While employers across the state of California have enjoyed dramatic rate decreases on their workers' compensation policies over the past three years, history shows us that the good times will not last forever. Experts may not be in agreement on how long the trend of decreasing premiums will remain; however, the inherently cyclical nature of the insurance industry all but guarantees that workers' compensation prices will eventually bottom out and move into another cycle of increasing premiums and less availability.
Earlier this month the Workers Compensation Insurance Rating Bureau released data for 2006 that showed an increase in both aggregate insured losses (up 6.7 percent from 2005) and accident year loss ratios (up 26.1 percent from 2005). This is the first time that we have seen increases in these categories since the legislative reforms of Senate Bill 899 were enacted over three years ago.
While these figures alone do not indicate that there will be an immediate shift in the market, employers would be wise to begin preparing for the next cycle while they are still enjoying the benefits of double-digit rate decreases associated with the current market conditions. While it is a natural instinct for employers to spend less time and money focusing on a decreasing expense, now is the time for employers to reinvest a portion of their insurance savings to ensure that they will be positioned to remain competitive once the market does turn.
Because insurance rates are based on cumulative factors such as overall loss results, investment returns and competition among insurers, the best way for a single employer to truly prepare for a "hard" market is to control its individual losses. Most employers throughout the state of California qualify for either a credit or debit (referred to as an "experience modification"), which is applied directly to the policy premium generated by a carrier's rates. This factor is a comparison of a company's loss history against industry loss trends, and uses data spanning back four years.
Considering the fact that the losses a company incurs today will affect its insurance premiums for at least four years, there is no more important time than now for employers to focus on safety and claims management. Those employers that lose sight of their safety culture during the remaining years of our current soft market will likely be faced with not only increasing rates, but also the effects of a higher than average experience modification. This combination may simply be too much for some companies, as evidenced by the number of business that were forced to close their doors or move outside of the state during the peak of our last hard market.
Now is the time for companies to control individual losses to safeguard against future hard markets. Insurance professionals understand the risks for companies and the appropriate insurance needed to address these risks. A knowledgeable broker will work in conjunction with a company to set guidelines to reduce risk and lay out the necessary steps to mitigate claims. With insurance brokers as partners for risk management strategies, companies can focus on what really matters -- their business.
Submitted by Sam Quigley of Barney & Barney LLC