Looking at the insurance industry, the saying, “Things often get worse before they get better,” is perhaps nowhere more relevant than in workers’ compensation. Back in July 2019, one expert referred to this market as a ‘poisoned chalice’ – and it has only become more challenging since then.
“Right now, I’m fairly confident in saying that this is the absolute bottom of rates,” said Shawn Hall, Sr., division SVP and managing director of workers’ compensation at Breckenridge Insurance Services. In that regard, he noted, “Workers’ comp is the exact inverse of the other lines of business.”
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The workers’ comp marketplace is, however, not going to remain soft for much longer, and that’s not only because of the impacts of the coronavirus, which Hall calls “a body paragraph in a very long thesis paper” of factors putting pressure on the market. Rewinding to 2018, workers’ comp rates had been trending downwards for around 30 straight quarters – an “incautious” move on the part of insurers, says Hall. At that point already, the expert was sounding the alarms that he could ‘smell smoke’ in the marketplace.
“Decreases were being based off of one or two years’ of data … when you probably need seven years to really look at loss maturation,” said Hall. “You cannot base decisions on a year of experience – that’s ridiculous – but that’s what everyone was doing … And now, it’s not even smoke anymore – it’s that you see the fire, your house is burning down, and the roof and basement are gone.”
He warns insurance professionals that come January 01, they need to prepare for a bounce back in workers’ comp that will leave many insureds in dire straits, especially as 80-90% of US carriers are asking for rate increases of around 3.5-7% in workers’ comp. Hall expects that this first set of increases will only be the tip of the iceberg.
“This is an acknowledgment that everything’s not OK. During the first quarter, insurers may project 5% increases, but 5% is quickly 8%, and the next quarter, everyone will realize that their initial increase wasn’t enough and will ask for more,” he explained. “That’s when things compound themselves.”
Add COVID-19 losses to the mix and this workers’ comp fire will only heat up further. Hall predicts that the worst COVID claims that lead to significant losses for insureds will come to fruition three, four, or five years down the road. Any current claims arising from illness related to the pandemic are not actually indicative of the losses that will eventually be experienced, considering the long-term effects that the virus could have on sickened individuals.
“It’s another nail in the coffin of rates that were going to imminently be going up anyway,” said Hall.
While the expert believes that the workers’ comp squeeze will be felt across many industries, mom-and-pop businesses will particularly get the short end of the stick. After all, if even one or two in a handful of employees contract COVID-19, the entire business may have to close, while at the same time, the owners will be filing significant workers’ comp claims. “Smaller shops can’t survive this situation,” stated Hall.
To prepare for the turmoil coming down the pike for workers’ comp, the Breckenridge expert recommends that retail brokers plan ahead.
“The best thing they can do is sit down with their clients, and lay out what is happening now and what could happen down the road,” he explained. “I know that they hesitate to do that, because they’re afraid to warn them of potentially bad news coming and the insured might then go talk to a different retail broker … but I do think that there’s an element of honesty that would help their cause.”
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Additionally, finding a trusted wholesale partner, like Hall or one of his specialist colleagues at Breckenridge, who’s an expert in workers’ comp is key for retailers.
“Retail brokers can come to me as the workers’ comp bubble explodes on them, and I’m going to be in a position where I can fix [their clients’ issues] much better than they can. I’m also the guy that can design their insureds’ loss control programs,” he explained, adding that in general, “Retail brokers need to find the best resources, rather than a point-and-click, block every market, robot wholesaler. [Finding an experienced partner is] going to put them in a position for long-term success and longevity.”