Why Are Business Owners Experiencing Workers Compensation Rate Increases?
Workers’ compensation insurance rates have experienced a steady rate increase over the past few years, as you have probably noticed. If you’re an employer that is required to purchase workers’ compensation insurance, this is going to affect you directly and probably already has. The result is that you will be paying more for coverage, which can cause a financial strain on you and your company. While these rate increases vary according to state and the type of account, they are usually between 2-5% and have gone as high as 25%.
This financial strain will vary according to the type of workers’ compensation insurance that is purchased by the employer. All but five states and two US territories are allowed to purchase their policies by private companies in order to be considered covered. These five states – Ohio, North Dakota, West Virginia, Washington and Wyoming and two territories- the US Virgin Islands and Puerto Rico, require policies to be purchased through a particular government-state fund. These jurisdictions are referred to as monopoly state funds.
Why is this extreme rate increase occurring and why is it happening so rapidly? There are a number of reasons that add to the rate increases; Claims costs are rising and insurers ratios are deteriorating. Insurers are finding themselves tightening their underwriting standards so that they can try to improve their profits. This is especially the case for labor intensive industries like staffing and construction. Between the years 2001-2009, these insurance rates were kept low and stabilized due to loose underwriting standards by different insurance companies. Once the insurance industry recognized this flaw in their policies, they also recognized that they were generating inferior rates of return in their investments for workers’ compensation programs.
Insurance companies are evaluating losses at a greater rate than ever and trying to improve their discipline to see their profit margin go up. This is particularly true in the “cream of the crop” market, which are the guaranteed cost accounts. These types of accounts are seeing a steadier rate increase combined; from 5-7% and even as high as 25%. This is true especially in the Midwest where industries like farming and manufacturing are booming and workers’ compensation claims are plentiful.
Another huge contribution to these rate increases is based on the recession. Insurers are not making the types of returns in investment markets that they had in the past. Thus, they are being forced to show a return of profit on each account instead of using the premium as an investment for the markets. This is forcing premium rates up and making high risk industries more difficult to insure than ever. Higher risk industries are even finding themselves forced into state pool policies when private insurers won’t accept them.
In addition to these internal insurer-based rate increase criteria, there are more liberal judges that are approving workers compensation claims. “Allowable injuries” is a broadly referenced criteria and the understanding of this jargon can vary from one judge to the next. Medical expenses are also on the rise and based on the state of the economy, cost increases are also driven by an inability to return those injured workers that are receiving the insurance back to work. In some cases, there is no work to go back to. The result is that these workers remain on workers’ compensation for longer periods of time.
In 2011, Fitch Ratings Ltd. published a report about the poor state of workers’ compensation overall. It was at a 117 percent combined ratio for the 2011 fiscal year, which was the worst result that the industry has seen in 10 years. It’s also worse than the combined ratio for other insurance lines. There isn’t much improvement expected at this rate, even with rising costs, so this trend may continue into 2014. Be prepared to do your homework to find out how these increases will directly affect you and your business.