The bumpy road ahead for workers' comp insurance
Just like periods of great disruption have led to significant societal changes in the past, COVID-19 will turbocharge change in workers' compensation.
This year, 2020, was going to be a win for workers’ compensation insurers. Coming off record years of profitability, with 2018 the best in the modern history of the National Council on Compensation Insurance (NCCI), this behemoth commercial insurance segment of $55 billion was destined for another good year.
Now, of course, the tables have turned. Workers’ compensation is one of the lines of business most impacted by COVID-19. Layoffs and furloughs are causing dramatic payroll drops, and the unemployment rate has been cresting upward. Many furloughed workers will not be brought back, and hopes of a rapid, V-shaped recovery are giving way to what many believe is a bumpy, ‘Swoosh’ recovery (after the Nike logo).
Reduction in payroll is greatly reducing premiums, and increases in unemployment have historically correlated with adverse claim results. Plenty of issues remain unresolved, especially possible assumed workplace causation leading to loss compensability related to the coronavirus outbreak.
Depending on your situation, the scenarios for the workers’ compensation line of business range from merely bad to catastrophic and potentially one of the largest losses in insurance history.
A time of transition
Just as good times belie the need for change, bad times accelerate it. During the good years, the industry’s high expense ratios held steady despite nationwide rate/loss cost decreases. Administration costs also remained stubbornly high. Take California, for example, where it costs the system $0.54 to deliver $1 worth of benefits.
Operating with limited loss history data, the industry relies on long-established rating guidelines with retroactive and rearward-looking underwriting policies. Investments in technology and operational efficiency have largely focused on treatment and back-to-work programs after an injury has occurred. The industry has been stymied in its desire to proactively prevent worker injuries by a lack of data and technologies to enable preemptive actions.
With those proverbial good times behind us, the tide is receding to reveal these shortcomings. We have been preparing for the transformation of the workers’ compensation line of business for the past three years, and this crisis points to fundamental shifts in how workers’ compensation is sold and serviced. Just like periods of great disruption have led to significant societal changes in the past, the COVID-19 crisis will turbocharge change in workers’ compensation.
Brokers and carriers tend to approach change along four, parallel pathways. Common to all is the use of technology and data to drive strategic differentiation, customer experience and operational efficiencies. Here’s a closer look:
From risk transfer to risk avoidance
Most brokers and carriers want to meet client expectations by dispensing proactive advice and preventing losses from happening in the first place. However, too often most end up merely facilitating transactions and transferring risks.
Technology has now evolved to where we can use data surrounding workers to prevent injuries. At futureWork, we have demonstrated how such data including information on workers’ musculoskeletal behaviors, the environment, the industry, and role and worker demographics. Such data can be aggregated, analyzed and used to prevent injuries.
Data also plays a pivotal role in reducing disease risk in the workplace. With worker symptom screening and body temperature capture now becoming commonplace in each state’s back-to-work guidelines, this is especially important.
New ways to create awareness, communicate and engage
The data surrounding workers will provide brokers, carriers and healthcare providers with tools to create safer workplaces. Communication and collaboration technologies used in other industries will play an important role in creating awareness, deploying training and monitoring safe working practices among all stakeholders. New solutions use electronic messaging, targeted micro-training and gamification, based on actual worker data, to create safety incentives and reinforce a company’s safety culture.
The effective digitization of an employee’s workday, where a combination of an individual’s geo-location, movements, environmental and other attributes are known, can positively impact all parts of the insurance value chain, from underwriting and policy servicing to loss control and claims management. The extent and timing of resulting efficiencies and cost savings will depend on carriers’ adoption and ability to re-engineer and automate processes.
New insurance policy models
Workers’ compensation premiums are determined based on historical loss data. Emerging data sources will provide deeper insight into predictors of risk and enable companies to proactively reduce risks with higher accuracy.
The result will be a better alignment of risk and price, rewarding companies that leverage these technologies to sustain and improve the safety culture.
We expect policies that provide premium credits to emerge first, like personal auto, where telematics-based information on driving behavior is most developed. The increased transparency brought about by improved data and insight may contribute to industry consolidation, as the current advantages enjoyed by niche providers with deep sector knowledge is diminished.
New platform-based solutions
Moving towards a data-rich future is not without peril. A proliferation of vendors and standards, a vast number of new data sources, new artificial intelligence techniques and connectivity options begin to describe the technical complexities. Further, changes will impact the ecosystem of digital partners and require a different approach and workflow. To reduce complexity, new platform-based solutions are needed.
Much like Uber and Airbnb were made possible because of the technology revolution brought about by digital technologies and smartphones, the combination of new data sources, artificial intelligence, awareness, communications and engagement technologies will have the same profound impact on workers’ compensation.
While it is still early days, the technical underpinnings to enable change are already in place. COVID-19 is an accelerating catalyst. With the expected hardening of workers’ compensation rates, insureds may become the primary instigators for change. The need for incumbents to pivot, learn and adapt is now more critical than ever.
Lars Skari (lars.skari@altumAi.com) is chief content and product officer at altumAI futureWork, a Chicago-based startup that capitalizes on technology and data to protect worker health and safety. These opinions are his own.
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