Additionally, there are few emerging trends in loss mitigation/cost reduction strategies. This is perhaps understandable given the reduced pressure on claims and payout. If economic downturns of the past serve as a model, we might anticipate more contentious claimants, such as those asserting fraud; although so far the industry has not seen any significant trend in that direction.

Regardless, at 30 percent, workers' compensation remains a significant component of any company's total cost of risk, including retained risks, according to the latest benchmark study reported by Conning Research & Consulting.

Importance of state funds

Individual states regulate the insurance industry across a broad range of sectors and coverages, and obviously play a pivotal role in workers' compensation. In the past, several states, notably California and Texas, have had competitive (voluntary) state funds. In some cases, aggressive agents have been placing standard and preferred–not depressed–risks in state funds when they offer better pricing. Overall, state funds are estimated to comprise one-fourth of the total workers' compensation marketplace, with about half the states, predominantly in the Midwest, Southeast and New England, maintaining workers' compensation funds.

Although many economically challenged states lack the necessary surpluses to underwrite such endeavors, expect to see an emerging competitiveness of individual state funds, especially as the economy improves. Another recent study from Conning reported that while distinctions among a number of parameters (loss ratio, expense ratio, dividend ratio, etc.) exist, profitability (operating ratio) was similar for state funds and private performance.

State programs promote initiatives in injury prevention, finding ways to limit the severity of injuries that do occur and encouraging wellness by thwarting chronic diseases among the aging work force. Some states have applied loss prevention programs that include financial goals and rewards. In this way, state funds reinforce many of the private insurance industry's cost containment goals. At present, state funds should be viewed as a threat to private insurance and, as of now, a form of healthy competition.

“Pay-as-you-go” matures

Due to economic challenges and the desire to contain costs, the emergence of the “pay-as-you-go” option is gaining momentum among more carriers, agents and insureds. The end-year reconciliation of projected-versus-actual premiums earned always has been a cumbersome exercise for carriers and employers. Neither party wants surprises or unexpected obligations. Pay-as-you-go originally was innovated and developed by administrative service organizations and professional employment organizations that were handling outsourcing of jobs and/or payroll functions for businesses.

Now, driven by economic concerns and advances in technology, more businesses are choosing pay-as-you-go as a means to improved expense projection and maximization of cash flow, the lifeblood of any business. Instead of estimating employee levels and job classifications for an entire year and having to pay a significant portion of total costs upfront, businesses can calculate actual premiums at each of its pay periods, as is done when withholding taxes and similar deductions. Job gains or losses, changing job classifications, or fluctuations in overtime are all easily handled.

These advantages–real-time expense, no surprises–more than offset the extra administrative work. Additionally, new technology solutions like Web-based reporting are making pay-as-you-go more attractive and convenient for all sizes of employers, not just the natural target audience of large companies or seasonal businesses. Employers can post and submit required information electronically, in harmony with agencies' or carriers' online client portals. It is an opportunity for retail agents, as it leads to improved customer satisfaction and retention of insureds.

Larger deductibles gaining favor

With lowered exposures due in part to reduced business activity and an older worker pool, and the corresponding reduction in claims experience, larger or more sophisticated businesses are opting to take on larger policy deductibles. As with any other class of insurance, the premium credits associated with such programs are subject to change and negotiation depending on current market conditions, regulatory climate, and the nature and size of the insured account and loss experience. In particular, larger deductibles for workers' compensation fit well as a foray into self-insurance for organizations with strong capitalization and financial planning and formal risk management programs.

Like other forms of self-insurance, the most meaningful benefit of a large deductible program for insureds is to reduce costs, as the fixed premium for a large deductible program is substantially less than that for first-dollar insurance. Larger deductibles are obviously attractive to underwriters. The insured is taking on greater risk, but one with limits. The insured also benefits from an increased focus on losses. The direct impact of losses and the related expenses on an insured's bottom line are clearly seen and understood. These programs create a strong incentive for insureds to develop and implement effective safety and loss-control programs, and thus fit in with the agent's role in helping clients develop strong loss prevention programs in all areas of coverage.

Larger deductibles can be an excellent selling tool with sophisticated clients. As with pay-as-you-go, large deductible programs demonstrate how the insurance industry is working more closely with insureds, helping us adjust and better manage the changing economic conditions.

What to expect

In 2010, the industry can expect the workers' compensation marketplace to follow the recent levels and behavior in claims loss, pricing and capacity. Following one of the worst years at holding the line in prices, rates may stiffen a percentage point or two. Still, the economy is likely to grow slowly, if at all, and there is plenty of capacity in the marketplace. Certainly, the healthcare expense component of claims will continue to bear scrutiny, and undoubtedly be affected by any large-scale changes in our nation's health care delivery system, such as Congressional passage of healthcare reform. As indicated earlier, state funds and their accompanying regulatory environment bear watching as well.

Roofs do get blown off buildings, and employees do file discrimination charges. However, for most business clients, these are rare to null events in their insurance lifetimes. On the other hand, workers' compensation may be one of the areas in which you interact most regularly with your clients and, as noted earlier, it is a large component of most businesses' total cost of risk among property-casualty exposures.

Savings and service go hand in hand, the latter strengthened by the availability of technology-enabled programs like pay-as-you-go. In this way, workers' compensation can be an excellent practice builder for other coverage lines, as well as related insurance-investment products