Workers’ Compensation: What Can You Expect in 2015?

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Workers’ compensation can be the most expensive line of insurance purchased by a contractor.  This cost can vary dramatically depending on the individual contractor’s loss history and experience modification, the specific class codes assigned to the contractor, and the health of the workers’ compensation market.

The volatility of the market can dramatically affect profitability. Often contractors are bidding on jobs which may not start for some time or may take several years to complete.  If workers’ compensation costs escalate greatly, it could materially affect the profitability of the project.  To the extent you can forecast your workers’ compensation costs, you will be in a better position to price for any changes.

The best way to manage your workers’ compensation costs in the long run is to have an effective safety program and strong safety culture that reduces the frequency and severity of your claims.

You also need to understand your Experience Modification Report (EMR).  You should have your EMR projected prior to the time it is actually published. The Workers’ Compensation Insurance Rating Bureau (the Bureau) is the organization responsible for calculating experience modifications.  The Bureau usually publishes EMRs 30-90 days prior to renewal. However, you can estimate your mod prior to that. The most accurate projections are done after the insurance companies have filed their Unit Statistical Reports with the Bureau.  This is generally in the seventh month after policy expiration.   If, however, there has been adverse loss history or you have other concerns, you can project the mod much earlier.  It is not uncommon for us to project mods for our clients immediately after expiration, and in some cases, given certain assumptions, two years out.  Needless to say, the further out you want to go, the less accurate your projection will be.

How Does 2015 Look and What Can Contractors Expect Rate-Wise in California?

Some Background on the California Workers’ Compensation Market

California is an “open-rating” state.   Every insurance company writing insurance in the state of California is free to choose their own rates.  Although the rates for admitted insurance companies need to be filed and approved by the Department of Insurance, there is a fairly large degree of latitude and diversity in rates for the same class code between various insurers.

The Bureau does publish loss costs and this is based on the data they gather from insurance companies writing business in California. These loss costs are relied on by most insurers to set their own rates.  The Bureau’s loss costs are also a great barometer to foretell where rates are going.

Some History on Rates Charged in California

While rates are clearly affected by the loss history experienced by individual insurance companies, they are also affected by the insurance market in general.  The two major factors affecting the market are Surplus and Return on Equity (ROE).  Insurance is a supply-driven business and when insurance companies have excess supply (surplus), the industry becomes competitive and prices trend down.  Of course, the reverse also happens. If surplus goes down, rates tend to go up. The industry also needs to attract capital, and in order to do that they need to generate a decent return for their shareholders (10% or more).  More on this later.

When returns are low, underwriters try to get more rate. The workers’ compensation loss experience in the latter half of the last century has been horrible and by 2003, workers’ compensation rates had reached an all-time high.  These higher rates and some reforms in the comp system turned the industry profitable.  Companies were making money, surplus was up and rates plummeted 67% by 2009!  Unfortunately, the industry tends to be reactive and in this case they reacted way too late.  Loss ratios began to skyrocket and the industry took a beating.  Beginning in 2010, rates started trending up and have increased about 40% since then.  To put things in perspective, that increase, when factored on top of the previously mentioned decrease, still leaves the average rate for an employer in California 53% less than it was in 2003.

Where Are We Today and What Can You Expect?

While loss ratios have improved, they have not improved nearly enough to allow insurance companies to make an underwriting profit. An underwriting profit is generated when the combined ratio is less than 100%. The combined ratio is calculated by adding losses and expenses and dividing by premiums.  As such, most insurance companies are still looking for rate increases on workers’ compensation although not as much as the previous four to five years.

Although the Bureau’s advisory pure premium rates have not yet been published, the Workers’ Comp Executive newsletter is estimating the Bureau will be seeking on average a 4-5% rate increase in 2015.  As mentioned previously, this is an average increase.  If I was projecting workers’ compensation costs in 2015, I would conservatively estimate a 5-10% increase in net rates exclusive of your experience modification.

Some class codes may go up and others may go down.  Unfortunately, those general and trade contractors that have qualified for the Executive Supervisor classification (Code 5606) may be in for a significant rate increase.

Based on preliminary filings, Code 5606 could go up 25%.  It would actually increase more based purely on loss data, however, the Bureau can only increase a given class 25% in any one year.  It also appears that the low wage Roofing classification (5552) may be in for a 25% increase as well.  Recognize that the Bureau’s current estimates are preliminary and could change before the actual rate filing is made. The Bureau will review its 2015 rate filing later in the year and will publish their pure premium rates after that.

The dramatic swing in rates for these two class codes underscores the importance of approaching your underwriters in advance.  Often an underwriter knows their filed rates well in advance of your renewal and will share those rates with you if you ask.

Bottom Line

Workers’ compensation is a big expense for contractors.  It is critical to manage this exposure.  Those contractors with a good claims history and low experience modifications have a huge advantage over those with a poor claims history and a high mod.  It is also important to understand your experience modification, which direction it may be going and which direction the insurance marketplace is trending.  To the extent you can predict your future costs you will be in a much stronger position.  Let’s face it, surprises can be a good thing when it comes to your birthday or the lottery, but not when it comes to an increase in your workers’ compensation costs!