Navigating Trends, Costs, and Technology in the Workers Comp Market
Q&A with Dick Lavey, President of Hanover Agency Markets, The Hanover
Agents and brokers are experiencing success and growth in the workers compensation industry.
But will it last? Leader’s Edge sat down with Dick Lavey, president of Hanover Agency Markets at The Hanover, to talk about the future.
Q
Workers compensation has been a profitable business for several years. Do you see this continuing?
A
Yes. Workers compensation is a focus for us, so it’s a market we follow very closely. The Hanover places great trust in insights and perspectives from the National Council on Compensation Insurance (NCCI), where I proudly serve as chairman of the board.
The workers compensation line is performing exceptionally well. The industry has seen a decade of combined ratios at or below 100, solid reserves, and low frequency and moderate severity of claims. In recent conversations, NCCI’s chief actuary, Donna Glenn, shared the organization’s thinking that the industry’s decade of strong performance has resulted from stable benefits structures, a strong labor market, and an environment where payroll increases have outpaced claim cost trends.
We share that outlook at The Hanover. Claims frequency continues to decline, loss cost trends are stable and even declining, the industry has substantial reserve redundancy, and the exposure base is increasing given recent wage inflation. In addition, even though most states are experiencing flat or declining loss costs, increased exposures have helped offset pricing pressure and allowed carriers to remain profitable.
Q
Why do you think the line has performed so well over time? Are there other factors that might impact this success?
A
There are a few factors driving the workers compensation line. While frequency continues to decline, we are also seeing employees out of work for shorter periods of time. In fact, NCCI has reported lost-time claim frequency declined by 8% in 2023, more than twice the long-term average decline.
On the medical side, we have witnessed fairly benign medical inflation driven by several factors, including fee schedules and a shift in utilization patterns, with more workers opting for outpatient care, including physical and occupational therapy, while increasingly forgoing surgical interventions.
However, the reduction in time out of work is offset somewhat by rising medical costs, indemnity wage increases, and other challenges in healthcare. Despite recent advancements, the industry is under pressure, leading to increased costs for services in areas such as provider visits and hospital stays, which data suggest have seen annual growth rates over 4%.
At the same time, we’re seeing positive trends and outcomes related to technological advances and business owner initiatives. Workplace technology, including wearables, is having a significant positive impact. And business owners are focusing on workplace design and manufacturing modernization. Ergonomic office layouts and safety-conscious designs reduce the number of accidents at work, while automation and robotics minimize physical strain, also making workplaces safer.
Q
It sounds like there have been some innovative technological advancements in this space. How is technology transforming the landscape? And are administrative costs being reduced?
A
Yes, definitely. Insurance carriers have built up expertise in this space and are doing an excellent job with injury management, cost containment, and claims management.
On the underwriting and risk assessment side, advanced analytics are helping carriers identify risk and loss patterns better than ever.
On the claims front, predictive models have been developed to flag high-risk cases, allowing proactive intervention. Fraud detection is also improved as algorithms spot irregularities, reducing fraudulent claims.
In addition, insurers are automating routine tasks like data entry, document processing, and communication in the claims process, which reduces overhead and speeds up claims handling. With this streamlined digital workflow, claims professionals can focus on more impactful return-to-work programs that are personalized to employees’ specific needs.
Q
Do you think this progress can continue? What do you think might impact performance in the future?
A
There are a few factors we are watching that could potentially destabilize the workers compensation environment. Although medical severity has been modest at 2-4% each year, this could change and is an important aspect to monitor. In addition, the trend of consolidation of healthcare providers could have an impact on access to care and costs and is important to watch.
Stable, modest economic growth is ideal for the workers compensation line, so any shocks to the economy would have an impact on the line’s performance as well.
Potential benefit liberalization at the state level is also critical. Fee schedules are in place in most states and are highly effective at managing costs; however, the mandated benefits could shift upward.
Finally, multiple years of flat to declining rates will ultimately impact margins. So there are several structural advantages such as fee schedules, cost containment programs, and built-in exposure increases as wages rise that act as a tailwind for workers compensation into the future. That said, we’ve got our eye on the economy, benefit liberalization, rates, and medical inflation.
