Workers' Comp Rates Invoke Fear

Fear is a word used by many employers about their expectations of future rates they must pay for workers' compensation insurance. This feeling of fear arises from the unknown and unpredictable, combined with past rate quote surprises. It can be like the white knuckle fear some experience when riding a roller coaster anticipating that next big surprise drop in the pit of your stomach.

Running a successful business in part requires predictability to plan revenues, expenses and profits. A major expense for most employers after their labor cost and taxes is their workers' comp insurance costs.

What Creates Volatility in Workers' Comp Rates

Rates are a combination of the expected claims costs for an employer, the insurance carrier's overhead costs, marketing costs (think spokes animals, Geckos, Jake, Mayhem, and Flo...), and a profit margin for the carrier's shareholders. This is a very simplistic overview.

One other key area that directly affects carriers' profitability is the investment return on their invested money. Carriers collect money in the form of premiums, and there is a long time until money is paid out for claims that occur during the policy. Thus, that is why workers comp claims are referred to as long-tail liabilities. During the time between collecting money and paying it out, carriers invest these funds into the stock market. When the market is up, the carriers make lots of money, but when the market and the economy is down, they don't make much money. If the investment returns are up or down directly affects what the carrier will charge for premiums. They can charge less in good markets to capture more cash to invest, but in bad markets, they must to charge much more in premiums to fully cover the cost of the insurance and claims.

Carriers are a lot like casinos in that 'the house always wins'. The employer will ALWAYS pay more than the total of the costs for what is paid out.

Stocks Have Worst Day in 14 Months

Today, April 25, 2024, Forbes reports Dow Plunges 700 Points—Worst Day In 14 Months As Disappointing GDP Report Accelerates Stagflation Fears. Later in the day the Dow recovered some of the losses, however since a recent high on March 28th, in just the past 30 days the Dow has dropped from 39,807 to 38,085. A whopping 1,722 points, or 4.3% of the total market. The drop came after the release of the Fed's GDP report.

MarketWatch reported that the GDP for the 1st quarter of 2024 grew at only a 1.6% rate "marking the weakest reading in almost two years". This signals a fear that inflation may be coming.

Uncertainty is the Enemy

Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley said “In the short term, the numbers don’t appear to be a green light for either bulls or bears...the uncertainty is unlikely to ease pressures in a market experiencing its deepest pullback since last year,” as reported by CNBC.

All of this is important because insurance carriers reduce rates when investment income is high. However, when investment incomes falters, they must make up for that lost income through the only other means available, raising workers' comp rates. The uncertainty of the market and investment returns will likely create fear in the carrier's actuaries and CFOs, causing them to consider rate increases to protect against the volatility of the markets.

Workers Comp Rates are Cyclical

Just like the financial markets, the workers comp market is also cyclical in nature. Discussing the cyclical nature of the workers' comp market on December 5th, 2023, at the Goldman Sachs U.S. Financial Services Conference, W.R. Berkley Corporation CEO Robert Berkley Jr. said, "The cycle is really driven by fear and greed, and that is what has, what is and will continue to drive the cycle." WR Berkley is one of the largest commercial lines carriers in the United States.

Protecting Against Fear and Hard Markets

There are few ways to protect against fear and a hard workers' comp market. The easy way would be to eliminate the factors that cause fear, and not to participate in the hard marketplace. But how can you do that?

Self-insurance is not responsive to economic market conditions the way insurance carriers and their products are. With self-insurance, you simply pay for the cost of claims. If the market is up, or down, or investment income dried up and went away, it doesn't matter.

Self-insurance has provided rate stability and access across all markets for over 106 years. Many of the largest companies in California are self-insured for precisely these reasons. In addition to protecting against market forces and volatility, they also enjoy other benefits that include greater control, improved outcomes, and lower costs.

Small and mid-sized companies can also benefit from the advantages of self-insurance through membership in self-insured groups (SIGs). Well-run SIGs provide the same benefits large employers enjoy from being self-insured and give predictable coverage access and stable rates.

ABOUT THE AUTHOR: Jon Wroten, MBA, CPP, is Senior Vice President at The PATH Alliance and Managing Director of California Risk Advisors LLC, where he provides strategic leadership to help California employers derive maximum benefit from being self-insured. In his prior role as the Chief of the Office of Self-Insurance Plans (OSIP) for the State of California, the nation's largest self-insurance marketplace, he was responsible for managing $22 billion in risk exposure, protecting 4.6 million California workers representing $192 billion in annual payroll. Jon taught business, insurance, and risk management as an adjunct professor at Sierra College for over fifteen years.