self Insurer has failed and need the claims to be run off and settled.

We also receive many inquiries from employers that have incurred a failed carrier. Alternative insurers are not the only coverage providers that fail. See page 7 of the 2013 NCIGA report to see how many bankrupt carriers there are for just one state’s Insurance Guarantee Association.

In the industry, we call this situation- file mercenaries as it is up to us or a company similar to us to get rid of files ASAP. The only drawback is that we are often spending cash out of an employer’s budget for coverage they already had previously purchased from a now defunct company. One of the hallmarks of a defunct alternative insurer or self-insurer is very poor claims handling.

The bottom line is- do not turn blindly to the alternative insurance market. You need to know much more about your WC coverage than signing up for a policy in the regular insurance market. Many reputable PEO’s, Captives, RRG’s and Self Insurance groups exist in today’s marketplace.

China Workers Compensation Hard Market flag raise

Wikimedia Commons – Daderot

One the most prevalent ways for a hard market to occur is possibly a Chinese money market crisis. Yesterday, the preparation needed for a silent hard market was covered in detail. This leaves the hard market that everyone usually mentions in WC circles.The best way to prepare for an employer to prepare for a hard market is by making the company attractive enough to be underwritten by a group of insurers. This does not mean one insurer as the more that competes for your business – the better. The #1 way to be underwritten by companies that are more affordable is to have a low E-Mod – plain and simple.

Many governmental contractors now require that a company have a Mod of 1.0 or less. Federal contractors were a little more lenient in the past on E-Mods that were over 1.0. Those days have long passed. Almost any contractor wants to see the actual E-Mod sheets from the respective rating bureau.

Paper On Board Clip Workers Compensation Hard Market List Vector

The WC system is a time-lagged system. The effective efforts made today will show up in your Mod in two to five years. That cannot be changed whatsoever. One of the best safety lists for WC is here. The list is actually the Schedule Credits. The modifications here are basically an arbitrary amount that is assigned to your company. Check the list for any safety recommendations. These will probably look very familiar.

If you read over your Workers Comp policy and final audit, Scheduled Modification is almost always on the sheets.

As mentioned very often in this blog, the Mod originates from the Total Incurred figures (Paid + Reserves) the claims staff assigns to the file. The Total Incurred is pegged to your upcoming Mod on the Unit Stat date.

A loss run review before the Unit Stat date will also help in reducing your Mod. Very few hard markets have begun overnight. Starting on your Mod now with some type of reduction program will keep your company better prepared for a hard market.

Online claims access is almost essential to any Mod reduction program. A paper loss run is acceptable in some cases. However, by the time you receive the loss run, your claims situation may have appreciably changed since you ordered the loss run. If you can see a review of the claims notes and reserve increases online, then your company can make timely inquiries into your reserves.

Firming Market Workers Compensation Diagram

Your agent/broker and insurer need to understand exactly what you do in your business. The broker is going to shop around your policy. The more your broker knows about your business, the better they can explore different insurance markets.

A list of job descriptions that should be used when an injured employee returns to work can also be used to better inform and educate your broker, insurer, and insurer audit department on your daily business processes.

The old adage – Information is power is the best way to reduce your WC costs. Obtaining the proper information and funneling the proper information to outside parties will help in almost any WC situation.

©J&L Risk Management Inc Copyright Notice

China Banking Crisis May Have Effect On US Insurers

January 21, 2014 By JL Risk Management Consultants

The China Banking Crisis and Insurance Markets

The China banking crisis that is supposed to arrive on January 31st may have an effect on US insurers. A few articles over the last three month warned of a possible money crunch in China. An article appeared in some of the fringe economic analysis websites such as this one concerning a January 31st mega default on loans back by a Chinese bank.

Map Of China Banking Crisis In Red Color Flag Graphic

The link in the first paragraph is to a website that looked to be more alarmist than truthful. This article from Forbes on the same China default gave the alarmist website credibility very quickly. This situation may never occur with the world’s largest bank on January 31st. Then again, it is a pending matter.As mentioned in this article on what actually drives insurance carriers’ rates , the rate of investment return will dictate much of the insurance carriers’ premium levels. If any company’s investments are lagging due to low investment rates, the shortcoming is usually balanced with an increase in prices. Insurance carriers are no different.

