Legislation and risk management to bring down claims

The workers' compensation market has historically been a difficult one, typified by significant volatility and a shifting legislative environment.

The abolition of managed care in the 1990s - the system under which claimants were treated by approved medical practitioners to keep costs to a reasonable level - had a dramatic effect, on the workers' comp market, with claims costs rising significantly. This, together with severe price driven competition, brought the market into a substantial deficit position, leading to the exit of several major companies.

That is not to say there have not been some long-term players over the period, one of the most consistent of which has been the London Workers' Compensation Consortium. The consortium has built up a book of specialist insurance and reinsurance business and produced consistent and stable results over the15 years since it was founded.

Positive legal and cultural developments may help to smooth the cycle in future

There are also some positive cultural and legal developments under way which may help to smooth the cycle overall in future, possibly tempting companies which have been nervous in the past to enter the market.

Effective risk management has become a key tool for managing this class in recent years. When clients are being assessed for cover, there is now a much more rigorous analysis of their risk management and loss control.

Questions around the right controls and processes are more frequent, as is analysis of staff turnover. A company that has a consistent workload will have less need to hire new unskilled workers, and therefore risks will be reduced. Equally, investment in staff training and an effective return to work policy are further positive signs that steps are being taken to manage potential problems.

This is so vital that many brokers now partner closely with their clients to carry out regular risk management audits at no extra charge, to ensure that comprehensive risk management measures are in place.

Many brokers now partner closely with their clients to carry out regular risk management audits

Legislation has recently been passed in California (with other states following) to control the costs of healthcare, thus stemming some of the problems associated with the abolition of managed care. This is already having a positive effect with claims costs declining substantially, and filed rates reducing. If such legislation were to be rolled out in all the US states it could prove a real boost to the market.

There could be significant under-estimation of the possible extent of catastrophe-related losses

However, one potential issue on the horizon is companies rethinking the extent of their exposures in the wake of Hurricane Katrina. While Katrina did not result in any substantial workers' compensation claims due to the advance warning, it did highlight the fact that there could be significant underestimation of the possible extent of any catastrophe-related losses - for example, a midday earthquake in California during the working week.

Assessing cover and sourcing capacity could be the next challenge in workers' comp

Therefore, assessing how much cover is really needed and finding the capacity to satisfy those needs could well be the next challenge facing the workers' compensation market.

Chris Willis