The soaring costs of workers' Comp: despite rigorous efforts to control costs and prevent accidents, employers still are experiencing staggering premium increases. Solutions are in short supply

Workforce, Feb, 2003 by Annmarie Geddes Lipold

Dade Behring Inc., a $1.2 billion medical diagnostics manufacturer in Deerfield, Illinois, did everything right to keep its workers' compensation premium down. Still, its insurance bill soared a punishing 100 percent.

Despite its efforts--shopping around for the best and cheapest insurance, demonstrating to insurers its commitment to curbing costs--the 6,600-employee company saw the price tag skyrocket. Even after a deductible increase, the insurance tab doubled, says Paul Moss, the firm's vice president for global health, safety, and environment. "In this kind of marketplace, you can do all the right things and still not see a reflection in your rates, and that's pretty scary."

Dade Behring's experience is a warning--workers' compensation insurance premiums will soar when policies come up for renewal, and there's not much you can do about it. Even rigid accident-prevention and cost-control programs may not help much. While Dade Behring's whopping increase may be unusual, the company is one of a growing number of firms that are experiencing huge jumps in workers' comp insurance premiums. Base rates, which are used by insurers to determine premiums, are rising in a number of states, with some seeing double-digit increases: Hawaii, 15.8 percent; South Carolina, 20.3 percent; and Florida, 21.5 percent.

Dade Behring employed a comprehensive arsenal to keep costs inline. It included the usual solutions such as workplace accident prevention, effective claims management, and returning employees to work as soon as medically possible. The company has instituted intensive ergonomics and safety programs and aggressively manages claims filed by injured employees. Other companies such as International Truck and Engine Corporation have developed impressive employee health and safety and medical case management programs.

So why the big cost increases? Why is the workers' compensation system, which was designed to provide medical care and wage replacement for workers who suffer work-related injuries or illnesses, or death, straining to sustain itself? The answer lies in a convergence of factors: rising claim costs, deregulated pricing, harder-to-obtain reinsurance, and the specter of workplace terrorism. And there's no relief insight, says Robert Steggert, vice president of casualty claims for Marriott International, Inc.

Not long ago, mandatory insurance was a routine business cost But rising premiums and claims costs are spurring employers to invest even more money to control costs, says Sara Taylor, president of Structured Health Resources Inc., a Chicago disability-management consulting firm. "Employers are recognizing that they have to be actively involved to look out for their best interest," she says. At the same time, insurers are expecting employers to be more than premium payers. Taylor says they want partners.

Dade Behring, which has been through several mergers and acquisitions in recent years, seems like the ideal partner. A comprehensive workers' compensation effort brought company costs down 600 percent from 1999 to 2001. Its workplace-safety efforts during the same period resulted in a 200 percent reduction in lost workdays and, recently, two consecutive months of zero lost workdays due to occupational incidents.

International Truck and Engine, a manufacturer in Warrenville, Illinois, undertook a "very aggressive" safety program that reduced the frequency of occupational incidents among its 17,000 employees by 20 percent from 2001 to 2002, says Dr. William Bunn, vice president of health, safety, and productivity. But the safety and case-management initiatives have simply kept insurance premiums from going up even more, Bunn says. In 2002, the premium increased 18 percent, to $2.3 million. Meanwhile, the cost of its self-insurance--80 percent of its workers' compensation program--dropped 27 percent, from $3.2 million in 2001 to $2.1 million in 2002. "We lose some control over increasing costs when we use external insurance," Bunn says. In locations where the company has gone from insurance to self-insurance, he adds, costs have generally dropped by a third.

Insurers in distress

"Workers' compensation is in a period of financial distress," says Peter Burton, senior division executive for state relations for the National Council on Compensation Insurance, Inc. Insurers paid out an estimated $1.27 in claims in 2001 for every dollar they collected from employers, according to NCCI data. This business insurance line is very unprofitable, Burton says, and insurer insolvencies are becoming more common.

Since 2000, premiums have risen, Burton says. Individual employers' premiums are based on such factors as the state the employer is located in and the employer's industry, amount of payroll, and frequency and severity of filed claims. Average premiums in the 37 states from which NCCI collects policy data increased about 5 percent for 2001 and about 11 percent for the first half of 2002.

"I see increases in losses and insurance costs as far as the eye can see," says Bruce C. Wood, assistant general counsel for the American Insurance Association. "It's only a question of how much costs are going to go up."