The other side of the coin is the debt owed by insurers to China. The level of debt owed to China has now reached record levels as of five days ago. Most of the debt is incurred by US banks. One has to think that insurers are in step with debt owed by the major bank.

At some point if China is experiencing bank defaults or reaches its limit of lending to the US, a money-tightening will occur no matter how much the Fed is pumping into the economy. Money scarcity among banks will also cause the insurance marketplace to harden in a very short time.

Beijng China Banking Crisis Forbidden city statue

Wikipedia – CEphoto, Uwe Aranas

If there is enough of a funds scarcity, the insurers will have to begin cherry-picking their client base. The only way for carriers to be able to make up for the lack of funds is to reduce their risk. No one can blame them after the last financial crisis.

Next up – Preparing For A Hard Market – easier than you may think….

©J&L Risk Management Inc Copyright Notice

NCCI Says PEO’s Questionable Reputation Not Deserved

June 12, 2013 By JL Risk Management Consultants

NCCI Says PEO’s Questionable

NCCI says PEO’s questionable reputation. PEO’s (Professional Employer Organizations) have long received somewhat of a bad rap from many different sources. However, we have found them to be extremely helpful in aiding our clients in finding Workers Comp coverage in a difficult insurance market.

StockUnlimited

PEO’s have also been a great vehicle for cash flow management. We have often recommended that our clients include PEO’s in their renewals as a great alternative. Please note that not every PEO is one that a company should put their WC risk with as will be discussed in this article.

Last month at NCCI’s Annual Issues Symposium, the issue of PEO’s was brought to light. NCCI also found that PEO’s when used in the right circumstance are not these under-the-radar sketchy companies that seem to go bankrupt all of the time.

In contrast, many Workers Comp insurance carriers and self-insureds have gone “belly up.” PEO’s bad developments also seem to make front page news. Some of the highlights of the NCCI report were:

StockUnlimited

% of Market

1% – 2% of the voluntary market
2% – 6% of the residual market – higher number due to insurance placement difficulty
6% of the voluntary market in Florida
30% of the voluntary market in Arizona – surprising number

Reputation of Underreporting Claims Disproved

Actually had higher number of claims – if claims were not being reported, frequency would be lower
Loss Ratios tend to be lower – showing that underreporting and misclassifying are not problems with PEO’s
E-Mods are comparable indicating no Mod manipulation

Industries Served

No cherry-picking as industries mix same as regular market
Loss ratios across industry groups are similar except for transportation industry

Picture Of Hand Drawing NCCI Says PEO's Time Saving Piggy Bank

StockUnlimited

One of the negative connotations with PEO’s is they were responsible for three recent insurance company collapses. The counter for that would be – did the carriers not properly underwrite the PEO’s?

Single State PEO’s did not fare well. This could be attributed to the Law of Large Numbers. In insurance, there must be a large enough premium base to offset a rash of losses. The single state PEO’s may be affected by this phenomenon.

Multistate PEO’s seem to do better than the regular insurance market. This was an unexpected outcome which shows the Law of Large Numbers to be a true effect. NCCI went to great lengths to study premium volume.

Of the three large insurance company failures, lack of premium was the main cause. The Law of Large Numbers will bare its sharp teeth quickly when violated as with the three bankrupt carriers.

PEO Shortcomings (Very Few)

PEO’s seemed to have more litigation than non-PEO’s. As with TPA’s, claims handling must be monitored heavily by the company that signs up with a PEO. A large number of PEO clients would have not qualified for a Mod rating. Somehow, that is not really seen as a negative development.

Bottom Line – (not from NCCI report)

You know what works best for your company. NCCI or any expert may not provide you with the information needed to make a decision on a PEO. PEO’s are not for every company. You have to decide if PEO’s are worth investigating for possible WC coverage.

My recommendation is a PEO broker. There are a few shady PEO brokers – know who you are dealing with before making a final renewal decision. From a loss reduction viewpoint, they can easily be one arrow in your quiver to reduce your insurance costs.

