Safety pays! New changes to workers compensation insurance.

• Author: Stich, Steve A.

Over the last several years, the cost of workers compensation and other insurance has decreased dramatically. There are multiple reasons. The most important one is the extra efforts employers have placed on workplace safety. You can thank yourselves for a job well done. Safety programs have made a positive cost impact.

The other major reason is that the insurance market as a whole has had significant dollars to invest and superior returns on their investments. Competition has been keen to gain market share, driving prices down. It is similar to the general marketplace where everyone wants a share of the available business. Profit margins are cut, as competition grows, for a share of a finite market. We often hear of competitors bidding work just to maintain cash flow. The insurance industry has been in this mode for some time.

This downward trend might be coming to an end. We are now receiving reports that the workers compensation reinsurance market (the insurance market for the insurance carriers) has problems that will have a direct impact on increasing the rates you will pay in the near future. This problem has been projected by some to be as high as $2 billion dollars in losses! In addition, the overall cost of paying claims is increasing. Losses outside of workers compensation have risen and investment income is not rising fast enough to cover the increase. There is a gap between income and expenses. Insurers have no choice but to begin to raise prices.

The main thing an employer can do to offset increases is to maintain a solid safety program. Safety impacts both frequency (the number of claims)and severity (how large the loss). From practical experience, this overall decrease in frequency and severity is across all of your exposures (worker compensation, property, general liability, business auto, etc.). This motto will become even more important as the market changes and prices begin to increase.

Adding to this is a new twist in the way your workers compensation premium is being computed. It's called "Loss Cost Rating." In the past, the National Council on Compensation Insurance collected information from all carriers on payrolls and the costs of claims. They computed what is referred to as manual rates. The chart shows the components of the manual rate.

What NCCI has done is to use developed losses and...