Now, as workers' compensation (re)insurers face increasing regulatory pressures, greater competition, and limited premium growth, they must take the next leap in risk reduction and mitigation by fully adapting lessons learned by auto carriers to leverage telematics, wearables and other IoT technologies to enhance existing safety and wellness programs.

Workers' compensation carriers have long understood that proper safety training, health incentives, and medical services prevent or reduce claim costs. Reductions in loss frequency and loss ratios since the early 2010's have been largely attributed by the National Council on Compensation Insurance (NCCI) to such initiatives.

For example, 2015 frequency decreased 3% over 2014 according to NCCI, and an August 2011 brief noted carriers with over USD 100 million in payroll enjoyed larger frequency declines because they “might be better equipped to implement loss control and safety programs.”

Looking at the data

The latest data from the Bureau of Labor Statistics indicates there were 48,500 fewer nonfatal workplace injuries and illnesses among private employers in 2016 than in 2015. Also, employers with Wellness Programs, which “can be valuable for older workers, who tend to have issues with flexibility and co-morbidities” are reportedly experiencing lower workers' compensation losses.

Now, as workers' compensation carriers look to further differentiate, the second wave of disruptive innovation is featuring telematics, wearables and other IoT devices.

From 2009 to 2011, workers' compensation carriers experienced a brief spike in loss ratios. In the immediate years following, rate increases contributed to improvements in accident and calendar year results. However, more recently, the sustained success in this line has been driven by favorable reserve development and reduced severity trends (see the graph below) driven by safety and wellness programs, resulting in improving loss ratios.

Related: 10 more issues impacting workers' compensation in 2018

As of 2017, Guy Carpenter Risk Benchmarks research shows that accident years 2013 to 2016 saw reserve releases totaling 4.4% of year-end 2016 estimated ultimate reserves. And while workers' compensation direct written premium in the U.S. grew only 4% annually from 2013 to 2017, the 2017 national loss ratio is 7 points below the average for the same period.

To continue this positive trend, carriers must now look to harness the technological advances that have spurred application of wearables, sensors, and drones in the workplace to a greater degree going forward. In 2015 the Industrial IoT market was valued at USD 113.71 billion; this figure is expected to jump to USD 195.47 billion by 2022, representing a compound annual growth rate of 7.89% for the period.

As of March 2017, 67% of respondents in the industrial manufacturing sector indicated an ongoing smart factory initiative, and General Electric predicts investment in the space will top $60 trillion in the next 15 years.

What these numbers mean

These statistics indicate a growing synergy between connected devices and loss control improvements and post-claim loss cost containment and mitigation.

Workers' compensation insurers stand to benefit from these trends more than others, as there is significant indirect loss related to the decreased productivity of injured workers. By employing wireless sensors, mobile devices, and wearables, employers and insurers can improve business results and employee satisfaction.

Traditionally, workers' compensation insurers' risk assessment was based on data collected at certain times of the year, such as policy renewal. And parts of the data set may rely on qualitative metrics like standard loss survey questionnaires, which can omit pertinent questions. By using telematics, employers and insurers can collect real-time data and institute a continuous feedback loop to identify unsafe conditions, immediately warn a worker who may be at risk and monitor and reward those who take corrective action.

This will also generate a much larger and more granular data set from which to draw insights to apply to other similar insured risks who may not be as advanced in their collection of exposure information. By leveraging big data and predictive analytics, they can then develop more accurate premiums for these insureds, refine policy coverages and exclusions and recommend prescriptive safety measures.

Carriers can derive additional value by extending telematics to downstream processes like claims handling. For example, the median amount of time a worker with a lumbar strain misses from work is 10 days, while a typical employee with depression with anxiety will miss work for 26 days. However, when an employee suffers from both conditions, median return to work duration increases to 153 days.

Biosensors, actuators, and gyroscopes can capture lead indicators of such cognitive conditions, including heart rate, stress level and fatigue, helping insurers triage claims with the potential to become “jumper” claims that escalate quickly. Such devices can also send an alert to notify the wearer if they are practicing improper posture that could delay recovery. Additionally, telematics can keep the injured employee engaged in their rehabilitation by alerting them to missed medications or rewarding performance of physical therapy.

Workplace sensors can also automate and increase the speed of claims adjustment by quickly detecting damage or injury, initiating reserving processes and alerting insurers and safety managers. Real-time data will also improve employers' and insurer's ability to detect fraud. And by reducing the time and paperwork traditionally associated with claims resolution or litigation, these applications not only reduce the loss component of a carrier's combined ratio, but the expense component as well.

Looking ahead

At a time when top-line growth is difficult to achieve, carriers must find ways to differentiate themselves. Implementation of advanced smart equipment and a robust wearables program offers insurers this opportunity. It is perhaps no coincidence that as the prevalence of these devices increase, the gap between the best performing workers' compensation insurers and the worst is widening.

In 2017 the difference between the initial estimated loss ratio of the 90th percentile carrier and the 10th percentile carrier increased to 27.2%, up from 26.2% in 2016.

This brave new world of telematics and connected devices has already impacted the auto insurance market in a positive way. Now it's time for the workers' compensation market to take notice and advance its investment in this exciting new space.

Related: Piece by piece: The state of affairs in the construction industry

Emil specializes in Workers Compensation exposure, experience and catastrophe modeling advisory and in the execution of optimal underwriting and (re)insurance applications and solutions. He can be contacted at [email protected]