Please note that we are not agents and do not directly place insurance policies. We are advisors.

©J&L Risk Management Inc Copyright Notice

Reinsurance/Excess Insurance Market Hardens

February 11, 2013 By JL Risk Management Consultants

Reinsurance Market No Longer Soft

The reinsurance/excess Insurance Market has started to change from a commodity marketplace. The excess insurance market is usually the bellwether for the rest of the marketplaces.

Picture of buildings Insurance Market place

StockUnlimited

Reinsurance/Excess Insurance is basically defined as a risk management technique. The employer will purchase this type of insurance to cover claims that exceed a certain payout per claim or an overall claims total known as an aggregate.

According to a recent article in Business Insurance, the employers may not be able to choose their Third Party Administrator (TPA) and then just pursue the lowest priced reinsurance. Reinsurers are starting to use more predictive analysis when underwriting a risk.

Hand Pointing Towards Insurance Market Icons

StockUnlimited

Insurance companies are not offering the same standalone product for reinsurance as in the past. The reinsurance/excess insurance market is now operating with ever-thin margins due to the return on investment the carriers are receiving for premium invested in stable investments such as money market funds.

The striking quote from article is that employers should expect a 10% increase in their excess insurance premiums. The other change is that re insurers are going to require employers to endure the same process as other insurance coverages.

The 10% increase is also for the employers with normal loss histories. Employers may see more severe increases with higher Mods or Loss Development Factors (LDF’s). The re insurers will likely analyze the same variables as normal Workers Comp carriers. One area that will receive more attention is whether or not an employer has a full safety and loss prevention program in place.

The one component that keeps the reinsurance market from actually being deemed hard is the availability of reinsurance. There are many carriers still offering reinsurance.

©J&L Risk Management Inc Copyright Notice

Will Workers Comp Fall Off That Nasty Fiscal Cliff?

December 5, 2012 By JL Risk Management Consultants

Nasty Fiscal Cliff – Will Workers Comp Fall Off It?

Will Workers Comp be affected if we all fall off that nasty fiscal cliff ? I think we first need to define what exactly is the fiscal cliff. According to the article from the link:

Hand with pen Analyzing financial paper Nasty Fiscal Cliff Data with Calculator

Wikimedia Commons – Dave Dugdale

“The now infamous phrase was coined by Federal Reserve Chairman Ben Bernanke in February 2012, during one of his required appearances before Congress on the state of the U.S. economy. He described … “a massive fiscal cliff of large spending cuts and tax increases” on Jan. 1, 2013. “

If one looks through the automatic cuts and tax increases that will hit on New Year’s Day, the insurance markets will be affected in the short-term only, if at all. As I pointed out in a recent post, Workers Comp has been stable through most of these so-called financial crises.

The hardening and softening of the insurance markets, especially Workers Compensation has had very little to do with the economy. The very basic definition of the hard market is when there are not enough suppliers (insurance carriers) to meet the demand by business for coverage.

The hardening or softening of the market has not followed any type of trend or financial forecast lately. Did the market immediately harden after the 2008 – 2009 financial crisis? It did not even blink. I thought the market would harden over the past three years. It has not whatsoever.

Woman Showing Nasty Fiscal Cliff Chart On White Board

StockUnlimited

In my opinion, the supply by Workers Comp insurers may have shrunk over the last few years. The contraction was met with a definite shrinkage in employer numbers, or at least the payrolls and number of employees have been greatly reduced recently.

Workers Comp is still a very stable industry when compared to others. According to an Insurance Information Institute article from November, “In September 2012 property/casualty (P/C) carrier employment slipped by 300 vs. August.”

There are 528,000 P/C employees in total. The one month drop equals .005% of the industry. The positive news is the P/C employees actually gained 1,600 jobs since September 2011.

I will cover more on this subject next time.

©J&L Risk Management Inc Copyright Notice

LIBOR Scandal And Hard Markets

July 24, 2012 By JL Risk Management Consultants

Hard Markets And LIBOR Scandal

Wikimedia Commons – Fletcher6

I was reading a great article on the LIBOR scandal that will likely make Madoff and the Wall Street scandals seem small at best. One of the main concerns that I hear floating around in conferences and among clients is the soft vs. hard market for Workers Compensation.

