Webster's Collegiate Dictionary defines deja vu as - something overly or unpleasantly familiar. Anyone that has been in the staffing business since the late 1980s and early 1990s knows exactly what this means when referencing worker's compensation. Prior to the early 1980s no one concerned themselves with the cost of worker's compensation nor did they talk about the roller coaster effect of premiums.
There were no terms such as soft market or hard market. But in the mid to late 1980s workers compensation insurance costs started spiraling upward. The upward swing saw many companies lose their business and forced others to turn to self-insurance, retention plans or other means of alternative insurance. Everyone knew that the state fund or assigned risk pool was a proverbial kiss of death for a staffing firm. Then in the mid 90s, without much notice, the market began to soften. Companies who had once fled the insurance market for other insuring vehicles found that the cost of workers compensation through conventional means was much more attractive from a cash flow perspective. In fact, staffing firms were being solicited by many carriers and enjoyed the benefit of a small pricing war. Premiums that were far below prior years losses were being quoted to companies. Modifiers were being ignored or negotiated down and premium credits became the norm as opposed to the exception. Little concern was shown for a companys risk management program. It was a real feeding frenzy by carriers.
The reasoning behind this soft market was that companies had identified the problems associated with injuries and resolved them. Losses were trending down nationally and there were those that said that the market would never go hard again. Carriers paid little attention to the insureds attitude toward safety and loss control when considering a quote for insurance. It is true that there are reasons that can explain the soft market, but the ones mentioned here are not the real reasons. In order to survive a hard market one must know why it occurs. By knowing what drives a market soft or hard, a company can position themselves to experience minimal impact and survive.
First lets look at the actions taken by companies when insurance costs started to spiral. Most companies began looking for ways to lower their premiums and in the early 90s, found that if they would retain a level of their losses, carriers were willing to give better pricing. The more retention taken the better the pricing offered. But this would mean that the insured would need to improve their safety and loss control program to ensure that deductibles they had to pay (retention levels) were kept to a minimum. Much attention was given to the implementation of comprehensive procedures to identify potential employees that might be apt to be injured or to file a fraudulent claim. More safety training was provided to employees. Drug screening became very popular and most companies hired or designated risk managers, qualified or not. A new process of qualifying clients became popular and a team effort for increasing safety and reducing losses was developed between staffing firms and their clients. All of these actions resulted in a significant reduction in loss ratios (losses divided by premium) that opened the eyes of a few carriers. At this time most carriers were reluctant to write workers compensation insurance for staffing firms because they did not believe that the industry could control the worker or the work environment and historical data confirmed this. Remember, this was a period in time that most people thought of staffing firms as secretarial pools or rent a drunk. And with average loss ratios of 150% or greater, payouts for losses were far exceeding premiums collected. So who can blame carriers for not wanting to accept this type of insured? With the advent of all of the intensive risk management being implemented coupled with several months of success resulting in loss ratios of 35% or less, and the retention of some of the losses, the prospect of being profitable by insuring staffing firms surfaced and some carriers decided to take the chance.
But it wasnt just the good risk management procedures that provided the incentive to insure a known high-risk industry. If you look at the graph of the stock market over the past ten years, you will quickly realize that there is a direct correlation between it and the insurance market. Heres why. Insurance companies collect premium from clients but they do not pay claims right away and when they do pay the claims, it is usually over a period of time. This allows them the opportunity to invest the money and earn a return. When the markets are doing well and returns are great, carriers are more interested in the amount of volume they have as opposed to the quality of the insured. An example of this is that in one recent year the insurance industry reported four billion dollars in losses. (This sounds like a lot but is a relatively small amount.) That same year they reported thirty-four billion dollars of investment income. With a thirty billion dollar net, it is easy to see why they would want the premium dollars regardless of the risk. The fact is that the pendulum swung so far in the other direction that in many cases a company could get a guaranteed cost policy for a price less than that of the retention programs. This would prove to be short-lived and the pendulum returned at a very swift rate when the interest rates began to fall and the stock market began its downward trend.
Another factor that must be considered is the number of catastrophes that occur in a given year. Hurricanes, earthquakes, floods, drought, fire and tornados can have an impact on all types of insurance premiums. Few insurance companies limit themselves to one type of coverage such as workers compensation. They usually have a variety of lines of coverage. If carriers are hit hard from the above mentioned catastrophes or if they lose millions in lawsuits from employment related issues such as discrimination, it will impact all premium costs. In the mid-nineties, catastrophic losses were minimal. If a carrier suffers losses to the degree that they are forced to shut down, there will be a rippling effect on all insurers. An example of this is the failure of Universal Re. When they were forced to shut down due to poor underwriting procedures, almost immediately prices increased across the country, from five to twenty percent as other re-insurers scrambled to protect themselves from a similar fate. Many front line carriers either failed or saw a significant decrease in their financial position.
