Pulling the levers of US workers’ comp

US workers’ compensation is statutory coverage, meaning the terms, conditions and limits of a policy are watertight, which may make European firms feel they have no control over structuring a workers’ comp programme that best fits their business, according to Lockton Companies’ senior vice-president, Brian Haston, and vice-president, Kevin Holland.

They told delegates at the Federation of European Risk Management Associations’ forum held in Madrid last week, however, it would be a mistake to “just leave it alone”.

Brian Haston, Lockton Companies Lockton

“A lot of European-headquartered companies that have significant North American operations are not taking advantage of some of the levers you can pull to get the best financial results for your company and claim outcomes for your employees,” Holland said. The levers include retention and rate analytics, claims cost control, claims consultation and credit strategies.

“We never want to sacrifice a good response to the safety and healthcare of employees for the sake of cost savings, but what we are saying is, sometimes you can improve both by taking a strategic approach,” he added.

“The more efficiencies there are from a cost standpoint, the greater the control the employer has over the resources that are being applied to help an injured employee get back to work quicker, shortening the duration of the claim and at a lower expense”
_{Brian Haston
Lockton Companies}

Companies should look at the deductible retention programme using their own, in-house analytics, supported by their broker, in addition to the analytics from their actuary or insurance company, Holland stressed. Using analytics to negotiate with the insurer is essential to establish the retention and risk transfer rate best suited to the company.

Companies should then work out how to use their retention effectively and identify opportunities to improve loss outcomes and claim outcomes, he said. This will have an impact on the cost of the coverage and the collateral required to satisfy the credit risk path.

Claims cost control

Haston said more savings opportunities may lie within this protection by describing the two main structures of large deductible workers’ comp insurance.

The first is a bundled approach, where the insurer handles the claims; the second is unbundling, where a third-party administrator performs that role.

“The more efficiencies there are from a cost standpoint, the greater the control the employer has over the resources that are being applied to help an injured employee get back to work quicker, shortening the duration of the claim and at a lower expense,” Haston said.

“Also, I would talk about the managed care portion of workers’ comp in the US, making sure you’re maximising your potential to get bill review, pricing appropriate and use of networks and getting discounts on the front side,” he added.

There is sometimes an imbalance, Holland continued, when the insurance company is expected not only to pay the claims, but also to administer them.

He said: “That could create a conflict because, if it’s a bundled programme, the insurance company may earn profit from handling and from paying the claims, so it might not be as incentivised to close the claim as quickly as possible.”

Separating these two services creates cost efficiencies and better outcomes for employees themselves, he added, “because this is supposed to be expedited and we also want to make sure we’re not getting lost in the medical system trap”.

Claims consultation

There are brokers, including Lockton, that offer a workers’ comp claims adviser, who calls the employee, neither on behalf of the insurance company, nor the employer.

“Their job is really to reach out directly to the injured party and make sure they understand what their recourse is now they’ve filed the claim,” Holland said.

Filing a workers’ comp claim in the US simply requires the employee to reply “at work” when their doctor asks them how their injury happened.

Kevin Holland, Lockton Companies Lockton

“Our job is to educate our clients on how to make sure once that comp claim is in the system, how do we take care of that employee as quickly as possible, get them the medical attention they need to get healed up and back to work without involving lawyers and without involving excess medical services that aren’t going to impact the healing,” Holland said.

“We try to be as efficient as possible and address the actual medical needs and the physical therapy needs, instead of spending money for spending money’s sake,” he added.

Lockton has return-to-work programmes, Haston said. “An employee may be injured and not be able to perform their normal duty, but we could get them back to work in light duty, maybe a job that’s more administrative.”

“Our job is to educate our clients on how to make sure once that comp claim is in the system, how do we take care of that employee as quickly as possible, get them the medical attention they need to get healed up and back to work without involving lawyers and without involving excess medical services”
_{Kevin Holland
Lockton Companies}

The obvious benefit for the employer is their employee is at work rather than sitting at home.