I do not want to just redo the article in the above link. One of the great quotes from the article is:

If LIBOR was manipulated, the results could be far-reaching. Since LIBOR is the benchmark for many other rates, an inaccurate LIBOR means millions of people all over the globe might have paid more or less interest than they should have. If rates were artificially low, borrowers for things like adjustable-rate mortgages and student loans would have benefited. But investors like cities, mutual funds, and pension plans may have earned less than they should have.

The extent and impact of LIBOR manipulations is still unknown. The effect on the average consumer is probably small, but as the professor in the video above opined, it could be measurable to people with large loans tied to LIBOR, like those with adjustable-rate mortgages.

As you can see, the insurance markets will likely be heavily affected overall. There are insurance investments that were tied to the LIBOR. The overseas investments of the very large carriers and brokerage houses will be affected directly.

Wikimedia Commons – Fructibus

In my opinion, the adjustments and corrections to the LIBOR will be felt worldwide. The major overseas index was manipulated so that banks/investment companies such as Barclays could make even more money.

If you notice from the above passage that any large organizations that would have benefited from higher rates received an artificially lower rate of return. The other side of the coin is to say that markets will stay soft now that the correction of the LIBOR is in place.

The overseas investments markets are now very volatile. The volatility of investment markets will make the market more susceptible to a market hardening. Insurance carriers need to have a stable market to properly set rates. One of the major considerations for setting rates is ROI (return on investment). If the markets are not stable, the carriers must look to their policyholders as being the stable element in their portfolio.

Bottom Line – I am not inferring a hard market is coming soon. Carriers may look to underwrite the safer companies, and with the changing of the E-Mod formula, a hard market acceleration could occur very rapidly. The best advice is to be prepared at renewal.

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Time Bomb for Workers Compensation Markets – Tick, Tick, Tick

November 23, 2010 By JL Risk Management Consultants

Workers Comp Is A Time Bomb

A time bomb may go off soon in Workers Comp. The post title has hit the Workers Comp airwaves after the President of Liberty Mutual had made it at a recent presentation. I often do not necessarily agree with Liberty Mutual. However, in this case, I think the assertion is highly accurate.

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The combined ratio for the Workers Comp market is 119%. The 119% is not the highest combined ratio in history. That means that when a carrier writes Workers Comp coverage it is at a loss. I have often commented in my presentations that Workers Comp carriers were writing low premiums and taking huge losses as they could recover it in the stock and bond markets. Now, they must invest it in fixed investments. Does this sound like a hard market is approaching?

A hard market is basically when carriers become very strict in their underwriting procedures. According to the old supply and demand model, if supply is cut and the demand is still strong, prices must increase to keep the market stable. If carriers become much more stringent, then employers with E-Mods of 1.2 and above will likely end up in risk pools/state funds which charge up to 400% more for the same coverage.

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The telling statistic is as follows – according to the Wall Street Journal, John Doyle, the president and CEO of American International Group Inc.’s (AIG) U.S. property-casualty operations, said his unit had cut back on how much workers’ compensation coverage it sells. It now has annual premiums of about $800 million, compared with $3 billion in 2007.

So the largest writer of Workers Comp is now highly concerned about a hard market and one of the major writers of Workers Comp just cut their writing by 74%……Tick Tick Tick.

Voluntary Market Best For Employers Workers Compensation Policies

October 25, 2010 By JL Risk Management Consultants

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)

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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.

When Does A Hard Market Occur – Are We In One Now?

October 5, 2010 By JL Risk Management Consultants

Term Of The Day – Hard Market

A Hard Market is the term used to designate the period after a Soft Market. It usually occurs after a wide-scale catastrophe that ends a soft market. During this time, standards for underwriting become more rigid, premiums rise as well as profits, and competition lessens.

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A soft/hard market in workers’ compensation can be very state specific. California survived many in the 1990s.

This market condition occurs in any type of economic situation when there are more buyers than sellers. Price increases are expected.