In 1998, some insurance experts began to warn of the upcoming hard market. But the economy was booming, prices were still low and these warnings fell on deaf ears. These experts realized that it was unlikely that investments could sustain their high returns. It was also evident that companies were becoming complacent with their risk management procedures. This coupled with the likelihood of a catastrophic year gave reason to warn companies of the impending hard market. And as these experts predicted, the hard market returned.
For some it is too late to salvage their businesses because the insurance companies had turned their heads to the staffing industry and the high cost of workers compensation in the state fund or assigned risk pool eliminated all profits. Some have just closed their doors while others have surrendered their businesses to larger firms for far less than the actual value. And many more will follow before this hard market is over.
Now that you know some of the reasons behind the fluctuating market, what can you do to survive and avoid becoming another casualty? First and foremost you must develop a mindset of long term planning as opposed to insurance carrier hopping. Insurance carriers are looking for companies that want to establish long-term relationships as opposed to those that jump ship every year. This type of relationship affords the carrier the opportunity to better understand the insureds needs and to benefit from averaging. Every company has the potential to have a bad year. This bad year can be softened if it is averaged in with a few good years. When you develop a relationship with a carrier and stay with them over a period of time, both will benefit. You must remember that price is not important; it is cost that counts. A low upfront premium could ultimately cost you thousands more if the company provides poor service. This could include poor claims handling or inadequate coverage due to hidden exclusions. Regardless of who is to blame, a year of high losses will negatively impact your ability to secure affordable insurance. If this is your current situation then do something about it now!
Second, consider some level of retention when possible. By accepting responsibility for the first level of claims dollar you have an incentive to reduce or eliminate a large portion of these claims. It is also important to remember that for every dollar the carrier pays you pay $1.50 to $2.00. If you pay the first dollar then you can save 50-100% on that portion of the claim. Make sure that your contract does not allow the carrier to up charge you for those deductibles. Retention levels come in a variety of amounts and as they get larger you must be aware that the carrier will require that you post collateral in the form of a letter of credit or cash. This can have a devastating impact on cash flow and growth. The most common retention levels are $10,000, $50,000, $100,000, $250,000 and for the larger companies $500,000 to $1million. Captive and Rent-a-Captive programs can be very favorable because they allow you to have better communication with your servicing providers and usually provide you with a return of a portion of your premiums after a low loss year. Many of these programs will also provide you with investment income dollars that normally go to the carrier. But beware. It is important that you have a thorough understanding of how these programs work before making the move. These types of programs are most assuredly designed for those with long-term plans for their business and a serious attitude toward controlling losses. If the program you are considering does not have this mode of operation, then avoid them. Captive-type programs may require a larger amount of upfront cash, but the long-term gain will greatly reduce the cost of insurance. Because they are less cash flow sensitive on the front end it is important to review your financial position prior to entering this type of program.
When deciding on a program it is sometimes best to secure the services of an impartial third party consultant to review your Insurance Desirability before making your decision. The advantage is that the consultant will not influence your decision based on the amount of commission to be earned as might occur with a broker, agent or other direct writer. One company that recently took this approach paid a small fee to have a consultant review their brokers proposal. After careful analysis, the consultant, working with the broker, was able to identify areas that would better suit the insured. The result of the review was that the company reduced their renewal premium by 48%. The consultants fee was 1%. That is a net savings of 47%. This may not happen in your case but it wouldnt have to be that good to be worth talking about.
Finally and most importantly, step back and take another look at your risk management program. Careful analysis will most likely reveal areas that have fallen off due to lack of attention. Situations change and you may need to add or take away certain parts of your program to make it better serve your companys needs. Sometimes you must weigh the cost of a safety process against the end result. If the cost exceeds the benefit then you may decide you dont want to implement this particular process. Look for opportunities to make risk management easier for your staff to implement and remember that they follow your example. If you dont stand firm with your program you cannot expect your staff to be any different. Provide them with the necessary tools for effective risk management and hold them accountable if they fail to use them. Make sure that if a carrier considering a quote for your company decides to visit your facilities that there is solid proof that you are a good risk. Dont expect them to believe you just because you have a risk management book and a few forms. They have fallen for this in the past but wont fall victim to this action again. Prove it without a doubt by making risk management an everyday part of your operation. The result will be fewer dollars spent on losses and bigger savings on renewing policies.
If you follow these simple instructions and monitor the factors such as the stock market and catastrophic events, you will position yourself to survive in a hard market and thrive in a soft market.
The principals of http://www.arcaetos.biz have a combined 50 plus years of experience in risk management, sales training, insurance, and information technology. Since 1997, JPA dba ArcAetos has been a consulting firm dedicated to educating companies on proper risk management techniques and assisting them in avoiding unjust premium charges by their workers' compensation carriers.