Saturday, February 6, 2021

Forty-Three Years Working With Workers Comp Insurance--Some Observations

 I started in the wonderful world of Workers Compensation insurance--still often called "Workman's Compensation" back then--in 1978, working at the late, lamented insurer American Mutual. American Mutual had, according to the company lore, written the very first "Workman's Compensation" insurance policy in the U.S., back in 1911. The company specialized in what we now call "Workers Compensation" insurance, and so they provided a very thorough training program to their Industrial Account Representatives, as they called their in-house insurance producers. They shipped me out from our offices in Chicago to a classroom they ran out by the Home Office near Boston, for an intensive three week course covering the fundamentals of underwriting, pricing, and auditing this unique line of insurance. 

That course was taught by a remarkable guy named Don Barber, who had an engaging and energetic way of covering materials that, in other hands, might have been dry as dust. 

Here I am, forty-three years later, still working with Workers Compensation insurance every day, and still using many of the lessons Don Barber tried to teach us, all those years ago. And yet, a great many things have changed in the field. Not all of them for the better, I think, although a great many of those changes have produced genuine benefits for many. Occasionally, those changes even serve the interests of the employers who have to buy the insurance. But some of those changes have eroded important things that were once viewed as inviolable principles that were fundamental to Workers Comp insurance.

The biggest change I've observed over these forty-three years is the erosion of regulatory oversight and control over insurance companies, along with significant changes in underwriting practices.

Back in the day, Workers Comp insurance was pretty closely regulated. Every company had to use the same rates, the same classification rules, the same experience rating rules. Innovation was discouraged, as it was felt that it was more important to maintain uniformity and predictability for policyholders, and to preserve financial strength for insurers.

But starting in the 1980s things began to change. Insurance regulators moved to allow price competition in Workers Compensation insurance, something that had been virtually impossible before. In 1978, American Mutual and other insurers differentiated themselves largely by the services they could provide for loss control, as pricing was pretty uniform. Then American Mutual introduced a rather revolutionary kind of policy, a sliding scale dividend policy that offered smaller employers the possibility of premium returns if losses were favorable--a feature previously only available to larger employers who were eligible for Retrospective Rating plans.

Then regulators in various states began to allow actual competition on filed rates and greater use of schedule rating. In Illinois, an insurer named Casualty Insurance Company took early advantage of these changes, filed their own manuals and radically different rates, and very quickly grew from nothing to the largest Workers Comp insurer in the state.

It took a while for more traditional insurers to catch on. I remember American Mutual seeing its book of Illinois business rapidly decline as Casualty swooped in and took policyholder after policyholder away. The oldest writer of Workers Comp insurance didn't realize it right away, but their days were numbered.

Today, most states don't really have much real oversight over Workers Compensation insurance pricing. They review and approve manual rules produced by rating bureaus like NCCI and WCIRB but there it often is a bit of a Potempkin Village these days. In my home state of Illinois, the Department of Insurance has seen an exodus of those who had real experience and knowledge of Workers Comp insurance. An older generation of regulators has retired or been forced out through budget cuts and those remaining, even with the best of intentions, are overworked and under supported by higher ups.

So the trend has been for insurers to underwrite policies without so much regard to figuring out things like correct classifications for a particular employer. I've seen sworn testimony from insurance company personnel that the prevailing attitude is to issue policies without exercising any real judgement about classifications initially used on a policy, with the thought that any errors can simply be caught on the audit.

That kind of attitude sets up employers for frighteningly expensive "Shock Audits" where classifications (or allocation of payroll among classifications) is changed after a policy ends, leaving an employer with a massively higher premium bill for a policy that's already expired.

It also fostered the environment where an insurer could market a program like EquityComp, where the details governing the ultimate cost of the insurance policy were so complex as to be incomprehensible to employers and even many of the insurance agents selling the policies. This ended in tears for many employers, when very large bills for additional premium came in and the explanations for those costs may as well have been an explanation of quantum mechanics. In Esperanto.

It's also fostered the huge growth of complex Large Deductible policies as well, where the ultimate cost of the insurance is determined by complex and proprietary formulas that are often poorly understood by those buying the insurance. It's only when the bill for huge additional premiums arrive that some employers start to realize they didn't really understand the pricing of the policies they purchased, to their eventual regret.

And even in smaller policies through Assigned Risk plans in many states, the concept of underwriting only at the time of the audit is a common one, causing Shock Audits a'plenty for smaller employers who often have only a very rudimentary understanding of this line of insurance. And insurance regulators typically can offer only very limited assistance when those Shock Audits threaten the existence of a small employer, because of deregulation and diminished authority and staff at many insurance regulatory agencies.

So in forty-three years, Workers comp insurance has gone from being tightly regulated (arguably too regulated, perhaps) to something that is, in this writers view, almost unregulated, in a practical sense. Policy forms are still filed, rates are still reviewed, but too much emphasis has been placed on using competition alone to regulate the pricing of Workers Compensation insurance. While that approach can offer some benefits, it also encourages large and powerful insurance companies to take advantage of employers, especially small employers, in the pricing of insurance that is a required purchase for most businesses.

Insurance regulators have been gradually enfeebled and hobbled in many states, and while this might make life easier for insurance companies it has not, in my view, been in the interests of employers.

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