Soft Market – Are We In One Now?

October 4, 2010 By JL Risk Management Consultants

Term Of The Day – Soft Market

Part of a cycle, the term soft market describes the time when premiums are low, profits dwindle, and competition increases. As the number of claims increase, insurance carriers can no longer afford to lower premiums to increase volume. When this happens, the soft market portion of the cycle comes to an end.

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Agents and underwriters also use the term buyers’ market.

The term in general economics means that prices remain low due to more sellers than buyers.

Florida and California – Hard Market May Be Starting

November 2, 2009 By JL Risk Management Consultants

Florida and California Hard Market

Has the Hard market in Florida and California Started? One of the hallmarks of what I consider the start of a hard market is when one of the major players in the Workers Comp business pulls back on writing coverage. A few articles this week have pointed out that Liberty Mutual (R) has begun to not write as much coverage in one state with a possibility of doing the same in another state.

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I have always considered the moves by Liberty as the direction the market is headed in a certain state. They are now reported to not write as many polices in California. Liberty has also considered Florida as a state to watch closely to see whether a pullback is in order. Over the years, this seemed to be the start of a hard market in a certain state.

A hard Workers Comp market usually begins when there are less insurance carriers competing to write policies in a certain state or region. The carriers will no longer undercut one another to get the business on the books. This leads to the underwriters becoming much more stringent in deciding to cover a risk. Certain types of employers such as trucking companies and temporary labor suppliers may be turned away by all the insurance carriers in a certain state or region.

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This is a heavily debated point as some insurance gurus will refer to investment income, negative insurance laws or court decisions, or a change in a state’s business environment as the reason for a hardening. I have stuck to the basic supply and demand theories. When a product is still desired by the same number of people/companies and the supply is restricted, the price increases quickly. This happened in CA in the early 1990’s. If there are any more updates, I will post them as I see them.

Long Term Outlook for Workers Compensation Mix of Statistics

June 17, 2009 By JL Risk Management Consultants

Workers Comp Long Term Outlook – Good + Bad

The National Council on Compensation Insurance (NCCI) had an optimistic outlook on the Workers Compensation market. However, the NCCI had recently adjusted its long term outlook for workers’ comp to cautionary. This may be the warning of a hard market.

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These concerns, according to NCCI, include:

· Rising medical costs remain a significant challenge and continue to rise faster than wages. California is the best example of spiraling medical costs. The NCCI does not track CA statistics.

· Higher indemnity claim costs. Researchers found that indemnity claim costs also continue to outpace wage increases The number of claims have decreased. The higher indemnity and medical costs have offset the decrease in the number of claims.

· Lower investment yields. I am of the opinion that the insurance markets follow the stock market. The recent downturn in the economy should have hardened the market. The bailouts in the financial markets may have delayed the hard market.

· Potential political changes. I think the political changes such as a Federal Insurance office has caused great uncertainties in the market. Workers Comp benefits could be even be affected by the nationalized health insurance program. With all of these uncertainties, the market could harden very quickly.

What Is the effect of a hard market in Workers Compensation? I will post on that next time.

Expected Has Come To Pass With Hardening of Insurance Markets

December 9, 2008 By JL Risk Management Consultants

Workers Comp Insurance Markets Likely Hardening

The Hardening of Insurance Markets occurred for Workers Comp recently. The old soft market is no longer with us. I was very surprised that it took this long for the market to harden.

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This includes Workers Comp insurance and all other insurance coverages.

In the last two years, the insurance markets have seen:

An increase in catastrophe losses
Collapse of liquidity
Disappearance of excess capital
Quite a few major insurers are in trouble due to catastrophic investment losses – AIG being the most notable.

All of the “dark clouds” have resulted in the demand for highly rated, secure insurers being greater than the supply.

The insurance companies need to raise rates to refill their bank accounts. With the economy in place, insurance carriers have not and cannot institute any type of alternative types of insurance or coverages. Risk financing is not a viable option, as the capital markets have dried up for the most part.