“In the US, lawyers advertise on daytime TV,” Haston continued. “And next thing you know, we have a lawyer involved in a case on workers’ comp, when there’s no business for them to be there. The programme also incentivises an employee to get back to their duty quicker, rather than be in a role they don’t want to be in.”

Although the way medical bills are priced varies state by state, the strategic approach to workers’ comp the Lockton executives described can be applied nationwide, they said.

Collateral and credit ratings

When an employer has a retention for workers’ comp, the insurer has a credit risk for this statutory coverage. It is important the employer is recognised appropriately for its financial performance.

Collateral is typically required by the insurance company for large retentions and states permitting self-insured status also require collateral, which can take the form of a letter of credit, cash, surety bonds or some combination of these.

The credit decision will be based on the loss pick within that deductible.

Holland said: “They’re going to say, ‘OK, we predict this many dollars of losses this year within the retention, we have a credit exposure there, so we have to be able to certify if this employer goes away, if they fail to pay the claim, the insurance company is on the hook to pay those claims.” These are statutory claims and thus must be paid, he added.

This creates credit risk, Haston stressed, and he described misunderstandings regarding the function of creditworthiness.

“When large employers take risk under deductible programmes, say a $250,000 deductible, it creates a credit exposure to the insurance company, so having direct access to the credit officers of these insurance companies is very important. This collateral stacks over time and can build up to be millions of dollars and having the ability to communicate your financial position with the insurance credit manager is very important,” he said.

The collateral is typically calculated by the insurance company estimating how much it thinks will be paid in losses within the deductible in a given year.

“The insurance company is going to have its idea of what that number is, an actuary is going to have its idea of what that number is and the client using their broker should provide an idea of what they think that number is,” Holland said.

“If you’re going to the market only using an insurance company’s numbers, only using an actuary’s numbers, then you’re estimating it way too high, because these are hyper-conservative estimates,” he added.

Holland said: “The insurance company will start at 100% collateral, so it predicts there’s going to be $2m of losses within the $500,000 retention. It will say ‘Right, we need $2m of collateral’ in the form of letters of credit, cash, surety bonds, whatever form that takes, and so it’s the broker’s job and the employer’s job to push back and say ‘We’re not a 100% credit risk. We have great financials’, and there’s different ways of looking at that.”

Sometimes in US operations, the financials are isolated and might not look as strong as the balance sheet of the parent company. Some clients can provide a parent guarantee letter that dramatically improves this perspective and thus they will be able to enjoy a reduction of, say, 50%.

“It’s just a matter of creating that relationship with the credit manager at the insurance company, to try to knock out as much as you can,” Haston said.

He continued: “You want the paid loss credits to apply and they’re not necessarily measured in percentages, they’re measured in months. But that’s where we oftentimes see a breakdown in the relationship between the insurance company and the employer if there’s not a meeting with credit within the insurance company.”

Credit and underwriting are “very separate arms” of the companies, he stressed. One is to protect the balance sheet of the insurance company and ensure it is compliant with its reserve requirements, the other is to try to make a profit on the underwriting.

“These are different groups and if we’re only accessing the underwriting, we’re losing opportunity on the credit side, and for companies that are trying to make large investments in the US, it’s not the cost of collateral, because a letter of credit might only cost 100 basis points. It’s not going to be significant, but it’s a lost opportunity to use that credit to make acquisitions and to make R&D investments.

“That’s where treasury gets excited about the idea of if you can free up some letters of credit, then let’s get it done.”

The other way to free up credit is to look at historical analysis.

Holland said: “What we find is, a lot of European firms make a tonne of acquisitions in the US, especially on the industrial side. There might be legacy claims and outstanding collateral for some insurance companies that date back decades.

“We’re going through one right now and there’s a $3.5m letter of credit for 1999. That thing needs to be unwound, we need to get that money back because that’s money sitting in a bank for 25 years now, untouched. So, we see opportunities. It’s a lot of work, but it’s also, I think, valuable to the treasury to see those resources.”