Workers Compensation: Employers Grapple with Higher Costs
Employers have long been concerned about the cost of workers’ compensation insurance. This year, though, the premium environment seems particularly harsh as the insurance industry changes the way it calculates the experience rating modification, or x-mod, that powerful pricing engine gear assigned to each employer. The change is expected to result in higher rates at a time when premiums are already rising quickly in response to escalating medical costs.
As if all that weren’t enough, a growing number of carriers are leaving the market, diminishing the supply of competing policies and putting even more upward pressure on the price of this mandated benefit.
It all boils down to a challenge for employers.
“We are currently in an environment of rising workers’ compensation costs,” said Peter Burton, senior division executive for State Relations at the National Council on Compensation Insurance in Boca Raton, Florida.
The New Math
For businessowners, the most immediate concern is the change in the x-mod. The portion of each claim that will flow into the experience rating formula at its full primary value will increase to $10,000 from the former level of $5,000. (See sidebar, “Calculating the New X-Mod.”)
The reason for the change, Burton said, is the growing mismatch between the cost of claims and the premiums employers pay.
“The split point portion of the experience rating formula has not been updated for 20 years, a period during which the average cost of a claim has tripled,” Burton said. “So our actuaries looked at the program and saw it was out of balance.”
Some industry observers recognize the connection.
“The new x-mod calculation is a reflection of medical costs which have gone up exponentially in recent years,” said Daniel Free, president and general counsel of Insurance Audit & Inspection in Indianapolis, Indiana. “The NCCI is really just catching up.”
Be that as it may, employers are sitting up and paying attention to the new math.
“The x-mod changes are a big deal for employers,” said Karl Ahlrichs, benefits consultant for Indianapolis-based insurance broker Gregory & Appel.
Those employers with historically safe workplaces are going to be better off under the new system. Those with more frequent, higher level claims will see their x-mods increase.
“The impact will vary based on the number and size of claims the employer has had,” Ahlrichs said.
Carriers Leaving the Market
A third factor contributes to premium angst: A dwindling supply of carriers serving the market.
“We are seeing a growing number of cases where multi-line (auto, property, umbrella, general liability) carriers are refusing to renew workers’ comp insurance for an employer whose experience is unfavorable,” said Mike Salazar, vice president and manager of Client Services at Gregory & Appel.
The reason for carrier’s growing reluctance is clear: In a low interest rate environment carriers cannot make up workers’ comp losses with profits from property and other insurance products.
“Employers turned down by the multiline outfits must apply to the single line workers’ comp insurance carriers,” Salazar said.