What may be the start of the perfect storm for insurance carriers and employers? Many companies will seek to offset the effect of higher insurance rates by taking larger retentions, either by self-insuring or placing more risks in a captive. Any move to increase retentions will be one of desperation rather than careful analysis.

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Unfortunately, some of these companies increasing their retentions will find themselves incurring greater losses that they cannot afford. Of course, with a professional risk management program in place to minimize and prevent losses, companies might escape unharmed.

The next part of the perfect storm is that increasing retentions is a great way to release internal capital. The other side of the coin is that these same companies will cut their risk management staff to the bone. In my opinion, risk managers are needed now more than when the insurance markets soften. When there is so much money at risk, who better to watch over the risks than a qualified risk manager?

The final part of the perfect storm is when the employers turn all of their risk management programs over to a broker. This may work in some situations, but as I have said often, the employer and their staff understand their business much more precisely than any outside party.

Many employers that have experienced skyrocketing Workers Compensation costs and wish to find an alternative way to cover all of their insurance risks after letting their broker administer their risk management functions have recently contacted us.

I estimate the hard market will be in place very long-term, as there are so many parts of the “Perfect Storm” for risk management that are already in place.

How Will Current Economy Affect My Workers Compensation Premium?

October 8, 2008 By JL Risk Management Consultants

Current Economy May Spawn Hard Insurance Market

The current economy may heavily affect the workers comp insurance markets. We have received this question very often from employers over the last three weeks. We have covered this recently. We thought it was best to cover it again.

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The Workers Comp market is not as bad as it may seem right now. Even AIG was not failing in its insurance divisions. AIG was failing in the investments area. The market for insurance coverage is doing OK right now. I am not sure if I would even call it a hard market. When looking at the hard to soft market fluctuations of the past, the insurance market usually has about a six month lag behind the investment markets. The worst hardening of the insurance market is probably yet to come.

What I have noticed is the insurance carriers have lately been performing questionable Workers Comp audits and then bullying the employers that try to dispute any part of the audit. The hotspot for the heavy-handed audits is California. As we all know, California seems to be at the forefront for how the insurance markets operate for the most part.

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We recently performed a re-audit for two different employers in California. The employers were a casino and a construction company. Even though the employers were correct to dispute the audits, the insurance carriers turned them over to their collection attorney without even considering the initial disputes.

That is when we became involved to straighten out the audit situations. The final results were a refund of $38,000 and the other one is still pending.

Could it be the case that the carriers are so overloaded with employers that are not paying their Workers Comp audit bills, that picking out the ones that have a legitimate dispute are lost in the masses? This is possible, but then again doubtful.

One of our mottoes is “Stop Just Writing Checks.(r)” If you are unsure of any communication from your insurance carrier, do not just assume that it is 100% true and correct. Asking Why is a very potent way to reduce your Workers Comp costs.

Workers Comp Market Affected By Economy

September 16, 2008 By JL Risk Management Consultants

Workers Comp Market – Hardening?

How Will The Economy Affect The Workers Comp Market? This is one of my most debated topics lately. The opinion that I have is not very popular. I do not believe that there are any internal dynamics to the market becoming soft or hard.

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As I have said for many years, the stock market controls the insurance markets directly. When insurance carriers can make quick and good profits off the premium dollars, then the insurance carriers can become much more competitive on price. During the 1990’s, the stock market was volatile and climbing. If a Workers Comp carrier can discount a premium 10% and then invest the money and make a 20% profit, they are going to look to bring in a large volume of premiums quickly. This results in a soft market.

With the recent plunge in the stock market, I would expect a hard market. Insurance carriers will be investing money in interest-bearing accounts that are safe investments. Who can blame them? If the carriers can only invest the premiums in low-earning accounts, there will be no price competitiveness. This will result in a hard market.

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There are other influences on the insurance market. One of them is the insurance companies faltering and going into receivership. With the failure of many banks in the near future, insurance companies are sure to follow. The smaller number of insurance companies will lower the competitiveness and harden the market even more.

Bottom Line – It may be best to prepare for the very limited availability of insurance coverages. If insurance carriers are going to cherry pick, make sure that your company is one of the nice cherries. There are many suggestions in this blog to help you in a time of a tight insurance market.