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Employers Fret Over Rising Workers’ Comp Costs

Insurance brokers saw it coming.

Workers’ compensation insurance rates have swelled dramatically—but not unexpectedly—during the past several months.

“Workers’ compensation rates bottomed out in mid-2011 to an average rate roughly equal to what it was in 1994,” said Travis Trask, managing director at the Irvine office of San Diego-based Barney & Barney LLC. “[But] rates are definitely increasing now.”

And that means brokers end up becoming the messengers of bad tidings.

“It’s a tough message to deliver when you’re doing rate increases,” said Jeff Cruz, assistant director at Barney & Barney. “It’s an interesting dichotomy. Because as rates go up, it would seem to be a good thing for brokers on the surface, since it seems like it would raise commissions. But that’s not really it—our goal is client retention, and you do that by getting clients the best rates possible.”

Approved Hikes

Increases have been approved in workers comp rates in the past six months, adding up to 45%.

The state Insurance Department in November approved a 37% rate increase, which took effect in January. Insurance Commissioner Dave Jones then approved a recommendation by the San Francisco-based nonprofit Workers’ Compensation Insurance Rating Bureau for an additional 8.3% rate hike for July.

“That doesn’t have to be followed by carriers,” Cruz noted. “These are recommendations. If carriers literally took the 45% increase, they would lose their business.”

Most insurers have been instituting much smaller premium hikes than allowed, while also cutting back on premium credits for companies with good workers’ comp records, he said.

Brokers suggest the rates are justified, as insurers have long been losing money on workers comp coverage.

“The last year of profitability on workers’ compensation in aggregate was 2007,” said George McLaughlin, vice president at Santa Ana-based Tutton Insurance Services Inc. “The claims or losses have overridden premiums, so they’re trying to raise rates to make up for that.”

The combined loss ratio—which compares an insurer’s expenses on claims and administrative fees versus premiums taken in—is currently 126%, reflecting that carriers on average are losing 26 cents for every dollar it earns.

“They can’t stay in business at that rate,” said Thom Lewis, who is at the Irvine office of USI Insurance Services LLC. Lewis is the regional chief executive of the Briarcliff Manor, N.Y.-based firm.

“Rates then have to go up, or insurers would have to reduce the amount of claims they’re writing,” he said. “Carriers are certainly fighting to retain existing profit margin accounts. But they’re taking a hard look at risks.”

A rise in workers’ compensation rates is something a broker can’t control, said Bill Tutton, owner and president at Tutton Insurance Services.

Still, brokers are well positioned to help client companies by keeping employers informed as early as possible and working to reduce claim frequency and severity.

“[It’s important to] maintain great relationships with the insurance companies, because that always helps when it’s time to negotiate premiums,” McLaughlin said. “We also can establish relationships with industrial medical clinics and make sure clients are using ‘pro-employer’ clinics with established protocols. Unnecessary return visits to the clinic, X-rays and MRIs run up the medical bill and show up on the loss record.”

Tutton Insurance Services works closely with Fullerton-based Hydraflow, a company that makes aerospace components and has about 100 employees.

“Workers’ compensation insurance can get so costly,” said Sarah Lipton, a Hydraflow spokesperson. “Just at our level, we try to instill safety on a daily basis. We have safety meetings, getting employees actively involved.”

Hydraflow manufactures valves, metal hoses and couplings for military and commercial applications.

“Nothing really big has happened this year,” Lipton said. “Our manufacturing claims are pretty minor. Some people get a cut here, some have pains from assembling. But if any of these get litigated, that’s something else to deal with. It’s a lot of paperwork; it’s never fun.”

Implementing safety measures and stressing the need to reduce claims are essential practices regardless of industry or rate adjustments, McLaughlin said.

“A rising tide raises all boats,” he said. “If a company’s claims record is good, it’s going to be impacted the least. It’s a matter of getting the clients to realize that this is an ongoing business practice that should be in both soft markets and hard markets. It’s always going to benefit you; it’s particularly going to benefit you now.”

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