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Industry trends help guide the management of Workers' Compensation

Recognizing and capitalizing on industry trends helps position a business to better manage its Workers' Compensation costs and gain a competitive advantage. One good source of such trends is the National Council on Compensation Insurance's (NCCI) annual issues symposium held in May.

The mood this year was more upbeat and positive than in recent years. For insurers, premium is up by $3.3B, about nine percent in all. The all-important combined ratio has dropped from 115 to 109 (projected). There is also good news in the loss area, with frequency of loss-time claims down an average of five percent across all sectors. Indemnity claim costs are up just slightly, as are severity costs. The improving medical trends were attributed to somewhat moderating pricing schedules (more fee schedules for hospitals); better control of drug costs and indications from two Pharmacy Benefit Managers (PBMs) that they've been able to reduce the use of narcotics.

While the taming of growth in medical costs is good news for employers, medical costs remain a major concern. NCCI CEO Steven Klingel demonstrated the dramatic impact of medical expense on profitability. He explained the difference in profitability attributable to a mere three percent increase in trend - that increased trend leads to an operating loss of around eight percent compared to just about breakeven at the current three percent trend. It is a clear message that employers cannot take their eye off containment of medical costs.

A few specific cost drivers are noteworthy. While surgery is only 5.4 percent of all services in Workers' Compensation, it represents 35.5 percent of the costs. Medical necessity and the likelihood of improved outcomes should be the basis of all surgery decisions. Another driver is the use of brand medications. Brand name Rx are 24 percent of scripts but over 50 percent of Rx costs in Workers' Compensation.

Improvements in the Workers' Compensation line for insurers are translating into a "hardening" market, or increased costs for employers. Discounting of premiums has decreased from 7.6 percent to a projected level of 4.5 percent. And there are challenges ahead that will impact future rates and availability. These include:

While many of the macro influences on Workers' Compensation are beyond the control of the individual employer, they demonstrate the overlying importance of strong risk profiles and being viewed favorably by insurers. What drives rates and increases premium is what underwriters perceive as risk. More than ever, carriers are requiring explanations for losses and evidence of the changes made to prevent the losses from reoccurring. But even valued customers with good loss histories are not immune to the pressure on rates. Underwriters are well aware how rapidly situations can change - a low risk company can be tomorrow's catastrophe. The smart employer constantly evaluates and differentiates its risk profile by reducing exposures and strengthening operations.